FCA Thematic Review 14/5 – Supervising Retail Investment Advice (part 1)

The FCA has recently completed the second stage of its thematic review on how firms and advisors are implementing RDR requirements. TR 14/5 focuses on the standard for independent advice, to respond to the industry’s desire for greater clarification on what actions firms should take to meet the new independence requirements.

The report published in March 2014 provides a clear steer on the FCA’s expectations:

“We expect firms to put their clients at the heart of their business. This involves firms considering the potential impact of their business model – including how they are trying to make money – on consumers, and ensuring that their own interests are not prioritised over those of their clients. When applied to independence, this concept of placing consumers at the heart of the business means that a genuinely independent firm considers the relevant products that suit each individual client and provides unbiased and unrestricted advice.

We do not see the independence requirements as an exercise that firms should complete primarily to satisfy us. We see the independence standard as a key element of the RDR, which firms should focus on to deliver fair outcomes to their clients.”

1.   What is independent advice?

Unbiased and unrestricted personal recommendation on all types of retail investment products (“RIPs”) that may be suitable for a retail client.

The key change post RDR is that the range of products that advisers must be willing and able to advise on has widened from ‘packaged products’ to ‘retail investment products’ (“RIPs”) sold to retail clients.

“We expect firms to carry out research on the whole of the market to identify the solution(s) that are in the client’s best interests, then conduct detailed due diligence on the recommended solution(s).”

The FCA noted that firms holding themselves out as independent may recommend a discretionary investment management (“DIM”) service. The RDR independence rules do not normally apply to the recommendation of a service, however there are certain circumstances where the advice does constitute a personal recommendation in relation to a RIP, and in these instances the rules apply. Where a firm is providing independent advice, advisors should not recommend a DIM service without:

  • objectively considering a wide range of investment solutions in the market;
  • considering the needs and circumstances of the individual client; and
  • undertaking sufficient due diligence on the DIM.

2.  RDR Thematic Review

The FCA found that the most common failings 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
  • Networks failing to ensure that all appointed representatives (ARs) are meeting the independence requirements (e.g. ARs that were biased towards the use of a distributor influenced fund).

3.  Statistics

  • 113 firms were included in the thematic review.
  • 88 firms stated they offered independent advice.
  • 2 firms (of the 88) were not meeting the requirements.
  • The FCA had concerns that 28 firms (of the 88) were not meeting the requirements.
  • On further investigation of 17 firms (of the 28), 10 were either not meeting the requirements or the FCA has doubts about their independence.

4.  Guides for firms

If you would like a copy of our handy glance card of good and poor practices please email: vsmith@cleveland-co.com to add your name to our mailing list.

Should you require any advice or information on RDRs, Cleveland & Co, your external in-house counsel, are here to help.

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