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Referrals to financial advisers: staying compliant

Author: ICAEW

Published: 19 Oct 2022

When accountancy firms refer clients to financial advisers, they need to consider a range of regulatory and ethical issues. We look at the difference between independent and restricted advisers, and discuss how you can ensure you stay compliant with ICAEW’s Code of Ethics and legal requirements.

If an ICAEW member or firm wants to refer a client to a financial adviser, they need to ensure they’re meeting their duty of care to the client and providing them with objective advice under ICAEW’s Code of Ethics. They must also check whether the type of referral they want to make is regulated under the Financial Services and Markets Act (see ICAEW’s technical helpsheet on introductions to financial advisers).

“Our firms and members will refer their clients to financial advisers across a variety of areas,” explains Dean Neaves, Senior Manager, Quality Assurance Department (QAD), ICAEW. “It might be for advice on anything from investments and pensions to insurance products.”

Because your clients rely on you for objective advice, you should only refer them on to financial advisers who can offer similarly objective advice.

When considering whether your proposed introduction meets the objectivity criteria, you need to find out whether the adviser is independent or restricted.

“Independent Financial Advisers (IFAs) have access to the whole of the market, and provide unbiased independent advice based on a comprehensive and fair analysis of that relevant market,” says Neaves. “Basically, they can go to anybody across all retail markets and find the best product for the client.”

“Restricted advisers, on the other hand, don't have to have access to, or recommend, different products across the whole of the market,” he says. “They will instead have their preferred investments and products, which may or may not be suitable for a client.”

ICAEW expects that, for most firms and clients, a referral to an IFA is likely to offer the most suitable and objective advice. “Although you must still be happy that the particular IFA is right for your client because the client is relying on your judgement that it can deliver a high standard of service,” explains Phil O'Halloran, Case Manager, ICAEW.

“We find that ICAEW firms will mainly be referring to IFAs,” says Neaves. “But, if a firm decides to introduce clients to a restricted adviser, it needs to have a good reason and to assess and document on a case-by-case basis why the restricted adviser offers the best outcome.”

Sufficient safeguards

The main risk and threat to objectivity if you are referring to a restricted financial adviser is that your client could be disadvantaged by not being offered the most appropriate choices in the market.

“The code doesn’t say you can't refer to a restricted adviser,” says Neaves. “But if you do decide to do that you need to be able to demonstrate that sufficient safeguards are in place to preserve independence and objectivity.”

You need to be satisfied that the restrictions don’t risk any potential detriment to the client and make sure your client is fully aware of the particular restrictions offered by the third-party adviser.

“You must focus on the individual client and their requirements, not on your relationship with an adviser,” emphasises O'Halloran. “You have to consider what the client wants in terms of investment business services and whether the third party provides sufficient choice in the marketplace. Then if you're still happy to go ahead, you need to record that in writing and make the client aware of the adviser’s restricted status.”

“As part of their monitoring visits, QAD will ask to see documented assessments of the suitability of referring to a restricted adviser on a client-by-client basis” says Neaves.

No blanket referrals

“What we sometimes come across is that a firm may have an informal tie or arrangement with a restricted adviser, which it thinks offers good products that are suitable for its clients,” says Neaves. “So a firm might be recommending all of its clients to that particular restricted adviser in a blanket referral arrangement.”

“Although you can make referrals to a restricted advisor in certain circumstances,” says O'Halloran. “You can't do it on a blanket basis.”

“If you make blanket referrals and don't actually consider the appropriateness of referring each individual client, then you run the risk of being in breach of the Code of Ethics,” he adds.

“You have to do an assessment on a client-by-client basis,” explains Neaves. “You can say: ‘I think the restricted adviser in this particular situation will offer the best outcome or products for my client’. But you then need to document exactly why; for example, this might be because of the specific type of investments the client is looking for.”

“This type of critical analysis and assessment on a client-by-client basis can be quite onerous,” he says. “And it can be quite complicated, requiring a high degree of knowledge and judgement.”

If you do not have a good knowledge of the relevant market, or are not confident about conducting your own assessment, it is better to stick to working only with IFAs.


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