In the second of our articles on Independence under MiFID II we highlighted what we believe is a lack of clarity in the rules. You can read that article here.
Having debated the topic extensively within ATEB we decided that the only way to settle the matter was to ask the FCA for clarification.
You can read the FCA’s response below.
ATEB QUESTION ONE
“(1) COBS 6.2B.11R does not require a firm providing independent advice to assess every relevant product available on the market before making a personal recommendation.”
We presume that this supports the notion that firms need to assess a sufficiently diverse range of products rather than EVERY relevant product. Is that a correct interpretation?
This is correct. COBS 6.2B.11R states that independent advisors must assess a sufficient range of products that are sufficiently diverse (in terms of type, issuer and provider) to ensure that the client’s investment objectives can be suitably met. COBS 6.2B.19G states that independent advisors do not have to assess every available product on the market. This reflects the position described in Recital 73 to MiFID II and Recital 71 to the MiFID Org Regulation.
ATEB QUESTION TWO
“Notwithstanding (1), since the assessment conducted by the firm must be such as to ensure the client’s investment objectives can be suitably met, a firm providing independent advice should be in a position to advise on all types of relevant product within the scope of the market (for the purposes of COBS 6.2B.15EU) on which it provides advice. When the client is a retail client in the United Kingdom, this means being in a position to advise on all types of financial instrument, structured deposit and other retail investment products.”
The bold text appears to be clear. We interpret it as meaning that a firm might be ‘whole of market’ or ‘focused’ (per COBS 6.2B.15EU) but only needs to be in a position to advise on those relevant products within its stated range of focus, however limited that focus might be. Do you agree with this interpretation?
The firm is correct in understanding that an advisor can hold themselves out as independent whilst also limiting their advice to a specific product range (e.g. pensions) or market type (e.g. sustainable investment), providing that they assess a sufficiently diverse range of products (COBS 6.2B.11R) and providing that they are able to advise on all types of product within the scope of the market on which they provide advice (COBS 6.2B.19G).
ATEB QUESTION THREE
Yet the last sentence suggests that, where the client is a retail client in the UK, the firm must be ‘in a position’ to advise on all types of product – regardless of any limited / focused independence the firm might adopt. Any clarification you can provide on this would be helpful.
A firm which provides ‘broad and general’ independent advice to retail clients in the UK should be in a position to advise on all types of financial instrument, structured deposit and other retail investment products. If a firm marketed itself as only providing independent advice on pension products, for example, then it would not need to be in a position to advise on shares, units and structured deposits. This is explained in paragraph 6.29 of CP 16/29: “A firm providing independent advice to retail clients which is narrower in scope than all RIPs, financial instruments and structured deposits may include the word ‘independent’ in its name as long as its marketing materials are sufficiently clear as to the nature of the service provided by the firm. For example, a firm which provides advice only on pensions might describe itself as providing independent advice (e.g. Evans Independent Pensions Advisers”. It would however need to ensure that any marketing materials explained that the firm only provided advice on pensions. The firm would need to ensure that it was in a position to advise on all pension product types within its service offering and, once providing advice to a particular retail client, would need to consider a sufficient range of pension products which were sufficiently diverse, in terms of their type and provider, to suitably meet the client’s objectives.
ATEB QUESTION FOUR
We also seek clarification on the meaning of the term ‘be in a position to advise’. The example given in note (5) of the guidance states –
“If a firm that provides focused independent advice is not able to recommend a financial instrument that would meet the investment objectives of a client, the firm should not provide that client with a personal recommendation. For example, if a firm providing independent advice on shares considered that a client’s investment objectives would be better met by way of investment in an accumulation product, it should not provide that client with a personal recommendation.”
That is clear enough in itself, but we believe that such a firm would require to have at least the knowledge and competence in respect of those other options in order to able to identify when what they can advise upon is not suitable or that what they cannot advise upon would be more suitable. So, we would interpret ‘be in a position to advise’ to require, as a minimum, that advisers have the relevant knowledge / competence on all financial instruments, structured deposits and other retail investment products, even if the firm chooses not to advise on some of these by dint of being ‘focused independent’. This would require at least training and CPD on those products and might in some cases require a specialist qualification. Comments?
We might go further and suggest that a firm can only truly ‘be in a position to advise’ where it not only has the knowledge / competence referred to above but also has the relevant permissions. Thoughts?
COBS 6.2B.19(5) does not create any new T&C requirements. In PS10/6 we stated: “A firm, holding itself out as independent within a relevant market, should establish and maintain systems and controls to ensure that it does not make a personal recommendation to a retail client if there is a retail investment product outside the firm’s relevant market that would be able to meet the retail client’s investment needs and objectives. If a firm, holding itself out as independent within a relevant market, is not able to consider that product, it will be unable to assess whether the retail client would be better served purchasing that product and is, therefore, unable to make a personal recommendation to that retail client. We would expect the firm to direct the client to an adviser firm that is able to consider all products which would meet the retail client’s investment needs and objectives.”
So, the requirements do not expect advisers to have detailed knowledge of products outside the relevant market on which they provide advice. But they should be able to recognise when to recommend a product within their market would not be suitable for the client and to be able to recognise that a different type of product would better suit the client’s needs. There is a difference between being able to recognise that a different product may be more suitable and having the knowledge to provide a personal recommendation satisfying the suitability.