Due diligence

The casual golf club acquaintance is still being entrusted with clients' financial well-being because the SRA has done nothing to police some of its Code of Conduct requirements, says Ian Muirhead

In November 2012, despite Law Society protests, the Solicitors Regulation Authority abandoned the requirement that solicitors should only refer clients for financial advice to independent financial advisers. One of the main reasons for the change was the fact that the Financial Services Authority, as then was, had adopted its own definition of the word independent, which differed from the dictionary definition and excluded many of the stockbrokers and discretionary fund managers who solicitors had dealt with for so long.

In an effort to protect solicitors against the consequences of being permitted to work with the less savoury elements of the financial advice industry, in particular the battalions of self-employed salespeople for national financial advice marketing machines, the SRA introduced a requirement in Outcome 6.3 of its Code of Conduct, that before making a referral, solicitors must ensure that their clients are in a position to take an informed decision as to whether the referral will be in their best interests.

Since then, doubtless pre-occupied by its concern over firms' financial stability, the SRA has done nothing to police this requirement and has equally failed to follow the precedent of the FSA (whose style of outcomes-focused regulation it was required by the Legal Services Board to adopt) by focusing on the requirement for management systems and controls. Principle 8 and Chapter 7 of the Code provide the regulatory mandate for demanding that due diligence is conducted centrally in accordance with Outcome 6.3 and that decisions are seen to be adhered to by all members of the firm.

So, in practice nothing has changed. Solicitors who were aware of the high charges and product lock-ins operated by what were previously called multi-tied and are now called restricted advisers, continue to shun them. But in other firms anything goes; the casual golf club acquaintance continues to be entrusted with clients' financial well-being.

The increasing likelihood that the chickens will come home to roost in the form of litigation by aggrieved clients against those who make inappropriate referrals may begin to affect standards of compliance, but meanwhile what should the more conscientious firms be doing? Many commentators expressed the valid opinion at the time of the change that it would be unrealistic to expect solicitors to undertake their own investigations into the credentials of financial advisers. So it is entirely reasonable that they should expect the advisers with whom they intend to work to provide this information for them.

The starting point should be for the law firm to adopt a referrals procedure, which would be adopted by management and administered by the firm's COLP. This would note the fact that the Law Society recommends strongly that firms should only refer to independent financial advisers; it would set out the basis on which a shortlist of potential appointees should be compiled; it would spell out the criteria for selection; it would state the information to be required of applicants; it would set out the manner in which the decision should be promulgated to all members of the firm so as to ensure compliance; it might require that appointees should share the information which they gather on referred clients with the referring fee-earner; and it would lay down the process for periodic review of the appointees, based on performance.

If more than one IFA firm were appointed, a panel should be constructed in accordance with Lexcel recommendation, and this might suitably be based on business specialisation, since different departments in the firm will have different needs. This raises the question of specialist qualifications on the part of the financial advisers. For example, IFAs involved in matrimonial work should be authorised to conduct pension transfer business and possibly possess the Resolution accreditation, and IFAs involved in trust work should preferably possess the STEP Certificate for Financial Services (Trusts and Estate Planning). Other relevant qualifications are that of Chartered Financial Planner and membership of the Society of Later Life Advisers (SOLLA).

Due diligence applies equally to solicitors' referrals to discretionary fund managers and stockbrokers. However, such relationships are best routed through an IFA, who will be able to provide the holistic overview, including tax considerations, which fall outside the DFM's brief.

Ian Muirhead is a director at Solicitors for Independent Financial Advice (SIFA)

Copyright & permissions