Independent – or what?

Solicitors may be confused by financial product providers, some of whom are still incentivised, despite the lack of commission, says Ian Muirhead

At a recent roundtable meeting hosted by the Financial Conduct Authority, Nick Poyntz-Wright, director of long-term savings and investments, admitted there was "lack of clarity" about the term "independent". To people outside the financial services community, this might seem strange. The dictionary definition is unequivocal and neither the American colonists during the reign of George III nor the Scottish Nationalists today had or have any doubt about its meaning.

The background to the remark, however, is that the FCA's predecessor, the Financial Services Authority, decided in its wisdom that independence should be given a different meeting in the context of financial services. It went as far as suggesting that this would assist consumer understanding.

The FSA has been likened to Humpty Dumpty in Through the Looking Glass: "When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean." Unfortunately, not even the people to whom the new definition applies are sure what the term should mean.

Under the previous FSA regime, a distinction was drawn between financial advisers who are independent of the influence of financial product providers and those who are tied to selling the products of one or more such providers. The underlying distinction was between those who serve only the best interests of their clients and those whose duty to their clients may be conflicted by their relationship with product providers.

The FSA's new definition, with which its successor, the FCA, is now saddled, is intended to prohibit any financial adviser from describing themselves as independent unless, in addition to providing impartial advice, they are able to advise from across the spectrum of available products.

No rule change

At the roundtable, FCA chief executive Martin Wheatley said that despite the lack of clarity, the FCA would not seek to change the rules. This has created a business opportunity for consultants who are offering to assist firms to determine their status. Some firms are relinquishing their independent tag simply to avoid potential hassle with the FCA, and many stockbrokers whose impartiality is beyond question have been obliged to abandon their claim to independence because the breadth of their service no longer conforms.

The uncertainty is such that some financial advisers whose advice is not conflicted but who choose to specialise in particular types of business, such as planning for later life, have sought to clarify their standing by describing themselves as "restricted whole of market", but the FCA has frowned on using this expression.

The difficulty in reconciling the new FSA terminology with its own literal definition of independence caused the Solicitors Regulation Authority to abandon its previous requirement that solicitors should refer clients only to independent financial advisers. Although the Law Society responded by advising firms to ignore this relaxation and stay committed to independence, which it described as being a fundamental principle of the legal profession.

Interestingly, however, the requirement that solicitors' joint ventures with financial services firms must be confined to independents, again in the dictionary sense as applied within the legal profession, remains in place.

Taking centralised decisions

The SRA's abandonment of its previous commitment to independence does not appear to have given rise to any significant encroachment by product salespeople into the legal fold. Most solicitors are aware of the shortcomings of the tied and multi-tied business model and are concerned to do the best for their clients. Helpfully, the new SRA rules require solicitors to conduct due diligence when selecting referees, and this encourages firms to take centralised decisions and to maintain audit trails.

However, in the absence of the previous clear dichotomy between categories of adviser, solicitors may be confused by the blandishments of the product salespeople, some of whom are still incentivised financially to maximise the sale of their principals' products, despite no commission.

It was once suggested that the FSA had a mission to put an end to independent financial advice and, while this is unlikely to have been its objective, there is a danger it could be the result of its action. A former FSA chief executive once admitted in an unguarded moment that the institution's decision-making process was subject to so many inputs, internal and external, that it regularly produced camels.

Ian Muirhead is director of SIFA

He writes a regular blog for Private Client Adviser