As professional bodies gain a greater role, some advisers, such as Chris Gilchrist (pictured), regard it as a move towards self-regulation, but they remain divided over its potential problems and benefits.
In the two years since the Financial Services Authority (FSA) dropped its controversial plans for an independent professional standards board (PSB), following concerns about costs and dual regulation, the existing professional bodies have taken a more central role in regulating individuals. They do this by issuing statements of professional standing (SPS) and work closely with the FSA in areas such as the policing of conduct and data sharing.
Some see this as a swing towards self-regulation, which could be set to continue after the implementation of the retail distribution review (RDR). But it is a controversial area and there is still confusion over the exact role of the professional bodies in this new environment.
The case for self-regulation
Chris Gilchrist, director of FiveWays Financial Planning, says: ‘The original proposal for an independent PSB tells us that, in principle, regulators are in favour of professional regulation being separated from the rest of the regulatory apparatus.
‘When the Financial Conduct Authority (FCA) takes over, you could see its role in relation to the adviser community moving towards macro-regulation: governing products, capital adequacy, corporate structures, mergers and acquisitions and the kinds of permissions companies have, for example. Everything to do with qualifications and ethics could be downloaded to professional bodies.’
Gilchrist is also in favour of self-regulation for best practice. ‘The FCA-type regulation is a poor way of dealing with evolving concepts such as best practice in the RDR world,’ he says.
‘It would take a couple of years before the FCA could codify that and, by the time it has, the world will have changed again. It seems sensible to delegate defining best practice to professional bodies. That will result in better, more responsive regulation. The accountancy bodies, for example, have managed this over many years.’
Issuing statements of professional standing
David Thomson, director of policy and public affairs at the Chartered Insurance Institute (CII), argues that issuing SPSs is not a major change for the professional body.
‘A lot of it was already in place: qualifications, continuing professional development, ethics and, in our case, having an independent disciplinary process. If an individual breaches our code, they can be subjected to procedures and have their membership and professional qualifications removed,’ he says.
A difference from other professions is that professional bodies like the CII cannot stop advisers from practising, he says. ‘We can inform the regulator if we have withdrawn an individual’s SPS, and it is up to the FSA to take the ultimate action. Nothing has really changed, other than we report our data to the FSA and have some requirements as an accredited body that our systems are fit for purpose.’
Data gathering and information sharing
Although in the past, professional bodies dealt with individuals and the FSA dealt with firms, these two functions are moving closer together and the SPS-accrediting bodies will facilitate that.
‘The FCA will put greater onus on culture and behaviour. It will have two mechanisms by which it will look at information,’ says Thomson. ‘First, it will expect firms to make sure their people are bona fide; and it will use accredited bodies as a second check on that.’
Thomson (pictured) says previously the regulator had a lot of data on firms and almost none on individuals. He believes this balance will change. ‘Going forward, it will have more on individuals, so I would expect it will crosscheck data from accrediting bodies and firms to make sure it matches,’ he says.
‘The FCA will probably also expect us to pick up on behavioural things by doing deep drills on particular firms or people. We will share information with [the regulator] in multiple ways. It will take a while for advisers to understand what an accredited body does and doesn’t do. The RDR doesn’t create a second regulator.’
Thomson says the FCA might ask professional bodies to do more policing as well as data gathering. However, he says, this would not change what the CII currently does because it already polices its own code.
Thomson opposes the idea of professional bodies authorising individuals, but stresses the importance of maintaining professional standards.
‘I don’t think we are in the regulation business. Professional bodies have never been keen on being an agent of the regulator,’ he says.
‘What matters is to have appropriate minimum standards. Then people aspire to higher standards, such as chartered status and taking pride in what they do, rather than just box-ticking and doing the minimum.’
Gilchrist, however, believes the issuing of SPSs already gives professional bodies a crucial role in policing standards. ‘If an individual breached the professional standards, [the professional body] would withdraw their SPS and they would no longer be able to advise. There may be some tricky legal issues [involved], but effectively you are out,’ he says.
Nonetheless, he agrees permissions are more like legal issues and should ultimately be dealt with by the FCA rather than a professional body.
