ABS countdown | Rely on your judgement

The SRA board’s decision in late November to allow solicitors to refer their clients to any financial advisers, and not just those who are independent, is an interesting application of the tenets of outcomes-focused regulation. What the SRA appears to be saying is that it is more important to give solicitors freedom of choice than to ensure that their clients receive independent advice. Before I go any further, I should declare an interest – I work for a membership organisation part of whose function is to promote independent financial advice. The debate which has led to the SRA decision has been bitter and some of those opposing its decision are not entirely content with the process by which it was made.

In order to understand the controversy properly, a little background information is needed. The Financial Services Authority (FSA) is introducing significant changes to the sector following the result of its Retail Distribution Review (RDR). Since 1 January commission has been banned, advisers are required to have enhanced qualifications, and they need to decide whether they qualify to be regarded as “independent” according to a new definition of the word created by the FSA, which attaches more importance to the scope of the service provided than to the impartiality of the provider. Those who do not qualify are to be regarded as offering “restricted” advice.

The new definition creates problems for stockbrokers, whose business proposition excludes advice on life and pensions, and this presented a problem for the SRA, which was lobbied by the stockbrokers’ trade association, APCIMS, to abandon its independent-only stance. This lobbying was also supported by the tied and multi-tied financial advice firms, which had been trying to gain legitimate access to the solicitor community for many years.

Informed decisions

By the time the SRA board met in July 2012 to discuss the issue for the first time, it seemed clear that the regulator’s strong preference was to abandon the existing prohibition which, according to its 2009 guidance was based on the principle that: “Firms must always act in the best interests of their clients. This means that they must refer clients to independent financial advisers for investment advice.” The consultation process which then followed generated an unusually high level of responses, of which 26 were in favour of retaining the existing prohibition and 22 favoured abandoning it. Despite this vote for the status quo, the SRA has introduced a new outcome 6.3 which makes no reference to independence and requires only that solicitors must ensure that their “clients are in a position to make informed decisions about how to pursue the matter”.

This provoked an immediate response from the Law Society (from which the SRA is now independent in the true sense of the word, of being free from third party influence). The Society’s press release stated that it had taken the “unprecedented step of urging the profession not to follow the Solicitors Regulation Authority’s (SRA) new rules” and urging solicitors “to disregard the liberalisation of the handbook in this area and to only recommend IFAs”. An indignant journalist at the Law Society Gazette described the new flexibility now available to solicitors as “a bit like opening a new shark tank at your local swimming pool on the grounds that it offers the punters an extra choice of where to swim.”

COLP responsibility

The way in which the SRA conducted the consultation exercise has also drawn some criticism. Only six weeks were allowed for responses, as opposed to the twelve weeks set out in government guidelines, and the SRA chose to ignore the fact that the majority of the responses were against the main proposal when the board made its final decision in November. The board is perfectly entitled to do that but the feeling remains that the SRA had made its mind up on independence some months earlier. Referring to the fact that the SRA will be publishing the consultation responses this month, the Law Society’s press release concluded with the words “We hope that in the interests of legitimacy there is a clear expression of support for the SRA’s proposals in this area from stakeholders other than those in the financial services industry who stand to benefit from liberalisation.”

COLPs may also be discomfited by the SRA decision. The SRA board papers made clear that it will be their responsibility to be seen to have conducted appropriate due diligence before recommending any financial adviser, in order to ensure that the clients’ best interests are served.