Introductions to financial advisers

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand whether they can make an introduction to a financial advisor and how to deal with any commission or introductory fees earned.

Members may also wish to refer to the following related guidance:

• DPB (Investment Business) Handbook
• Clients’ Money Regulations
• ICAEW Code of Ethics

Prior to making an introduction, a firm must ensure that:

1. It is appropriately licenced to make the introduction.
See Is a DPB licence or FCA authorisation required to make the introduction?

2. The introduction meets the requirement to give objective advice.
See Does the introduction meet the requirement to give objective advice?

3. It deals appropriately with any commission or introductory fees it expects to or actually receives.
See Dealing with commission or introductory fees.

In order to work through these steps, a firm must first establish the facts surrounding the proposed introduction. This involves identifying:

• The type of product;
• Whether the proposed financial adviser is independent (and if so which type of independent financial adviser) or restricted; and
• The proposed method of introduction.

• Guidance on each of these is available in Appendix 1: Definitions.

 A firm must establish whether an introduction is regulated as, depending on the nature of the introduction, a firm may require a DPB licence or FCA authorisation.

Guidance on the type of product, type of adviser and method of introduction is available in Appendix 1: Definitions.

1A. Unregulated

If the introduction is unregulated, a firm does not require a DPB licence or FCA authorisation to make the introduction.

1B. DPB licence required

Where an introduction requires the firm to hold a DPB licence, introductions must be incidental to the firm’s other professional services (see Part 3 of the DPB (Investment Business) Handbook . If not, the firm would need an FCA authorisation.

1C. FCA authorisation required

Introductions which require FCA authorisation are outside the scope of this helpsheet.

When making an introduction to a financial adviser, a firm must ensure that it adheres to the requirement to give objective advice as required by paragraph R331.19 of the ICAEW Code of Ethics.

The requirements along with supporting guidance are set out in section 331 of the ICAEW Code of Ethics ;and depend on whether the financial adviser is:

• An independent financial adviser (providing advice across all markets and all retail investment products) (see 2A);
• An independent financial adviser (relevant market) (see 2B); ;or
• A restricted financial adviser (see 2C).

Guidance on the type of adviser is available in Appendix 1: Definitions.

2A. Independent financial adviser

An introduction to such a financial advisor is likely to meet the requirement to give objective advice (paragraph R331.24 A1 of the ICAEW Code of Ethics).

2B. Restricted financial advisor (independent advice in respect of a relevant market)

Before introducing a client to such an adviser, firms should ensure that the client’s requirements can be met by an adviser who can advise across a market that comprises all retail investments that are capable of meeting the needs and objectives of that client, e.g. socially responsible investments or Islamic financial investments.

Assessment can be made either by making enquiries with the adviser about the nature of the restriction, scope of providers or products or by reviewing their website and other marketing material. The firm should assess and document the assessment of suitability on a client by client basis.

2C. Restricted financial adviser

ICAEW expects that, for most firms and most clients, an independent financial adviser will offer the most suitable and objective advice. If there are particular reasons why a firm believes that this is not the case, and wants to introduce clients to a restricted adviser then the firm must assess and document the assessment of suitability on a client by client basis.

The principal threat to objectivity in making an introduction to a restricted financial adviser is that clients might be materially disadvantaged by not being offered the most appropriate choice of product.

A firm must assess the client’s requirements and then assess whether the restricted adviser places business with the product providers that account for a large majority of the relevant market or offer the sector of the market that is most suitable for the client’s needs. Assessment can be made either by making enquiries with the adviser about the nature of the restriction, scope of providers or products or by reviewing their website and other marketing material.

If the client’s needs and objectives are so specialised that they can only be met by a small section of the market, the firm must:

• Be satisfied, having made the relevant enquiries, that the person to whom they introduce the client does not restrict (to any potential detriment) the client’s access to product providers; and
• Make the client aware of the range of investments offered by the adviser to whom the client is being referred.

In the event of a complaint, or as part of a Quality Assurance Department review, ICAEW will ask to see this assessment of the suitability of a restricted adviser. A suitable assessment will demonstrate a good knowledge of the client’s needs and the products offered by the restricted adviser.

3A. All commission or introductory fees

A firm must always disclose to clients any commission or introductory fees it receives. The specific treatment depends on whether the money is received as a result of an unregulated activity or a regulated one (i.e. one for which a DPB licence is required). Guidance on whether the introduction is regulated or unregulated is in the section Is the introduction regulated?

