Advisers need more detailed guidance from FSA over RDR concerns, says expert

Insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said he was disappointed with the latest guidance the Financial Services Authority (FSA) had issued on RDR issues and encouraged the regulator to give more detail about the standards of procedure firms should follow under the framework. The new RDR rules came into force on 31 December 2012.

The FSA has published a new RDR factsheet (6-page / 337KB PDF) that contained questions it said advisers had posed at recent events it had staged. Many of the regulator's answers to those questions, though, fail to provide sufficient guidance to advisers on how to address the issues raised and ensure their compliance with the RDR regime, Geiringer said.

One of the questions the FSA sought to answer in its factsheet was what evidence advisers should have to provide in order to demonstrate that there is no conflict of interest in cases where those advisory businesses operate a discretionary investment management (DIM) arm.

The FSA said that the risk of a conflict of interest arising in those cases is that advisers may recommend that clients use their DIM services when this may in fact not be "suitable" for those clients not "in their best interests".

The regulator said that advisory firms "should have appropriate systems and controls in place to mitigate this risk and ensure that the advisers provide suitable advice". It said that the "nature of the controls will vary depending on the business model and the level of risk".

Geiringer said that the issue of conflicts of interest was a big area of concern for financial advisers. He said that it was incumbent upon the FSA to provide more thorough guidance on the issue than offered in its factsheet.

"The FSA should expand on what it would consider 'appropriate systems and controls' to be in most cases for mitigating conflict of interest risks," Geiringer said. "Does that mean that advisory firms' compliance team need to assess each and every referral from advisers to the DIM arm? Does it affect whether sales incentives can be offered to advisers over such referrals? The FSA needs to be clearer on the standards it expects and how firms can achieve them."

In its factsheet the FSA made clear that advisers cannot be paid a referral fee from fund managers where they advise retail investment clients to use their services. This rule applies even where the DIM is part of the same group as the advisory services business, it said.

The regulator also said that it had been asked about the kind of "controls" advisers should have in place to ensure that their 'paraplanners' do not give out retail investment advice when speaking with clients. Paraplanners are staff that take down financial details from clients in a fact-finding operation designed to determine the extent of savings clients wish to invest and their attitude to risk, among other things. Under the RDR framework there are new professional qualification requirements that have to be met before staff can offer retail investment advice.

The FSA said that it expects advisers to have "robust systems and controls in place to ensure that unauthorised and/or unqualified employees are not giving retail investment advice, as would be the case with any other regulated activity".

Geiringer said that the guidance lacked the detail advisers would need to understand what the FSA would interpret 'robust' to mean in that context.

"Firms operating in the financial services sector face significant monetary penalties for failing to adhere to regulation," Geiringer said. "There remains a lot of industry uncertainty about the RDR regime and how the rules should be interpreted. It is incumbent upon the FSA to provide firms with more clarity than in this latest factsheet about the standards it expects firms to achieve. Hopefully, the thematic reviews looking at the implementation of the RDR will result in more detailed guidance."