14th February 2012

Restricted or Independent the choice is yours

The new rules on adviser services apply to firms advising retail clients in the UK on retail investment products.

A retail client is defined in the FSA Handbook as someone who is not a professional client or an eligible counterparty (broadly, any financial institution or undertaking). This is not quite the same as a consumer (defined as someone acting for purposes outside his trade, business or profession), although the vast majority of those affected by the new regime will be consumers.

The new definition of retail investment products is deliberately broad in range. It includes what are termed packaged products: life policies, a unit in a collective investment scheme, exchange traded funds, stakeholder and personal pension schemes and an interest in an investment trust savings scheme.

It also includes a security in an investment trust, and a structured capital-at-risk product, as well as a "catch all" provision: "any other designated investment which offers exposure to underlying financial assets, in a packaged form which modifies that exposure when compared with a direct holding in the financial asset".

Independent advice

Firms advising on retail investment products must clearly describe their services as either "independent" or "restricted".

Firms providing independent advice must disclose this in writing to the client before providing the service. This will not apply to advice on group personal pension schemes, which are subject to separate disclosure rules.

To qualify as independent, a firm must base any personal recommendation it makes to a retail client on a comprehensive and fair analysis of the relevant market and the advice must be unbiased and unrestricted.

The guidance states that the relevant market should comprise all retail investment products capable of meeting the client's investment needs and objectives. For some independent financial advisers (IFAs) offering a non-specialised service, this will mean considering a much wider range of products than they do currently as the relevant market will generally include all retail investment products

Advisers specialising in a relatively narrow field, such as ethical and socially responsible investments, may have a more limited relevant market to consider. If so, the firm must explain the nature of this relevant market as part of its written disclosure to the client and should not hold itself out as acting independently in a broader sense.

The guidance adds that a firm specialising in a relevant market should have systems in place to ensure it does not make a personal recommendation if there is a suitable product outside that relevant market. In this situation, the FSA would expect the firm to refer the client to another adviser that could consider all the products that would meet the client's needs.

Guidance is also provided on what constitutes unbiased and unrestricted advice.

Where appropriate, this might include considering financial products outside the definition of retail investment products, such as National Savings products (e.g. premium bonds) or cash ISAs, if they are capable of meeting the client's needs and objectives.

Independent firms should also ensure they do not enter into any agreements with product providers that limit or restrict the advice they give.

Ownership

The FSA's earlier consultation gave rise to mixed views about whether a firm owned or financed by a product provider could properly call itself independent. The guidance says this will not contravene the requirement for unbiased or unrestricted advice - provided the advice remains unbiased and unrestricted.

"We recognise there are a number of valid concerns with ownership issues of IFAs especially where an IFA firm is recommending its own product or a product of a parent company. But we do not believe they are sufficient strong to automatically prevent an adviser owned by a provider from describing itself as independent," the FSA concludes in its policy statement.

"We would expect such firms to monitor the outcome that recommending their own product or the product of a parent company produced for the client and compliance with our rules more generally."

The FSA says it will also be keeping an eye on such firms via the data it collects.

Panels

Firms that use panels can still hold themselves out as providing independent advice, provided the panel is sufficiently broad in composition, is regularly reviewed and using it will not materially disadvantage the client.

Where the analysis of the relevant market is carried out by a third party, the firm remains responsible for ensuring the criteria used are sufficient to ensure it is fair and comprehensive. Selecting products on the basis of a fee, or because a product provider facilitates adviser charging, would clearly not meet this.

As is currently the case, a firm constructing a panel can decide what products are suitable for its client base.

If it decides to exclude certain types of product, the FSA will expect the firm to be able to demonstrate clearly why this is consistent with its clients' best interests.

Restricted advice

If advice is not independent, then it must be described as restricted. This label covers firms that advise on their own products or on a limited range of products, such as bank advisers and other single-tied and multi-tied adviser firms. It also includes basic advice - streamlined advice on charge-capped stakeholder savings and investment products, often provided by supermarkets and other retailers.

Firms providing restricted advice (including basic advice) must disclose this in writing to the client in good time before providing the service.

The FSA has decided not to impose a mandatory form of words for this disclosure, but the firm must explain whether the advice is limited to products from a single provider, a single group of providers or a limited number of providers.

If a firm provides both independent and restricted services, the disclosure must clearly explain the difference between them.

If restricted advice is to be given orally, this disclosure must be given orally as well as in writing. The guidance gives some examples of oral statements that would comply with this requirement.

Firms are also reminded of their obligation to set up and maintain appropriate systems and controls when providing restricted advice. COBS rules on suitability still apply. If nothing within the firm's range of products meets the client's needs, no personal recommendation should be made.

The FSA says it will be closely monitoring firms' training materials and will be carrying out mystery shopping exercises to check the extent to which these rules are being complied with.

Simplified advice processes

Simplified advice is where the adviser provides a personal recommendation to assist consumers in making straightforward investment choices.

As it involves a personal recommendation, it follows that simplified advice should be subject to the same rules on adviser charging and professional standards. The FSA has confirmed it is not going to create a separate regime for simplified advice.

Basic advice

The FSA Handbook defines basic advice as advice on stakeholder products using a process that involves putting pre-scripted questions to the client.

Under the new regime, basic advice will be a form of restricted advice and so firms offering this service will need to comply with the same disclosure requirements. They will not, however, be subject to adviser charging and so will still be able to earn commission on individual sales. Nor will they be subject to the same qualification requirements as independent or restricted advisers.

Non-advised services

Non–advised services, or execution-only sales, where no advice or recommendation is given will not be affected by the new rules for the present, but this will be kept under review. Existing COBS rules for non-advised sales will continue to apply to the narrower definition of packaged products and firms will continue to be able to earn commission on sales.

The FSA will, however, be looking for any evidence that firms are exploiting the distinction between advised and non-advised services by, for instance, providing advice but then referring the client to a related company to complete a "non-advised" sale, or simply by mis-labelling services as non-advised.

Professional standards

The FSA intends to impose the same minimum professional standards and qualification requirements on advisers whether they provide independent or restricted advice. The only confirmed exception to this is basic advice.

John Joe McGinley

Head of Business Brain at AEGON

Investments, FSA/FCA, RDR, Panacea Comment