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Avoid the pitfalls of advice referrals

When referring clients to financial advisers, accountants must ensure they will receive the highest level of advice, says Roger Purcell.

A key characteristic of a professional accountant is the independence of the professional. This applies not only to advice given by the accountant but also to any referrals made by the accountant for other services. In the case of referrals for financial advice, the requirements of the financial services regime also need to be considered.

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In the past, many accounting firms used to give advice to clients on investment matters. The onset of increased regulation has meant that very few firms now give advice themselves. If a client requires investment advice, the firm will refer the client to a person authorised under the Financial Services and Markets Act 2000 (FSMA). The authorised person becomes responsible for the financial advice and for compliance with the investment business regulations, while the accountant will continue to look after the client’s other financial affairs.

In making any introduction the accountant has a duty of care to the client (see section 241 of the ICAEW Code of Ethics) and also has to have regard to the requirements of the FSMA. ICAEW’s view is that the ethical requirements are met if an accounting firm introduces a client to an ‘independent financial adviser’, which it defines as ‘an authorised firm that can provide independent advice’. 

The essence of independent financial advice is that it is based on a comprehensive and fair analysis of the relevant market and is unbiased and unrestricted. Common sense suggests that referring a client to an adviser that cannot provide such advice is unlikely to be in the client’s interest. 

Although there is a definition of ‘independent advice’ in the FCA Handbook, there is no definition of ‘independent adviser’. So an authorised firm is permitted to give independent advice on some occasions and restricted advice on other occasions. If so, it must not hold itself out as acting independently for its business as a whole.

There are some FCA-authorised firms that may give the impression of being independent advisers but do not in practice give independent advice to the majority of their clients. The spirit of the Code of Ethics is that the accountant (who is required to be independent) should refer clients elsewhere for advice that is itself independent. 

It is therefore important that the referral agreement with the financial adviser should stipulate that the financial adviser will provide independent advice to the client. This should provide the client with the highest level of advice.

Provided the accountant is licensed by ICAEW under the Designated Professional Body (DPB) regime, the accountant may attend meetings with the client and discuss with the client the advice of the authorised firm. He may even recommend the client not to take the advice of the authorised firm, but is not permitted to substitute his own advice.

ICAEW permits introductions to an adviser for restricted advice. However, the accounting firm is required to make an assessment of the client’s requirements and satisfy itself that they can be met by the range of product providers that are dealt with by the restricted advice. This is burdensome for the firm and could potentially lead to future claims from the client if the restricted advice turns out to cause loss.

Roger Purcell FCA is the principal of Roger Purcell LLP, a practice specialising in financial services and compliance

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