RDR has resulted in rules to improve the clarity with which firms describe their investment advice services to consumers. The rules set out what is expected of firms that describe themselves as either independent or restricted (COBS 6.2A).
The second stage of the FCA’s RDR thematic review has been published and is snappily titled ‘TR14/5: Supervising retail investment advice: Delivering Independent advice (March 2014)’ and comes with a free accompanying video (12 mins). Both can be accessed here .
The report is relatively short (23 pages), is intended to clarify what the requirements in key areas are and gives good and poor practice examples.
Here is a very brief summary of the report but we would recommend all principals and advisers read the document in full:
- Independent advice rules state that the recommendation should be ‘based on a comprehensive and fair analysis of the relevant market and be unbiased and unrestricted’;
- Advice should be genuinely free from bias towards a particular solution;
- All Retail Investment Products must be considered;
- If an independent service has been promised then it must be delivered.
In further guidance:
- The FCA clarify what is meant by a relevant market;
- They give guidance on how panels can be used, the process and due diligence requirements;
- Within the Platform section they state ‘It is likely to be very rare, if possible at all, that a firm could use one platform for all clients and meet the independence rule………..’ As mentioned further information and examples of good and poor practice are included in the document;
- They give 6 key points to consider if your firm uses a platform – research, review, due diligence, appropriateness and off-platform solutions, limitations, process etc;
- There are key messages under the model portfolio section including construction, a process to avoid restrictions, alternatives and adapting them;
- There are key messages if firms make personal recommendations for clients in relation to discretionary investment services, including consideration of a wide range of providers, ensuring there is a process in place, ensuring advisers do not restrict the offering and making clear clients best interest rules are followed.
Some of the common failings found during the review were:
- Firms not considering and/or not having the ability to advise on all retail investment products (RIPs);
- Firms adopting a single platform and not carrying out sufficient research and due diligence on the other options available and/or not considering off-platform investments;
- Advisers referring clients to other advisers (either externally or within their own firm) for advice on certain RIPs (e.g. income drawdown) and hence breaching the independence rules;
- Networks failing to ensure that all appointed representatives (ARs) are meeting the independence requirements.
The FCA uses a quote in the document from one firm which was reiterated at a recent conference we attended, in that:
‘independence is a state of mind – you just need to keep an open mind and consider all the options’.
We will be issuing a separate article on the FCA’s third stage of the thematic review, dealing with disclosure, imminently.