Any commission or introductory fee received prior to obtaining the client’s consent to retain it must be paid into a client bank account in accordance with the Clients’ Money Regulations, until the firm has received the client’s instructions.

3B. Commission or introductory fees from unregulated activities

Firms must adhere to the requirements of paragraphs 330.12 A1 to 330.13 A4 of the ICAEW Code of Ethics. A firm must not retain the commission unless it has explicit written consent to do so.

The firm must therefore adopt one of the following courses of action in respect of commission receivable (regardless of the amount concerned):

(a) Account to the client for the commission or other benefit (i.e. pay the whole commission to the client or deduct the whole commission from fees payable by the client and show this deduction on the bill);
(b) Obtain the client’s advance consent to each receipt of commission;
(c) Obtain the client’s advance general consent to the member’s retaining commission; or
(d) Obtain the client’s subsequent consent.

Further guidance is available in the ICAEW Code of Ethics.

3C. Commission or introductory fees from regulated activities

In accordance with rule 4.15 of the DPB (Investment Business) Handbook, the firm must either pay the whole commission or introductory fee to the client or secure the client’s consent to retain the commission or introductory fee by:

• Disclosing in writing the amount and frequency of the commission or introductory fee to the client;
• Informing the client that they have the right to have the commission or introductory fee paid over to them; and
• Obtaining the client’s express written consent to retain the commission or introductory fee.

Further guidance is available in the DPB (Investment Business) Handbook.

The following examples highlight which sections of the above guidance apply in the specific circumstances outlined.

Example 1

A client asks for advice on investments in shares and the firm would like to provide the client with the contact details of an independent financial adviser that it recommends who provides independent advice across all markets and all retail investment products.

Outcome:

• Section 1 confirms that the introduction is unregulated and therefore the firm does not require a DPB licence or FCA authorisation to make the introduction (see Section 1A).
• As the financial adviser is an independent financial adviser who provides independent advice across all markets and all retail investment products, the introduction is likely to meet the requirement to give objective advice (see Section 2A).
• As the introduction is unregulated, any commissions or introductory fees are dealt with in accordance with Section 3A and Section 3B.

Example 2

A client asks for advice on a contract of long-term insurance (but not related to large risks) and asks the firm to pass their contact details onto a suitable financial adviser who provides independent advice in respect of the relevant market that includes all retail investment products within the market.

Outcome:

• The firm requires a DPB licence or FCA authorisation to make the introduction because the introduction is regulated (see Section 1B).
• The financial adviser is a restricted adviser, however as they provide independent advice in respect of the relevant market that includes all retail investment products within the market, the firm must adhere to the guidance in Section 2B to ensure it meets the requirement to give objective advice.
• As the introduction is regulated, any commissions or introductory fees are dealt with in accordance with Section 3A and Section 3C.

Example 3

A client asks for advice on investments in government securities and the client would like the firm to introduce them to a suitable financial adviser. The financial adviser the firm thinks is most appropriate is a restricted financial adviser.

Outcome:

• The firm requires a DPB licence or FCA authorisation to make the introduction because the introduction is regulated (see Section 1B).
• As the financial adviser is a restricted financial adviser, the firm must adhere to the guidance in Section 2C to ensure it meets the requirement to give objective advice.
• As the introduction is regulated, any commissions or introductory fees are dealt with in accordance with Section 3A and Section 3C.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Ethics Advisory Service on +44 (0)1908 248 250 or via webchat.

The type of product

For the purposes of this helpsheet, the types of product have been classified as follows. For ease of use, definitions have been summarised. The Full definitions are available in the DPB (Investment Business) Handbook.

Independent or restricted financial adviser

FCA rules require financial advisers to disclose their status – a firm should be able to check whether an adviser is independent or restricted by discussing this with the adviser, checking their website and/or reviewing other promotional material which describes the range of their services.

The following table identifies the types of advisers (there are two types of independent adviser – further enquires may be required to establish which a financial adviser falls within).

The proposed method of introduction

A firm must also identify the proposed method of introduction.

• The client approach – where the firm gives the client the contact details of the financial adviser and leaves the client to approach the adviser; or
• The firm approach – where the firm approaches the financial adviser either to provide the client’s contact details or arrange a meeting between the client and the financial adviser.