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Fortitude | SRA Due Diligence Event
Transcript of Fortitude | SRA Due Diligence Event
The SRA's consulatation and rule changes regarding referrals to financial advisers
The current position following both reviews
Due diligence for solicitors - for financial advisers and discretionary fund managers The FSA's Retail Distribution Review The retail distribution review, conducted by the Financial Services Authority over several years, changed the definition of independent financial advice.
From 1st January 2013, there is a new, contrived definition of independent financial advice, centering upon advisers being able to advise upon the "whole of market".
The previous definitions of "independent", "tied" or "multi-tied" advisers have gone.
The new FSA definition splits financial advice into the new categories of "independent" and "restricted".
Advisers that provide independent advice can consider all types of investment product which might be suitable for a client. The FSA's Retail Distribution Review An adviser which offers restricted advice can only consider certain products, product providers or both
Advisers must clearly explain whether they are offering independent or restricted advice
The new definition is difficult to understand and moves away from the dictionary definition of independence
The FSA appears to have given up on the idea that independent advice is better "We do not have a preference as to whether a firm is independent or restricted". The SRA rule changes The FSA wrote to the SRA, and the other professional bodies, inviting them to take their own view on independence. The SRA rule changes The consultation exercise Only 6 weeks allowed instead of the usual 12
62 respondents - the largest in recent years
The majority of those who expressed a view were against the SRA's preferred option
The Law Society stongly against the SRA's view The SRA rule changes SRA Board decision of 28 November No guidance has been forthcoming but the board paper said: " the client would need to be given sufficient information about the status of the financial adviser and all other pertinent information, to be able to confirm their consent. This means that the lawyer and the client will work out together whether an independent or restricted adviser is the more suitable choice" The SRA rule changes The board paper says: Still no SRA guidance on what this means. "the person making the referral would need to discuss the relevant facts of the referral with the client and obtain the client's informed consent to the particular referral. This would involve the client in the decision making process" The SRA rule changes Des Hudson, Law Society CEO, expanded on this: “... Solicitors may become more open to negligence claims based on that recommendation or referral or that the profession as a whole becomes embroiled in the type of mis-selling scandal which has plagued the financial services industry in recent times”. Solicitor decisions on financial services referrals need to be evidenced
Due diligence evidence is needed on selection of those financial advisers to be used for referrals. But what, exactly?
Is evidence needed of client consent to the decision made?
Under what circumstances might referral to restricted advisers be more "suitable" than to independent advisers?
What about in-house advisers? It seems that they cannot be restricted because the SRA "forgot" about them in the consultation.
Are joint ventures with restricted advisers now permitted? The current position on referrals The current position on referrals The SRA has not published the consultation paper responses, as it said it would
The SRA will not comment on why it has not produced guidance on the new rule, despite saying that it would
The Law Society is due to publish a revised version of its own guidance, moving its recommending that solicitors refer to sources "impartial", rather than "independent" advice i.e. free from third party influence Due diligence for referrals A suggested procedure for financial services referrals Should form part of a firm's post-OFR compliance plan
Follow the Law Society line on continuing to use independent/impartial advisers
To form part of the COLP's compliance responsibilities The SRA rule changes Outcome 6.3 COLP to consult with relevant managers/departments and compile a shortlist of relevant financial advice firms with whom the firm has or might wish to deal with
Invite firms on the shortlist to tender for the referral business and submit a summary of their credentials, to provide evidence of due diligence COLP should review the tender submissions, together with other relevant individuals within the firm, and recommend the most appropriate, based on the following considerations: Suitability of the IFA's specialisations to the work of the firm
Cultural compatibility with the firm and its clients
The status of the firm and the qualifications of its advisers Due diligence for referrals The quality of the IFA's client reports The reputation of the IFA an its regulatory record The firm's performance at a beauty parade? No member of the firm should refer clients other than to members of the panel without written consent of the COLP Due diligence for referrals The authorised third party agreement requires the IFA firm to report to solicitor firm any complaints received by clients and any regulatory action taken against the IFA firm Working with discretionary fund managers Many firms of solicitors have long established relationships with DFMs. Very few have been subject to due diligence
