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Independents can thrive despite SRA’s restricted referrals verdict

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Independents can thrive despite SRA’s restricted referrals verdict

After months of consultation, the Solicitors Regulation Authority (SRA) has finally given its verdict over the question of referrals to advisers.

It has abandoned its commitment to independence, and will permit solicitors to refer to restricted advisers after the retail distribution review. Advisers who would now be deemed tied or multi-tied will therefore be allowed to gain business from the legal profession.

The SRA’s caveat is that solicitors’ clients need to be ‘in a position to make informed decisions about how to pursue the matter’. Solicitors will have to satisfy not only themselves but also their clients that any referral will be in their clients’ best interests. The solicitors’ regulator intends to issue guidance explaining the due diligence and record-keeping that will be required.

It has chosen to ignore the response to the consultation made by the Law Society, which warned that abandoning the commitment to independence could open up referrals to ‘providers with an agenda that is predicated on self-interest and tied arrangements rather than a transparent market-wide assessment’.

The double meaning of independence

The elephant in the room is that there are now two different meanings of the word ‘independent’. The dictionary definition, which will continue to be the meaning understood by consumers and solicitors alike, is that of being free from third-party influence.

The meaning the Financial Services Authority (FSA) is now seeking to persuade us to adopt attaches greater importance to the scope of the service offered than to impartiality. The regulator seems to have taken its cue from Humpty Dumpty: ‘When I use a word, it means exactly what I mean it to mean.’

In this situation, one can sympathise with the challenge the SRA faces in attempting to reconcile its own rulebook, which assumes the first meaning, with the FSA’s esoteric redefinition.

The beneficiaries

Among the beneficiaries of the relaxation of the SRA code of conduct will be those members of the Association of Private Client Investment Managers and Stockbrokers who, in addition to providing stockbroker services, provide multi-tied financial advice.

It seems the SRA’s regulatory promiscuity is likely to extend to joint ventures between solicitors and financial advisers. These are described in the SRA code of conduct as solicitors’ separate businesses, and outcome 12.6 of the code states that solicitors may only participate in separate businesses that are appointed representatives of financial advice firms if these firms are independent.

However, anticipating the outcome of the consultation process, the SRA announced only a few weeks before its 28 November board meeting that it had granted a waiver of this outcome for the benefit of the Alexander Associates Group, a representative of the multi-tied adviser St James’s Place.

A question that was not raised in the consultation was about the consequences for solicitors’ in-house financial advice. The answer may lie in the fact that the SRA plans to retain outcome 6.1 of the SRA code, which insists on solicitors’ own independence in the true sense: being free from third-party influence.

This suggests that solicitors would be able to employ, or continue to employ, financial advisers who satisfy the SRA meaning of independence, even though they may be classified as restricted by the FSA, but they would be prohibited from employing tied or multi-tied advisers or operating as sales offices for product providers.

Client referral compliance

Independents may draw some comfort from the fact that client referrals are to become a compliance issue. Currently, two practices are prevalent when it comes to referrals.

In some law firms, fee-earners simply give clients a list of three local advisers and avoid any involvement. In most others, every fee-earner has their own financial adviser connections, thus defying any attempt at quality control or central co-ordination.

The requirement for due diligence should put paid to both these practices, and independents would have a golden opportunity to promote their superiority.

Ian Muirhead is chairman of Sifa.

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