The Solicitors Regulatory Authority have made recommendations to the board to the effect that Solicitors are free to refer their clients for investment business, financial planning and financial advice to whomsoever they see fit. To be more specific:

The Code of Conduct’s Outcome (6.3) <will be amended> allowing solicitors to put clients “in a position to make informed decisions about referrals in respect of investment advice”

For background, it should be understood that from 31st of December 2012, the difference between Independent advice, and advice that is not Independent will blur. Firstly Independent advice is defined as (source FSA):

The rules set out a new definition for independent advice, which is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market. This is designed to reflect the idea of genuinely independent advice being free from any restrictions that could affect their ability to recommend whatever is best for the customer.

Restricted advice is given seven different definitions (source FSA):

We will advise and make a recommendation for you after we have assessed your needs. We only offer products from a limited number of companies. You may ask us for a list of the companies whose products we offer.

We will advise and make a recommendation for you after we have assessed your needs. We only offer products from [name of provider].

We only offer our own products. We will advise and make a recommendation for you after we have assessed your needs. You may ask us for a list of the products we offer advice on.

We will provide basic advice on a limited range of stakeholder products and in order to do this we will ask some questions about your income, savings and other circumstances, but we will not conduct a full assessment of your needs or offer advice on whether a non-stakeholder product may be more suitable.

We offer products from a single stakeholder product provider.

We will advise and make a recommendation for you after we have assessed your needs. We only offer advice on limited types of products. You may ask us for a list of the products we offer.

We will advise and make a recommendation for you after we have assessed your needs. We offer advice on limited types of products (which we offer from [a single company or limited number of companies]). You may ask us for a list of the companies and products we offer advice on.

So in short, the term ‘restricted’ covers everything from what is essentially no advice, just guidance on ‘stakeholder’ products, through to whole-of-market with respect to providers but on a limited number of products. Most Stockbrokers and Discretionary Fund Managers will be restricted, despite offering in many cases, a broad range of client options. Those who ‘manufacture’ their own products, for example Retail Banks, Private Banks and Wealth Managers, such as St James’s Place, will be restricted.

The nature and complexity of Financial Services, along with the incessant innovation means that not all companies that continue to hold themselves out as Independent will have the resource to do due diligence on the ‘relevant market’. It is our opinion that a proportion of these firms, who have essentially always been restricted (by the new definition) will incur the wrath of the regulator in 2013.

At the same time, it is clear that a firm, ignoring certain esoteric investments, but in all other cases ‘whole-of-market’, would be forced to hold itself as to be restricted.

Potentially the SRA’s stance makes the level of due diligence that a legal firm needs to conduct vastly more complex. We have a document which we share with firms we work with in partnership, this covers the following areas:

  • Name, Trading Address, Company Reg No.
  • About the firm: Synopsis, Type of practice, How is the firm regulated
  • Areas of Expertise: Breakdown of fee income for each key advice area, Professional Qualifications and Professional Body Memberships
  • Compliance and Risk Management: Client Complaints, Risk Management systems, Business Continuity, Use of third parties, Independent Compliance Monitoring, Professional Indemnity Insurance
  • Procedures: Regulatory Audits, Disciplinary, Accolades & Awards
  • Financial and Business Control: Business Planning, Regulatory Solvency, Regulatory Compliance
  • Client Management: Number of clients, Remuneration Structure, Contact/Service Commitments, Source of new clients
  • Associate Businesses

Most legal practices have no formal referral agreements in place (source JPMorgan research), which means each fee-earner often has their own connections. This may increase the firm’s risk, as if most Financial Advisers aren’t clear on whether they’re Independent or not, one does wonder how Solicitors are now expected to ” to put clients in a position to make informed decisions about referrals in respect of investment advice”.

Update 29th November: The Law Society have taken the unprecedented step of urging the profession not to follow the Solicitors Regulation Authority’s (SRA) new rules on recommending financial advisers to clients, warning that it could expose solicitors to negligence claims.

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