In the continuing unpredictable economic climate, guarantees around retirement income are becoming increasingly popular with advisers and clients alike.

This is in large part caused by the problem of knowing just what 'restricted advice' means – and there is little doubt that this will be much magnified amongst consumers once they are confronted with the issue.

The confusion, of course, is caused by the future nature of an IFA firm.

At present, pretty well all parties would agree that Independent Financial Advice is at the top of the financial advice tree. As a term it encompasses holistic financial planners, wealth managers and other specialists so, in its way, it is already confusing but it is the brand of quality advice. In the future the requirement to use the descriptor 'Independent' will become more stringent because the definition of whole of market will become more stringent because the products considered to be a part of the 'market' will be increased.

While this is confusing in itself, I am still more confused by the fact that a key part of the regulation of 'Financial Advice' will be governed by the products which the adviser elects to consider rather than the quality and depth of the advice. Whilst this is simply the result of the FSMA, it does seem poor targeting.

The definition of whole of market is, effectively, widened by the move from 'Packaged Investments' to 'Retail Investment Products' (RIP). This means that the IFA of the future will have to 'consider' the full range of RIPs and 'understand how they work', any adviser not meeting these requirements will have to describe their service as 'restricted'.

The disclosure statements proposed by the FSA in CP10/22 show between 6 and 9 possible models of restricted advice (6 main models with 3 models where the restriction could be 'contractual') and one of these, '(e)', would exactly fit the model of an existing IFA firm wishing to continue to offer the same services as at present – whole of market, independent, advice – but without committing to considering the whole range of RIPs.

'We will advise and make a recommendation for you after we have assessed your needs. We only offer advice on a limited number of products. You may ask us for a list of the products we offer'

But why would a firm not wish to 'consider' the full range of RIPs? Broadly, because this includes some higher risk investments such as unregulated collective investment schemes (UCIS) and structured investment products (SIPs).

In fact, 'considering' really isn't much of an issue for most firms. The FSA has confirmed that this is not a case by case consideration, it is more general than that, so a firm could delegate 'consideration' to its Investment Committee which could decide that, as a general rule, UCIS should only be considered appropriate for clients who meet the 'sophisticated/high net worth' etc definitions and have £1,000,000 plus to invest as most UCIS have high minimum investment thresholds and shouldn't form more than 5% of their client's investment portfolio. Similar logic could be used around SIP and other investments.

'Understanding how they work' is a more contentious issue. A knowledge of how UCIS work, for example, is not a 'learning outcome' and, as such, this doesn't fall into any gap filling exercise – all of which are designed to bridge the gap between existing qualifications and the learning outcomes.

So there may not be a way for an IFA to demonstrate an understanding of such esoteric investments without taking an additional exam – which goes against the FSA's intent of there being no qualification differences between Restricted and Independent advisers. The delayed gap-filling paper should provide some clarity around this aspect with, hopefully, a non-exam based solution.

The final major hurdle is a financial one, PI. The FSA's reviews of SIPs and UCIS has shown that these are higher risk areas of advice and this is already reflected in premium levels and, in some cases, exclusions. Having spoken to a couple of PI brokers, the expectation is that the PI market will harden post-RDR. The FSA has confirmed that a firm which effectively excludes itself from dealing with an investment within the RIP definition by excluding cover under its PI policy will be a restricted firm and will have to describe itself as such.

The IFA brand is a great one and has been built up over several years of providing good quality advice to largely satisfied consumers, for existing firms to wish to continue to build upon that brand is understandable and, for many firms, that will be the right answer. For other firms, the PI costs and, indeed, the risks of utilising higher risk, more complex products, may make the 'business as usual' model of restricted advice more attractive.

David Ingram
Technical Director
threesixty services