Standards required for retail investment advice to be classed 'independent' too high in the UK, says expert

Out-Law News | 21 Mar 2014 | 3:09 pm | 3 min. read

Financial advisers in the UK are being asked to go to greater lengths than their counterparts in Europe to demonstrate the independence of their advice, according to an insurance law expert.

Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, questioned whether it is necessary for UK advisers to be subjected to more stringent rules and said that the cost of meeting those standards may not be one that ordinary investors are willing to foot the bill for.

Geiringer made his comments after the Financial Conduct Authority (FCA) revealed that more than 10% of independent financial adviser firms may not be meeting the standards required to allow them to label the advice they provide as 'independent'.

The regulator has issued new guidance on meeting the standards as part of a report charting the outcome of its review into delivering ‘independent’ financial advice (26-page / 149KB PDF) following the implementation of the Retail Distribution Review (RDR).

In its review the FCA said that it believes that delivering independent advice is "an achievable outcome for any firm that would like to offer an independent service, regardless of their size".

The regulator explained that it expects independent advisers to conduct research across the whole of a relevant market, identify the potential products that "are in the client's best interests" and then carry out "detailed due diligence on the recommended solution(s)"

The FCA also sought to clarify what is meant by the requirement that independent advisers assess options across a 'relevant market'.

"The requirement refers to the needs and objectives of the client and not product categories that the firm wants to advise on, so for example, pensions are not a relevant market," the FCA said. "Examples where a relevant market may be applicable are ethical investments, Islamic financial instruments and pension decumulation."

The regulator also said that each individual adviser within an advisory firm must be able to make personal recommendations on an independent basis if those firms seek to be labelled as 'independent'. It also provided guidance on how advisers can remain 'independent' when using panels, model portfolios and platforms.

"I think it is very hard today if not near impossible, with so much choice out there, for independent advisers to really be able to undertake the amount of research needed to consider the relative merits of all investment solutions to meet their client's needs and objectives and provide a cost-effective service that clients, other than the really high net worth ones, can afford," Geiringer said.

"Providing an independent advice service at a price that can be afforded is the real problem today. These standards for an independent service are not found in Europe and yet we persist with it here in the UK. Why? Is this standard of advice still required today or has it outlived its time? Is it time to consider where exactly is the boundary of regulated and non-regulated advice and look to find a formula that better serves the investing public today?" he added.

Under the RDR rules, financial advisers are required to inform clients whether they are providing advice on an 'independent' or 'restricted' basis. This declaration must be provided to clients in writing in good time before they provide advice services.

Generally, independent financial advisers are required to consider all available products and providers in the relevant 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, even if taken from a single source, providing they are up front about this with clients.

Both independent and restricted advisers are bound by adviser charging rules that generally ban them from receiving payment for personal recommendations they make from anyone other than the person to whom that recommendation has been made. The ban has disrupted traditional payment models whereby advisers could claim commission from product providers when their clients invested in the providers' products.

"Where some firms have been found wanting, it is interesting that the FCA has requested firms 'to attest to making the required changes'," Geiringer said. "The practice of asking for attestations from individuals in regulated firms to correct failings has been a growing development and one that has rather crept into the regulator’s armoury. I don’t recall any consultation from the FCA about the use of this tool and it would be useful if there were some guidance about this as it has and will continue to cause some concern to firms and approved persons who are asked to provide these attestations."