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Is FCA's 'restricted' definition fit for purpose?
on May 13, 2014 at 12:55
We ask three wealth managers for their views on the regulator's definition of ‘restricted’.
The RDR’s new definition of independence has made it nigh on impossible for most wealth management businesses to comply, leaving many firms grappling with how to communicate their new-found restricted definition to clients.
This has no doubt proved to be a problem in the industry. Recent Financial Conduct Authority (FCA) found that 31% of firms offering a ‘restricted’ service were not being clear with clients about the nature of the restriction.
While many in the industry understand the rationale behind the FCA’s decision to change the definition of independence, they take issue with the word ‘restricted’. We asked a handful of wealth managers how they would like to alter the current definition.
Alan Beaney, investment director, RC Brown, Bristol
‘The FCA’s objective in trying to inform the retail investor of whether the financial advice they receive is impartial is entirely laudable. However, the retail distribution review has not provided the expected panacea, mainly because it does not really distinguish between the essentially two different elements involved in providing financial advice: first, the development of a strategy to meet a client’s financial goals and second, its successful implementation.
‘This has brought about another unintended consequence as fund managers and advisers have sought to encroach on each other’s territories to secure distribution and increase revenue. Hence there has been a marked reduction in purely independent advice.
There is nothing inherently wrong with this as long as the investor knows this at the outset. However, the current FCA definitions on the classification of the type of advice are not particularly helpful and some would say misleading.
‘If one were to change the definition of “restricted” to cover only those types of firm that seek to provide an integrated service, it would be more helpful and customers could make their own minds up as to the quality and impartiality of the advice they are receiving.’
Haig Bathgate, CIO, Turcan Connell, Edinburgh
‘The principle behind the effort to define “independent” versus those who can provide restricted advice is sensible and, in keeping with the majority of initiatives implemented under the retail distribution review, should provide greater transparency for the end consumer, which is critically important to rebuild trust in the financial services sector.
‘A problematic issue that has arisen is the general lack of understanding from the general public on what “independent” means in the context of advice. When questioned, the majority of those who responded to a survey thought IFA was a term for financial advisers in general and didn’t appreciate the difference between independent and restricted.
‘The Financial Conduct Authority has admitted the new definition of independence is not working quite as it would like and is making efforts to look at these points again.
‘The term “restricted” at present feels too wide and “independent” too restrictive – although providing further definition, relaxing the restrictions on independence or adding further categories is likely to confuse the public even more. The FCA has a difficult job to implement effectively what is a sensible initiative.’
Jonathan Moyes, investment manager, Whitechurch, Bristol
‘While the objective of providing retail clients with greater clarity on the level of service offered by financial advisers is a positive step, I believe the term restricted should be changed as it is too broad and confusing for clients and their advice outcomes. The reason for this is there are varying levels of “restriction”, ranging from companies that are restricted to their own product range to those restricted because they do not offer advice in a specific area – for example, those companies who do not offer advice on structured products.
‘The difference between these examples is that the first company may not have a suitable solution within their product range whereas the second company can offer advice in all areas from a range of companies and sources and have a solution for all clients. The decision on who to use would not automatically be obvious from the “restricted” label.
‘I would suggest a more dynamic labelling of restricted businesses, perhaps introducing a “specialist independent” label to bridge the gap between independent and restricted advisers.’
Jonathan Moyes appeared in our Top 30 under 30 2014 class of new wealth management talent, see who else did here.