A Solicitors Regulation Authority (SRA) proposal to scrap the ban on solicitors referring clients to tied financial advisers presents a “disproportionate risk” to both lawyers and clients, the Law Society has argued.
Responding to an SRA consultation on changes to regulations on independent financial advisers (IFAs) following completion of the Financial Services Authority’s (FSA) retail distribution review (RDR), the society argued in favour of an option that “unequivocally preserves the requirement for independent advice”.
In the consultation the SRA provisionally recommended that instead of the requirement, solicitors would simply have to ensure that clients are involved in the decision-making process that goes into any referral. It argued the approach was consistent with outcomes-focused regulation.
The society urged that prescription be retained. “We contend that this is an appropriate and proportionate regulatory response to an area of work where solicitors are referring clients for the purposes of obtaining products and services from a third party where there may be a considerable lack of sophistication on the part of purchaser. It also serves to minimise the potential risk to solicitors’ indemnity insurance cover from claims arising from alleged poor advice or by dint of any referral.”
In the consultation paper, the SRA predicted tighter restrictions on the definition of ‘independent’ advice promoted by the RDR may result in a reduction in the number of financial advisers able to call themselves independent. Liberalising the solicitors’ rules would ensure “that the client is involved in the decision-making process”; that clients understood “the implications of a particular recommendation”; and it would remove “restrictions of customer choice”.
The society responded: “There is… no significant evidence put forward of a current or future lack of client provision in this area caused by the requirement for independence, nor is there any suggestion of a trend of inadequate or negligent advice from independent advisers.”
It continued: “The alternative proposition is to open up the market for referrals by solicitors to providers with an agenda that is predicated on self-interest and tied arrangements rather than a transparent market-wide assessment. This cannot be in the best interests of clients. It also presents clear risks to solicitors where such advice leads to client detriment.”
The society’s view echoes a warning made by the solicitors financial advice group SIFA in August, that dropping the requirement that solicitors refer clients only to advisers defined as independent by the FSA would lead to massive claims on the compensation fund.
The society agreed with the SRA that it was reasonable to amend the solicitors’ code of conduct to make it consistent with the FSA’s terminology and the new definition of what constitutes independent advice.