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Is independent label meaningless after SRA referral call?

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Is independent label meaningless after SRA referral call?

The Solicitors Regulation Authority’s (SRA) decision to allow referrals to restricted advisers following the retail distribution review (RDR) has left many firms feeling vindicated in not changing to comply with the standard.

Questions remain over how firms can distinguish themselves in an industry that is dominated by restricted businesses, however.

Under RDR rules, private client investment companies that do not offer life policies and pensions will not be able to describe themselves as independent.

Similarly, firms that use models and internal multi-asset funds, and do not cover all retail investments, may also struggle to meet requirements.

A large number of wealth management companies have said they will be restricted, including national firms such as Brewin Dolphin, Quilter, Rathbones, Brooks Macdonald and Close Brothers Asset Management. Cazenove will be independent.

The SRA’s decision to allow referrals to ‘restricted’ advisers follows a similar decision by the Institute of Chartered Accountants in England and Wales (ICAEW).

Simon Lough (pictured), chief executive at Heartwood – which will be restricted post-RDR as it has an internal multi-asset fund range – welcomed the SRA’s decision. ‘This is exactly the view I took when I became CEO three years ago,’ he said. ‘I looked at this and felt it was not going to benefit our clients to be independent.’

While Lough is very positive about the principles underpinning the RDR – not least improved transparency and the removal of trail commission – he believes the FSA’s decision to change the basis of independence could prove a mistake as it is confusing for consumers.

Soundings from FCA

Nonetheless, he was encouraged by comments that Martin Wheatley, chief executive of the incoming Financial Conduct Authority, made at a recent conference, telling investment managers they should not fear being restricted as clients would be aware of the services they require.

‘Heartwood has an independent ownership structure. We are independent minded and buy third party products. If Heartwood doesn’t qualify to be independent, is it a term of any value?’ Lough said.

‘I don’t think the FSA has got this right and I would interpret Martin Wheatley’s comments at the recent Apcims conference as an explicit recognition of that.’

Quilter will also be restricted come 2013 as it does not advise on life products and pensions. Its Bristol office head Pamela Reid also welcomed the SRA’s decision.

‘It opens doors or keeps doors open to us for direct referrals, and I am absolutely sure the solicitors who refer to us do so in the full knowledge of what we do, how we go about it and understand what we do as a company, which is extremely useful for us,’ she said.

Reid is also pleased the firm opted not to move into life product advice in light of the new  rules. ‘Our decision has been to stick to our knitting and do investment work and not move into financial planning.

‘This is absolutely consistent with the way we work with financial advisers, where we complement their work by offering discretionary investment services for clients they refer to us,’ she added.

Law Society warning

Nonetheless, not everyone has welcomed the SRA’s decision. The Law Society has urged solicitors not to follow the SRA’s new rules, warning that referrals to restricted advisers could result in mis-selling scandals and negligence claims.

However, Lough described the Law Society’s reaction as potentially overblown, as it underestimates the ability of solicitors to decipher between different models.

‘They seem to have a low opinion of solicitors. The ones we deal with are more than capable of distinguishing between models and understanding the degree of independence we have,’ he said.

Reid, on the other hand, recognises some of the Law Society’s concerns, arguing the ICAEW’s code of ethics is clearer by specifying that the referral should be made to a firm that is independent in relation to the scope of the services that are required for the underlying client.

She adds the SRA could have focused more on the distinction between whether restricted firms offer unbiased or biased offerings. She also questions the value in the term ‘independent’.

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