For two of the groups for which recognising and managing risk are part of daily life, I was surprised to learn that in a recent survey by independent financial services group AWD of 100 UK solicitors and accountants, more than 50 per cent said they were not especially concerned about third party risk. Admittedly, this related specifically to the relationship between them and their financial advisers, but with the long-awaited introduction of depolarisation coming into force, how professionals ensure their valuable client relationships are not compromised by potentially unregulated advisers should be top of the agenda.
The survey also found that more than 90 per cent of respondents intend to consult an independent financial adviser (IFA) during 2005. But how many of these advisers can say that they know their current IFA is functioning within the confines of the new Financial Services Authority (FSA) rules, effective from 1 June? And when recommending the services of an IFA to a client, or consulting an IFA on a client’s behalf, are you 100 per cent certain they are a qualified independent? The issue of reputational risk is influential enough within the legal industry itself, let alone when these trusted client relationships are opened up to other advisers.
From 1 June, all financial advisers must decide whether they are multi-tied (selling the products of several providers), single-tied (a representative of a single provider) or independent (offering products from the whole market). However, to truly retain the title of IFA, advisers must also give clients the option of paying for advice through a fee, rather than commission only.
This could mean solicitors are now better placed to work with an IFA, rather than multi or single-tie, as a defined payment process would be more akin to their own charging structure (not to mention the increased opportunities for solicitors to advise financial services clients on dealing with this changing regulatory landscape).
However, a considerable number of professional firms are now reviewing their financial services options in light of the latest regulatory changes, with many seeking alternative options. Some with in-house operations are looking to find a safe home for their advisers, as many cannot sustain their operation profitably. And this includes not just small firms, but top 50 practices too.
Another notable finding of the survey was that more than 30 per cent of respondents feel “unprepared” for ‘A-Day’ next April – the biggest pension legislation overhaul for a generation. Solicitors and accountants, then, will be seeking additional guidance from financial advisers in order to help clients become fully prepared.
Other key issues include the introduction of pre-owned asset tax from 6 April 2005 – effectively an anti-avoidance measure against schemes designed to circumvent inheritance tax (IHT) and avoid the ‘gift with reservation’ rules. These rules affect many arrangements previously thought to be IHT effective, and in some instances apply where the avoidance of IHT was not even a consideration.
The Trustee Act 2000 provides further scope for a mutually beneficial and profitable relationship between professionals and their IFAs. The rules have been in place since February 2001 and enshrine in law a statutory duty of care for trustees in general, with additional considerations for professional trustees. However, many trustees have yet to review the effectiveness of trust assets or formalise a process to ensure compliance with the legislation’s reviewing and reporting requirements.
It is anticipated that professional associations such as the Law Society and the Institute of Chartered Accountants will issue their own advice to members on the wider impact of depolarisation. However, I would urge those firms which have not yet found a reliable financial services partner to look at flame-proofing their business now in preparation for the new depolarised marketplace.
Douglas Gardner, AWD chief executive and FSA Practitioners Panel Menbers