15 October 2009
APCIMS says FSA's proposals on 'independent advice' are seriously flawed
APCIMS has challenged the FSA’s new definition of ‘independent advice’ in the Retail Distribution Review saying it will mislead consumers about the services offered by firms and will lead to riskier investment advice.
David Bennett, APCIMS’ Chief Executive, said:
“While there are some aspects of the FSA’s RDR initiative that APCIMS supports, we believe that the concept of “independent advice” is fundamentally flawed and contain the seeds of the next mis-selling crisis.
Independence should be about firms providing advice which is driven solely by consideration of their clients’ best interests and which is not influenced or controlled by the business needs of product providers. By setting up a divide between independent and restricted advice where the former is inevitably seen as superior, the FSA is inadvertently promoting a regulatory culture which rewards being a “jack of all trades but master of none” over the provision of specialist advice tailored to specific client needs.
Given that the FSA is currently investigating the sale of Lehman-backed structured products, describing it as a “hugely complex area” giving rise to “serious issues”, we question whether now is the time to put structured products on the list of investments which all firms giving “independent advice” must consider.
We urge the FSA to drop the requirement for firms offering “independent advice” to advise across all types of retail investment product and to rely instead upon the common understanding of what independence means – objective advice, free from bias or influence, based on a comprehensive review of the market for the product in question.
APCIMS firms are required by MiFID to clearly describe to their clients the nature and scope of their services and the range of investments covered – so long as the advice they give on those investments is independent in the commonly understood sense, we believe that they should be free to describe themselves as offering “independent advice” regardless of whether they advise on life and pension products as well.”
- Ends -
For more information please contact:
David Bennett, Chief Executive, APCIMS
on 020 7448 7100 or Mobile: 0798 3543529
Email: davidb@apcims.co.uk
OR
Ian Cornwall, Director of UK Regulation, APCIMS
on 020 7448 7100 or Mobile: 07990 842952
Email: ianc@apcims.co.uk
Background note for editors:
Under the FSA’s RDR proposals, firms advising retail customers on a wide range of investments will have to describe themselves as providing either “independent advice” or “restricted advice”. To describe itself as offering independent advice, a firm will have to provide a consumer with advice which is:
- unbiased and unrestricted, i.e. not influenced or determined by the wishes of a third party;
- based on a comprehensive and fair analysis of the market, i.e. not limited to a handful of products from a handful of providers.
While these requirements are perfectly reasonable of themselves, the FSA has muddied the waters by stating that a firm providing independent advice will have to advise on all types of “retail investment product”, a definition covering an enormous range from life policies and pensions, to unit trusts and investment trusts to higher-risk investments like unregulated collectives and structured products.
APCIMS believes that stretching the definition of “independent advice” in this way runs contrary to general understanding of what independence is all about (i.e. being objective and free from influence, persuasion or control by others) and is likely to result in a number of practical problems –
- advisory firms which are determined to secure the marketing benefits of the “independent advice” label may extend their service offerings to cover all retail investment products notwithstanding that they do not have the resources to thoroughly research such investments and their advisers have neither the detailed knowledge nor the experience to advise on them.
- requiring independent advisers to include more complex and high-risk investments in their advisory range may well result in consumers being recommended investments which are far from suitable for their needs and which neither they nor their advisers truly understand the risks of.
- firms offering specialist investment services focussed on particular areas of the market will be deemed to be offering “restricted advice” even if, for the types of products they do advise on, their advice actually meets the independence criteria (i.e. unbiased, unrestricted, based on comprehensive analysis). Many APCIMS firms are in this position – while they provide specialist advice on shares, bonds and collectives, they believe it is in their clients’ best interests for life insurance and pension needs to be met by other specialist advisers.
- consumers are unlikely to appreciate that the FSA’s idea of independence is not in line with common understanding and may be led by the independent/restricted split into accessing sources of advice that are not in their best interests. For example, would a consumer really want to take advice on buying investment trust shares or structured products from a firm whose service offering had been expanded to include them just to win the “independent advice” label? Equally, would a consumer wanting advice on collective investments be able to spot the difference between two “restricted advice” firms, one of which surveyed the whole market before making its recommendation while the other limited its recommendation to the products of one provider?
- APCIMS members are all covered by MiFID and the Capital Adequacy Directive.