SIFA professional firms can assist by providing access to a DFM comparison service
If the IFA has discretionary permission from the FSA, then this can be taken into account Working with discretionary fund managers Both IFA and DFM have a responsibility to ensure that recommendations are suitable for the client
IFA will be primarily responsible for the advice and will outsource investment management. The IFA cannot delegate responsibility for advice
IFA will provide instructions to the DFM reflecting the client's investment objectives and attitude risk For IFAs who do not have discretionary permission, the FSA advocates the following structure: Working with discretionary fund managers IFA will instruct the DFM to monitor the portfolio to ensure that it satisfies the instructions and to review the instructions at least annually
The IFA must ensure that instructions given to the DFM are suitable for the client and that the DFM has an obligation to act in accordance with these instructions
The client will not have a direct relationship with the DFM. The IFA is the DFM's client, this must be explained to the client What happens next? As a consequence of RDR, the number of IFA's is reducing. Although not by as much as some organisations claimed. This should not be a problem for solicitors.
Most solicitors will continue to use only independent financial advisers.
Many former "tied" and "multi-tied" financial advisers will attempt to get business from solicitors. St. James' Place will re-double efforts. Solicitor referrals in 2013 Stuart Bushell
Legal Affairs Director, SIFA Professional Services
Contact: 07815 840078 or email@example.com Due diligence for referrals Due diligence for referrals Why adopt a due diligence process for referrals? The IFA will provide feedback to the referring fee-earner, compromising Agenda MORNING SEMINAR
9:30 AM - Formal presentations, Q&A
Presentation 1. Stuart Bushell, SIFA
Presentation 2. Abbie Tanner, A Business Innovation
Presentation 3. Neil Bailey, Fortitude
11:30 AM - Expected departure Is the beauty parade dead? Solicitor referrals to financial advisers in 2013 Up to this point the SRA/Law Society definition of independence in the context of referrals to financial advisers had always followed the FSA definition
The SRA had to do something - otherwise, by default, some solicitors would no longer be able to use advisers used previously Of the Solicitors Code of Conduct now simply requires solicitors to ensure that : "Clients are in a position to make informed decisions" Indicative Behaviour 6.2 Of the Code now states: "Any referral to a third party that can offer products from only one source is made only after the client has been informed of this limitation" The Law Society response - 29 November "The Law Society has taken the unprecedented step of urging the profession not to follow the SRA's new rules on recommending financial adviser to clients, warning that it could expose solicitors to negligence claims" More questions than answers - Many firms prefer to appoint a panel of IFAs, based upon the respective specialisations of the firms to be listed. We suggest that the following documents should be used on relation to client referrals:
- Terms of business for financial services leaflet to be provided to clients
- An authorised third party should be signed, confirming the relationship between the two firms
- A client referral document, recording the instruction to the IFA - A summary of the advice given
- Note of any requirement for additional legal advice
- Comments by clients on quality services Better quality advice for clients
Meets Law Society advice on referrals, as well as that of the SRA
Minimises the risk of future negligence/mis-selling claims This procedure enables IFAs to take charge of solicitors’ DFM relationships and influence the structure of DFM portfolios. For discretionary trusts this can extend to advocating an investment bond wrapper, which would be outside the scope of most DFMs’ authorisations. Much solicitor confusion on:
What has to be done to demonstrate compliance with the new rule on financial services referrals
What should be recorded
What clients need to know The SIFA Directory of IFAs becomes an even more important tool to enable solicitors to identify truly independent sources of financial advice. Any questions? Total Return Bid-Bid performance vs volatility scatter chart over 60 months (from 31 Jan 2008 to 31 Jan 2013) from UK Retail UT and OEICs universe. Rebased in Pounds Sterling Total Return Bid-Bid performance vs volatility scatter chart over 120 months (from 31 Jan 2003 to 31 Jan 2013) from UK Retail UT and OEICs universe. Rebased in Pounds Sterling ‘Independent advice’ is defined in the Handbook as ‘a personal recommendation to a retail client in relation to a retail investment product where the personal recommendation provided meets the
requirements of the rule on independent advice (COBS 6.2A.3R)’. i.e. is:
(a) based on a comprehensive and fair analysis of the relevant market; and
(b) unbiased and unrestricted. in·de·pend·ent
Free from outside control; not depending on another's authority.
