Just what exactly is “New Rules” Independent Financial Advice? (Not all Financial Advisers are the same..)

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SewellBrydenGunn Financial Planning & Wealth Management (Corporate) Chartered Financial Planners

Independent Financial Advice

Just what exactly is “New Rules” Independent Financial Advice? (Not all Financial Advisers are the same..)

The Retail Distribution Review (RDR) resulted in new and updated rules, which will improve the clarity with which firms describe their investment advice services to consumers. From the end of 2012, firms providing advice on retail investment products to retail clients will need to describe these services as either ‘independent’ or ‘restricted’.

Finalised guidance on the “Retail Distribution Review: Independent and restricted advice” was published by the then Financial Services Authority in June 2012.

The new standard for independent advice is intended to ensure that such advice is genuinely free from bias towards particular solutions or any restrictions that would limit the range of solutions that firms can recommend to their clients. In providing independent advice, a firm should not be restricted by product provider, and should also be able to objectively consider all types of retail investment products which are capable of meeting the investment needs and objectives of a retail client.

‘Independent advice’ is defined in the Financial Conduct Authority Handbook as a personal recommendation to a retail client in relation to a retail investment product where the personal recommendation provided meets the requirements of the rule on independent advice (COBS 6.2A.3R)’

The requirements of the rule on independent advice (‘the standard for independent advice’) are that the personal recommendation is:

(a) based on a comprehensive and fair analysis of the relevant market; and

(b) unbiased and unrestricted.

‘Retail investment product’ is defined in the Financial Conduct Authority Handbook as:

(a) a life policy; or

(b) a unit; or

(c) a stakeholder pension scheme; or

(d) a personal pension scheme; or

(e) an interest in an investment trust savings scheme; or

(f) a security in an investment trust; or

(g) 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 a financial asset; or

(h) a structured capital-at-risk product;

whether or not any of a) to h) are held within an ISA or a child trust fund (CTF).

Shares in investment trusts and open-ended investment companies are captured by the retail investment product definition.

Exchange Traded Funds are also considered to fall within the retail investment product definition.

A personal recommendation in relation to any of the products in this list must meet the standard for independent advice to be described as such.

Advice on Shares and Securities and Derivatives are now treated as separate areas of advice in addition to “Retail Investment Products”. Not all “Independent Financial Advice” firms offer or include advice in these areas mainly due to the fact that additional levels of competence must have been evidenced in order to gain the relevant “Statement of Professional Standing” required to conduct this type of advice business by the regulator and issued by an Accredited Body such as the Chartered Insurance Institute or the Chartered Institute for Securities and Investments. These advice areas require firms (at corporate management and oversight level) as well as individual advisers to have set up and to maintain specific programs of advice competence through Continuous Professional Development in addition to the more standard areas of required learning maintenance.

The definition of retail investment product is intentionally broad to ensure that all comparable investment products sold to retail clients on an advised basis, including those developed in the future, are subject to the same relevant selling standards, for example the requirement to be remunerated by adviser charges. To determine whether a product is captured by the definition of ‘retail investment product’, the characteristics of that particular product would need to be considered. In general, we expect there to be very few types of investment products sold to retail clients that would not fall within the definition. Examples of financial instruments that are not retail investment products would include a share in an individual company whose primary business is not investing in two or more financial assets, an individual fixed interest security and an individual derivative, where the exposure to the relevant asset is not modified in any way.

[Conduct of Business Source Book] COBS 6.2A.11G says that a relevant market should ‘comprise all retail investment products which are capable of meeting the investment needs and objectives of a retail client. For example, if a client indicates that they are only interested in ethical and socially responsible investments, it is clear that there is a range of products that would never be suitable for them, namely non-ethical investments. Their relevant market would exclude non-ethical investments, and an adviser would not need to consider these products when forming independent advice for such a client. So, a relevant market in the context of the standard for independent advice is defined by a client’s investment needs and objectives and not, for example, by product or service types.

If a firm cannot or will not advise on a particular type of retail investment product, and that product could potentially meet the investment needs and objectives of its new and existing clients, then its advice will not meet the standard for independent advice.

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[Last Updated: 2014 02 02] Information here can quickly become out of date – be sure to come back and check for the latest up to date information.