The world of solicitors’ financial services has been through a profound upheaval since the Financial Services Authority (FSA) assumed responsibility for regulation. The arrival of the FSA in December 2001 was heralded by an explosion in the volume and complexity of regulatory edict and increases in the cost of doing business. At the same time, the first attempt was made to reduce product providers’ margins, and charges caps were introduced on simplified products, accompanied by dark references to the possible consequences of failing to draw consumers’ attention to a low-cost alternative when recommending another product. The industry was being squeezed.
The empowerment of the FSA, coupled with the worst stock market crash in half a century, led to efforts to drive the less savoury elements out of the industry. Product providers were beginning to wonder if they had a future in a world of low charges and standardised products. But the coup de grâce at the retail level arose as a consequence of regulatory activity. It arose from the impact of consumer complaints and accusations of mis-selling on professional indemnity (PI) insurance, which is a pre-condition of authorisation. Some 30 per cent of the adviser market found itself to be uninsurable. And to add fuel to the fire, the financial ombudsman informed MPs in the summer that he could equally expect to be able to entertain a complaint that a consumer had been inappropriately advised to stay out of the stock market as to invest in it.
Hopefully, we have reached the nadir. Coincidentally, the advice market is shortly to be reshaped into two categories: on the one hand, those advisers who work directly or indirectly for one or more product providers; and on the other those who provide wholly independent advice. The former are likely to be largely commission-based, and the latter largely fee-based.
The units in which independent advisers will be organised will be larger than in the past, better resourced and more specialised. In effect, independents will come closer to the professional business model. They will also usually be addressing a more sophisticated client, one who is likely to have some grasp of the rudiments of investment and with whom they will maintain an ongoing relationship. Both of these factors should, in themselves, reduce the likelihood of frivolous complaints.
What the FSA and PI insurers are looking for is evidence of a structured business process, which demonstrates to the regulator that all relevant considerations have been addressed and informs the client about the balance of risk and return. The precedent is the recent dispute between the Unilever pension fund trustees and Merrill Lynch, which were unable to demonstrate that their fund manager had not been making maverick decisions. Clearly, at the adviser level, IT systems and the availability of product and market research will play a vital role in providing this audit trail, but so will organisational structures and remuneration policies.
So where does this leave solicitors seeking financial advice for their clients? The days when they might expect to provide financial advice themselves, as a cottage industry, are gone. Which means they must resort to external sources. But where? As Philip Coggan said in the Financial Times, stockbroker portfolios are inappropriate for most private clients. The tax-efficiency of mutual funds and life policies makes them an obvious solution in many situations.
What is required is financial advice that complements legal advice, whether in the context of trust investment, pensions on divorce, advice to older clients or the investment of personal injury damages. Expertise does exist in these areas though it is not easy to find. A good starting point is the professions. A significant number of financial advice firms are part of, or have sprung from, firms of solicitors and accountants and therefore have no difficulty in relating to the needs of professionals. Solicitors for Independent Financial Advice, the affinity group and trade association for solicitor financial advisers, will shortly be launching a Directory of Professional Financial Advisers, which will enable solicitors to access appropriate specialists on a number of criteria, including specialisation, qualifications, location and basis of charging. The online site can be viewed at www.sifa-directory.info.