Out-Law News 3 min. read
03 Dec 2012, 4:38 pm
Late last month the SRA, which regulates lawyers based in England and Wales, announced that it backed changes to its code of conduct that would allow solicitors to recommend that clients use advisers that operate on a restricted advice basis. The decision was taken following a consultation on the issue which was prompted by rule changes affecting the retail investment advice market that are set to come into effect from the end of this year.
However, the Law Society, which is a representative body for members of the legal profession in England and Wales, has said that lawyers would open themselves up to claims that they acted negligently if they do recommend the use of advisers that are not independent.
"The SRA has 'liberalised' the rules on recommending or referring financial advisers to clients so that referrals can be made to advisers who are not independent," the Law Society said in a statement. "Previously, solicitors could only recommend independent financial advisers. The Society warns that solicitors could get tangled up in mis-selling scandals if they advise clients to use financial advisers who may benefit from selling particular products."
Law Society chief executive Desmond Hudson said that lawyers have the discretion, under the terms of the SRA's new rules, to continue to recommend the use of IFAs only.
"From the outset, the SRA's proposals ran the risk of leaving the profession ill equipped to advise clients on which financial adviser to use for the product that they wish to procure, given a choice of a range of providers with differing interests and motivations," Hudson said. "The inevitable consequence will be that solicitors may become more open to negligence claims based on that recommendation or referral or that the profession as a whole becomes embroiled in the type of mis-selling scandal that has plagued the financial services industry in recent times."
"The provision of independent advice has historically been one of the fundamental tenets of the profession. As such we would urge solicitors to disregard the liberalisation of the Handbook in this area and continue to only recommend IFAs. On this issue, under the new rules, solicitors will not be penalised for exercising discretion. We urge them to use that discretion to only refer and recommend IFAs to clients to avoid the risk claims," Hudson added.
Under the Retail Distribution Review (RDR) rules, outlined by the Financial Services Authority (FSA) and effective from the end of this year, firms advising on retail investment products must clearly describe their services as either "independent" or "restricted". This declaration must be provided to client investors in writing in good time before they provide advice services.
Both independent and restricted advisers are generally prohibited from receiving payment for those services by anyone other than their clients. The FSA has introduced these adviser charging rules after taking issue with the often complex nature of the payment models that exist in the retail investment market.
It wants the arrangements for the payment of services to be easier for consumers to understand and said that it wants to eliminate bias in the market which it said can exist where, for example, advisers are paid commission by financial product providers in circumstances where they recommend that their client invest in a particular product.
Generally, IFAs will be required to consider all available products and providers in the market before making a personal unbiased and unrestricted recommendation to clients on what to invest in. Restricted advisers will legitimately be able to offer advice based on a smaller list of products or providers, such as from a single source, providing they are up front about this with clients.
However, both IFA and restricted advisers will be bound by the adviser charging rules other than in cases where restricted advisers can be said to be offering "basic advice". In those circumstances restricted advisers could legitimately obtain fees, commission or other benefits from product providers or others.
The Law Society said that there were questions over the "effectiveness" of the SRA's consultation on the issue of what advisers lawyers could recommend that the regulator would need to answer.
"All eyes will be on the SRA in January when it publishes the consultation responses on this issue," Hudson said. "We hope that in the interests of legitimacy there is a clear expression of support for the SRA's proposals in this area from stakeholders other than those in the financial services industry who stand to benefit from liberalisation."
"If there has been significant informed opposition to the SRA’s proposals, it will bring into serious question the legitimacy of the consultation process as anything other than a paper exercise conducted for form. It is not sufficient to cite an apparent incompatibility with outcomes-focused regulation as an absolute rationale for diluting regulatory safeguards for both clients and solicitors," he added.