For and against
Advisers are divided over whether self-regulation is a good thing in principle. Joel Adams, joint chief executive at Lift-Financial, says: ‘As a chartered firm, we subscribe to the CII’s code of ethics, which is a wide-ranging document. If the code were adopted more widely in the industry, it would be a safer place for clients.
‘If I had to choose between being regulated by the FCA or FSA, who are faceless and dish out rules from an ivory tower, or a professional body that understands my role in industry a little better, I would choose the latter every time. It works for accountants and lawyers.’
Alistair Cunningham (pictured), financial planning director at Wingate Financial Planning, disagrees. ‘Regulation through the FSA has room for improvement, but it broadly works quite well. Other professions, such as the legal profession, have had problems with self-regulation. Professional body regulation is not a panacea just because the FSA has areas for improvement,’ he says.
He highlights some concerns he has about handing power over to other potential regulators. ‘My concern with having professional bodies regulate themselves is the potential for conflicts of interest and the old boy network. Who regulates the regulator?’ he says.
Goodwill and skill
Gilchrist welcomes self-regulation as long as it is carried out by experienced practitioners who are not given a licence to spend other people’s money.
‘There is plenty of goodwill and skill: retired executives or senior IFAs could set up and run those systems easily, quickly and efficiently,’ he says.
Resources would not be a problem, he adds. ‘The FCA could pass the appropriate money from fees to the professional bodies, or their fees could be lower. People shouldn’t knock self-regulation. When it has the right people involved and the right powers of persuasion, it can be incredibly effective.’
Gilchrist concludes this is a crucial issue for the future of the profession. ‘The adviser community has to think about this,’ he says. ‘Do you really want it to go on being [regulated] by bureaucrats in Canary Wharf who don’t understand the industry well, who are grotesquely overpaid for what they do and who don’t engage with the adviser community in the way they need to if regulation is to work?
‘Or are you going to endure the pain of setting up a new system inside the professional bodies, which will be hard for everyone, but you will end up with a much better and cheaper system of regulation?’
Transition tale: 35 Finance
Barr Ellison Solicitors has sold its shareholding in Cambridge-based IFA 35 Finance to a private investor. Jeremy Davis, managing director of 35 Finance, says the move will free up the firm to pursue opportunities created by the RDR.
‘Barr Ellison felt it wasn’t its core interest any more, although it wants to continue working closely with us,’ says Davis (pictured). ‘The deal gives us the opportunity to become independent and to grow the business in a way we wouldn’t have been able to before.
‘We see the RDR as an opportunity to position ourselves as a top-level, fee-based investment business and, particularly in view of our past professional connection, to make new professional connections in addition to the ones we already have and expand the business that way.’
Davis says his firm is set on boosting staff numbers and qualifications. ‘We are focusing on graduate recruitment and upping our status in terms of qualifications. We have recruited three graduate advisers we are going to train within the business, and there is quite a substantial increase in staffing.’
He says a relocation is on the cards: ‘We are bulging at the seams, so we will be moving offices quite soon.’
The firm plans to obtain discretionary permissions to bolster its investment proposition. ‘We are looking to develop ourselves as a wealth manager in addition to financial planning,’ Davis explains.
‘Our wealth management proposition is on an advisory basis, but we anticipate expanding to our own discretionary service, which will allow us to respond more rapidly to changing market conditions,’ he says.
‘In addition to our own service, we will continue to use one or more external discretionary fund managers. We find that with large portfolios, it is normally desirable to diversify, not only in the normal sense of the word but in terms of management as well.’
The RDR is also bringing challenges and a bigger workload for 35 Finance, particularly because of the differences in platform providers’ ideas of charging.
Davis says: ‘The main thing causing us to tear our hair out is dealing with all the individual platforms and making sure we will carry on being paid.
‘We have always been fee-based and have worked on an adviser-charging basis. In the past, our fee was offset by commission and that stream will be switched off, so [the concern is] about the mechanism by which we are paid.’
He says he wishes wrap providers were more consistent in their approach to charging. ‘The way the individual platforms have interpreted charging is different, and we have to make sure we do it right for each platform. That has caused us a temporary but significant workload.’