Insurance companies could buy law firms and use them as conduits to sell their products to consumers if the Solicitors Regulation Authority (SRA) changes the rules on referring clients to financial advisers, it has been warned.
Currently solicitors can only refer clients to financial advisers defined as independent by the Financial Services Authority (FSA), but the SRA board is to review the position next month ahead of changes brought about on 31 December 2012 by the FSA’s retail distribution review (RDR).
To call themselves independent, financial advisers must currently be able to advise on products from across the entire product market (called ‘whole of market’) and must offer clients the option of paying by fee rather than by commission. Those who are contracted by providers to sell products are called ‘tied’ or ‘multi-tied’ (which will change to ‘restricted’).
Under the RDR, the FSA will ban commission payments, replacing them with a system under which consumers can agree either to charges being deducted from any products they may buy or to pay their adviser a fee. It is also introducing higher qualification standards and requiring 35 hours of CPD a year.
As a result, the FSA is placing more emphasis on the first limb of the independence test, although there is concern that ‘whole of market’ may exclude independent advisers who specialise in a particular area. FSA guidance says an adviser will only be able to call themselves independent if they are able to advise on all of the types of products in which people could invest.
But the FSA has said it expects 80% of those firms which currently meet the independence test to continue to do so next year.
The SRA has been under pressure to relax its rules on referrals to financial advisers, but in a submission to the SRA board ahead of its meeting, SIFA – the body representing solicitors providing independent financial advice – urged it to maintain the current position so as to safeguard solicitors’ own independence.
To do otherwise would expose solicitors and the clients to “the least competent and the most unscrupulous elements in the industry”, SIFA said. “The scope for inappropriate referrals and the consequences of such referrals would undoubtedly lead to an increase in compensation and indemnity claims and risk damaging the reputation of the profession.”
It pointed to a recent decision of the Solicitors Disciplinary Tribunal, in which a solicitor was struck off for dealing with a multi-tied financial adviser involving the sale of £2m of tied products and a substantial personal loan to the solicitor.
SIFA continued: “It is by no means beyond the bounds of possibility that if ties were permitted, an insurance company might buy or form a law firm as a tied conduit for its products. The advent of ABS means that this could be done relatively simply.”
The SRA said its board will next month be asked to approve a consultation on a range of issues on financial advisers.