Most advisory firms in the UK describing their service as “independent” are using the description accurately, according to a thematic review, Supervising Retail Investment Advice: Delivering Independent Advice, published today by the Financial Conduct Authority (FCA). The FCA is also clarifying certain issues to provide further support for those firms that remain unsure what standards they must meet to be able to call themselves “independent”.
One of the central elements of the RDR was that financial advisers operate as either “restricted”, where they are only able to recommend certain products and providers; or “independent”, for which they have to objectively consider all types of retail investment products including structured investments to meet the investment needs of a retail client.
A number of UK market players told SRP that the introduction of the RDR has been beneficial as it has helped the intermediary industry to improve by increasing its knowledge of structured products and improving the quality of service. The end of the Bancassurance model forced UK domestic structured products providers to abandon their high street distribution channels and to launch RDR-compatible products with unbundled, explicit and transparent charges for advisers. The real impact of the new regulation among retail investors has been criticised from some quarters as it has removed the access to advice to the bottom of the market.
Poor practice
In its review, the FCA put structured products under the spotlight with an example of poor practice. According to the regulator an undisclosed firm was not willing to provide advice on structured investments.
“Through discussions with the firm it became evident that the adviser was unwilling to recommend these products on the basis that he did not fully understand how the products and underlying investments worked,” it said. “We would expect advisers to have sufficient knowledge of each product type to identify if it was potentially suitable for a client. Once the potential need is identified, the adviser should then have the knowledge and ability to carry out further work to identify a suitable product and make the recommendation, if appropriate.”
The FCA also said that advisers should not be held themselves out to be independent if they don’t have the knowledge and ability to identify if a particular product type is potentially suitable for a client.
Apfa responds
The Association of Professional Financial Advisers (Apfa) has responded to the FCA’s thematic review highlighting areas where it prompts the regulator to explain some of its requirements to advisers more clearly.
“That so many companies have successfully met some of the most stringent regulatory changes in a generation is testament to their professionalism and diligence,” said Chris Hannant, director general at APFA. “However, the fact that the review contains a further twenty pages of guidance for firms only goes to highlight some of the problems with the regulator’s definition of independent advice, for example the list of retail investment products which is vague and appears to be at odds with FCA announcements on UCIS and the like.”
FCA video
In addition the FCA has also released a video on the issue of independence for financial advisers which addresses a number of topics, including providing advice on all retail investment products in a relevant market; referrals to other advisers; the use of product panels; the use of platforms; the use of model portfolios, which are a collection of funds with a certain asset allocation typically designed to meet a specific risk profile; and referrals to discretionary investment services.
This latest RDR-focused review from the FCA is part of the second of three cycles of thematic work, looking at how firms disclose their advisory services to their customers and whether firms that are describing themselves as ‘independent’ are acting independently in practice.
In April, the FCA will be releasing the remaining part of the second cycle of research, which looks at how cost and services are disclosed by advisers.
The Retail Distribution Review (RDR) came into force in 2013 to improve outcomes for consumers by enhancing standards of professionalism, removing key biases, and ensuring the cost of advice is clear.
Related stories:
UK City watchdog releases first RDR thematic review, outlines new regulatory approach
FCA seeks feedback on RDR rules implementationUK regulator to conduct four RDR thematic reviews in 2013