Independent or restricted? Read these guidelines to help you decide

The Personal Finance Society yesterday issued its interpretation of the rules regarding the status of advice post-retail distribution review(RDR).

With plenty of anxiety in the industry about whether advisers will end up being tagged as independent or restricted, the paper sought to address some of the key issues, including platform status, the meaning of ‘whole-of-market' and disclosure rules.

While most of the paper was effectively a précis of the various FSA documents issued in recent years, the examples were particularly useful in applying the rules to the real world.

IFAonline has selected some of the more useful examples for advisers:

UCIS

A firm chooses to restrict its services by not offering advice on Unregulated Collective Investment Schemes (UCIS).

The firm makes this decision on the grounds that:

• its clients have never required such an investment

• its clients' needs have always been met by other suitable products

• its clients do not require exposure to products which tend to have a high risk profile

• the firm has concerns about regulatory aspects of such investments.

However, the firm is approached by a client for whom a UCIS is appropriate. The exposure to the underlying investment would be appropriate for the client's portfolio. The client's attitude towards investment risk was appropriate for the investment risks of the scheme. This investment would play a relatively small part in their overall portfolio.

Finally, the client has been investing over a long period and is well-informed and knowledgeable about investment markets.

The acid test is whether, considering a whole range of factors regarding the suitability of a UCIS for this client, the firm would (or could) advise the client on this matter.

If the firm cannot or will not advise on this product, regardless of its suitability for the client then its advice will be defined as restricted.

Names

A network that has Appointed Representative (AR) firms which offer independent advice as well as AR firms that offer restricted advice would not be permitted to market itself as an IFA network.

Specialists

A firm providing independent advice has three advisers, each with their own specialist area. The ‘IHT specialist' has a client for whom a QROPS might be appropriate. He consults the pension expert to seek his advice and guidance. The result is that the personal recommendation provided to the client meets the independence rule. This does not therefore jeopardise the independence of the IHT specialist.

Please note that personal recommendations of the pension expert would also need to meet the independence rule for the firm to hold itself out as independent.

A firm focuses its business on investment advice. It does not provide advice on life products or personal pensions. This firm would not be permitted to call itself independent.

Panels and platforms

An IFA network has decided that structured products as a product range are too risky and too expensive for its normal client base.

As a product with specialist application it is possible for a firm to take this position and retain its independence provided that should one of the ARs take on a client for whom a structured product might be suitable, they are able to do so, for example, through a sign-off or pre-approval process provided by the network.

An IFA firm has conducted due diligence of the platform marketplace and has decided that one particular platform is the most suitable for the majority of its clients, based on a wide range of factors, including cost, availability of funds and various administrative facilities.

However, an adviser has met a client with no previous financial arrangements who wishes to contribute £100 per month to an ISA and £100 per month to a pension.

The facilities of the wrap platform are not appropriate to this client. The costs of the platform itself and the incremental costs of the pension wrapper on the platform make the total costs significantly greater for this client than they would be with an individual ISA and a stakeholder pension. The adviser recommends that this client does not use the wrap platform and arranges the contracts off platform. In these circumstances, the firm is not likely to jeopardise its independent status.

PII

A Professional Indemnity insurer has imposed a restriction on a firm's activities, such that advice on structured products would not be covered by its PI policy. The firm prohibits advice on these products until they can be covered by its PI policy and would therefore be offering restricted advice.