The Solicitors Regulation Authority’s (SRA) decision to change the rules on recommending financial advisers to clients has come under fire from opponents, with the Law Society taking “the unprecedented step” of urging the profession not to follow the new provisions and IFAs threatening judicial review.
However, there is a potential upside of requiring a formal referral process, expert body SIFA has suggested.
The Law Society warned that allowing solicitors to refer to advisers who are tied to providers – as agreed by the board of the SRA on Wednesday – could expose solicitors to negligence claims and they could get tangled up in mis-selling scandals.
Chief executive Desmond Hudson said: “From the outset, the SRA’s proposals ran the risk of leaving the profession ill equipped to advise clients on which financial adviser to use for the product that they wish to procure, given a choice of a range of providers with differing interests and motivations.
“The inevitable consequence will be that 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 that has plagued the financial services industry in recent times.
“The provision of independent advice has historically been one of the fundamental tenets of the profession. As such we would urge solicitors to disregard the liberalisation of the Handbook in this area and continue to only recommend IFAs. On this issue, under the new rules, solicitors will not be penalised for exercising discretion. We urge them to use that discretion to only refer and recommend IFAs to clients to avoid the risk of claims.”
Mr Hudson said there were also questions about the effectiveness of the SRA’s consultation on the change and whether it was anything other than a paper exercise conducted for form. “It is not sufficient to cite an apparent incompatibility with outcomes-focused regulation as an absolute rationale for diluting regulatory safeguards for both clients and solicitors,” he said.
Gillian Cardy, managing director of IFA Centre, described the SRA’s decision as flawed. “It is not in the best interests of solicitors’ clients and it must be reconsidered. IFA Centre is questioning the regulatory understanding, research and cost benefit analysis which lay behind the recommendation made to the board, and is investigating whether the decision can be challenged through judicial review.”
She said the SRA’s view has been fuelled by speculation that most advisers would not remain independent after 31 December – when the Financial Services Authority’s retail distribution review, which prompted the SRA’s move, takes effect – and that those who did would charge fees which would price most clients out of the market for professional financial advice.
“It is now clear from FSA and other research that these assumptions are flawed,” Ms Cardy said. “I cannot believe that we are in this bizarre situation where solicitors, who prize their professional independence above all else, have agreed that it is no longer appropriate to retain the requirement to refer their clients to other professional financial planners and advisers, who also prize their independence above all else.”
SIFA managing director Ian Muirhead said the consequence of the change will be that “solicitors will be free to refer clients to all and sundry financial advisers, regardless of whether their advice is influenced by a third party. Among these will be the bank salespeople whose unsatisfactory practices are regularly reported in the national press. There seems little doubt that this could pose a major risk not only to the reputation of individual firms but also to that of the profession as a whole.
“The Solicitors’ Compensation Fund could also be impacted, potentially becoming subject to the same massive compensation claims for mis-sold products as those which are currently crippling the Financial Services Compensation Scheme.”
However, he said there was an upside: “The removal of the prohibition will place a heavy onus of responsibility on solicitors to demonstrate that they and their clients are making informed decisions and that referrals will be in clients’ best interests.
“They will need to be seen to have conducted due diligence on their proposed referees before making any referral, and this will represent a major improvement on two unsatisfactory practices which currently prevail, namely giving clients a list of three local IFAs and leaving them to make their own choice, or permitting partners and fee-earners unbridled discretion to refer to whomever they wish, in defiance of any attempt at central co-ordination or quality control…
“To the extent that a formalised client referral process is about to become a compliance requirement, what may seem to many as a strange and perverse decision by the SRA may yet prove to have beneficial consequences.”