Advice restricted to 'passive investments' cannot be called independent, says FSA

The FSA described 'passive investments' to Out-Law.com as financial products or funds that are not actively managed and said that it had been asked to consider whether advisers could refer to themselves as 'independent' if they only recommend those type of investments. The FSA said that they cannot. It said that the 'passive investments market' cannot be defined to be the "relevant market" IFAs need to consider when giving personal recommendations to their client investors.

Under changes to the regulation of retail investment advice that came into effect at the end of last year, financial advisers are now required to inform clients whether or not the advice they offer is provided on an 'independent' or 'restricted' basis.

Under the Retail Distribution Review (RDR) rules, advisers are prohibited from referring to themselves as offering 'independent' advice unless the personal recommendations they make to clients on retail investment products are "based on a comprehensive and fair analysis of the relevant market" and are "unbiased and unrestricted".

The RDR rules define a 'relevant market' as one which comprises "all retail investment products which are capable of meeting the investment needs and objectives of a retail client".

The FSA said that IFAs cannot deem the 'passive investments market' to be the 'relevant market' for all their clients.

"We do not consider it possible that many firms will be able to say upfront what products may be capable of meeting the needs and objectives of their clients," the FSA said in its latest RDR newsletter. (4-page / 342KB PDF) "On this basis, we consider that ‘passive investments’ are not a ‘relevant market’, as we consider ‘relevant markets’ to be defined by a client’s investment needs and objectives (e.g. ethical or Islamic financial investments) and not by product or service type."

"This means a firm’s review process should always start with the consideration of the whole of the relevant market in an unbiased and unrestricted way (actively managed, passive, OEICS, investment trusts, etc)," it added.

The FSA said that there may be legitimate circumstances where an IFA recommends passive investments to "many of its clients" but said that those firms "must ensure that the recommended passive investment is suitable for each individual client and not assume that passive investments are suitable for all of its clients".