An independent person or body.
free - substantive - self-contained - self-sufficient 4. REVIEW REGULARLY 2. RISK PROFILE 3. INVESTMENT MANAGER 1. DESIRED OUTCOMES Three Year Volatility Total Return Bid-Bid performance vs volatility scatter chart over 36 months (from 31 Jan 2010 to 31 Jan 2013) from UK Retail UT and OEICs universe. Rebased in Pounds Sterling One Year Volatility Total Return Bid-Bid performance vs volatility scatter chart over 12 months (from 31 Jan 2012 to 31 Jan 2013) from UK Retail UT and OEICs universe. Rebased in Pounds Sterling Three Year Total Return Total Return Bid-Bid monthly line chart since start of data, end Dec 2009 from UK Retail UT and OEICs universe. Rebased in Pounds Sterling INVESTMENT DECISIONS SHOULD BE MADE IN THE CONTEXT OF A FINANCIAL PLAN
RISK AND RETURN ARE CLOSELY RELATED
ASSET ALLOCATION DRIVES PORTFOLIO PERFORMANCE
COSTS MATTER 4. REVIEW REGULARLY 2. RISK PROFILE 3. INVESTMENT MANAGER 1. DESIRED OUTCOMES RISK
PROFILE RISK REQUIRED RISK
TOLERANCE 2. RISK PROFILE 3. INVESTMENT MANAGER 1. DESIRED OUTCOMES ” “ To select the ‘right’ manager for the client
To meet managers to understand their processes, philosophies and future plans
For Trustees to understand if they can work effectively with the managers BEFORE COMPREHENSIVE PLANNING RISK IS MULTIFACETED.
YOU NEED TO LOOK CLOSELY & ANALYSE A FAIR COMPARISON OF PORTFOLIOS IS DIFFICULT PERFORMANCE IS EASILY EXPLAINED AWAY Which portfolio would you prefer now? CHOICE BETWEEN PORTFOLIO STRATEGIES PUT
PERFORMANCE IN PERSPECTIVE YOU NEED TO ASK THE RIGHT QUESTIONS BUT, HOW MUCH CAN YOU LEARN IN 45 MINUTES? WHY BEAUTY PARADE? THE BEAUTY PARADE MODEL FSA DISCUSSION PAPER CHOICE BETWEEN PORTFOLIO STRATEGIES Which portfolio would you prefer? CHOICE BETWEEN PORTFOLIO STRATEGIES AFTER COMPREHENSIVE PLANNING RISK PROFILE = RISK TOLERANCE
RISK CAPACITY CHOICE BETWEEN PORTFOLIO STRATEGIES Investment
£1 million initial pot
30 year time horizon
+ Income of £50k pa
When you take fixed
income from the portfolio,
your chance to ‘bounce
back’ from poor market
considerably reduced Clearly the overall growth rate is not the sole factor to consider ASSESSING SUITABILITY: Establishing the risk a customer is willing and able to take and making a suitable investment selection
January 2011 SUITABILITY. RESPONSIBILITY OF FINANCIAL ADVISER ...AND THE RISK PREMIUM IS BUILT IN BOOK 1:2:1 MEETING TO FIND OUT MORE