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Proper and compliant use of introducers

No sensible adviser firm would get involved in a situation where they are responsible for the outcome of advice effectively provided by others – or would they? ATEB’s Steve Bailey looks at the FCA’s investigation into the practice of using unauthorised introducers, where adviser firms can and have come unstuck and the proper and compliant use of introducer agreements 

Here’s a scenario to ponder:

“It seemed like such a good deal. This lead generator offered to send me a steady stream of clients who needed a SIPP. Not only did I not need to pay them for the leads, but they arranged for payment of a commission (or marketing allowance). And they even told me which fund the client wanted the SIPP to invest in. All in all, a great deal …”

Now this is a made up story but it’s not complete fiction. This sort of deal has been happening for the past few years and has come to the FCA’s notice as many of the underlying investments proved over time to be worth little or nothing.

And, of course, they were usually unregulated investments, which gave rise to other issues that I will outline shortly. (For ease of reference in this article I simply refer to these investments collectively as ‘non-mainstream assets’.)

Yes, it was a great deal – a great deal of hassle for the financial adviser involved when the regulator knocked on the door. And we should not overlook that many of these situations turned out to be a very poor deal indeed for the client whose pension took a nose-dive as a result of the investment being made. How so?

Finding new clients

Advisers have been buying leads as a means of finding new clients for many years. There is nothing inherently wrong with that, provided the lead has genuinely come through a process designed to identify people who are actually interested in having financial advice and have given their permission to be contacted.  The lead generating firm identifies suitable people, the adviser advises them. Everyone is happy.

However, the practice has taken a wrong turn in recent years. First, there does appear to have been a proliferation of firms acting as ‘introducers’ to financial advice firms. The increase in FOS complaints and noises coming out of Canary Wharf attest to that. A likely explanation is that many of these unauthorised introducers are former advisers or direct salespeople who, for one reason or another, did not continue as advisers following the introduction of RDR.

Second, many of these introducers appear to have been unable or unwilling to stay within the bounds of merely introducing.

It is impossible to know what their conversation with individual clients was, although there is evidence that some of them are actually giving advice, even if they claim not to be.

Introducers might claim, and even believe, that they only provide generic or ‘educational’ information. There are several problems with this.

First, as stated earlier, it is impossible to be certain that only generic information was provided.

Second, the border between generic information and regulated advice is pretty narrow and easy to stray across, even inadvertently.

And, in the unlikely event that they are not caught by ‘advising’, it is likely that the introducer is doing one or more of the following:

• Making a financial promotion;

• Arranging;

• Making arrangements or assisting in the completion of, and sending, an application.

All of these are regulated activities.

According to the FCA, some introducers have presented the referral to an authorised firm with a completed fact find, attitude to risk questionnaire, application/transfer forms along with a clear investment desire expressed by the customer!

Finally, within the regulated financial adviser firms there appears to have been a lack of professional oversight and a willingness to accept the customer’s (pre-prompted) view as the driver for advice.

“It is not possible to advise only on the SIPP without
consideration of the underlying assets that are to be used”

As virtually all of the problem introductions involve a regulated adviser having to advise a SIPP into which the non-mainstream asset can be invested, advisers will certainly be caught by the clear FCA and FOS position that it is not possible to advise only on the SIPP without consideration of the underlying assets that are to be used. Additionally, and regardless of any technical interpretation of the rules around advice, weight must be given as to whether the client perceived that the introducer gave advice.

FCA alert

As a result of this ever increasing problem, the FCA issued an alert on 2 August 2016 to highlight some of the risks arising from authorised firms accepting business from unauthorised introducers / lead generators or indeed from other authorised firms.

Key points

• An authorised firm which accepts business from an introducer must still meet all regulatory requirements. If customers are given unsuitable advice by an introducer, the authorised firm may be held responsible for this and subject to regulatory action.

• Many authorised firms the FCA has visited do not have adequate input or control over the advice they are ultimately responsible for. This has been particularly evident in relation to advice on switching and transfer/conversion of pension benefits, where pension pots have been moved to non-mainstream assets, high risk, illiquid products based in the UK or overseas.

• Many of the investment outcomes facilitated by these introducers are without Financial Services Compensation Scheme and Financial Ombudsman Service protection and therefore in the FCA’s view not suitable for retail clients.

• ATEB has also observed situations first hand where both introducers and regulated firms have pocketed sizeable payments (commissions) despite the fact that: conflicts were rife, it was illegal to receive a payment (or against the spirit of the regulation); there was no disclosure and clearly the transaction was not in the client’s best interests.

Our View

No sensible adviser firm should or would get themselves involved in a situation where they are responsible for the outcome of advice effectively provided by others. The old maxims apply – if it sounds too good to be true, it’s not true and there’s no such thing as a free lunch!

We know that the FCA now has a dedicated team that is investigating adviser firms who they believe have had involvement with unauthorised introducer firms. Primarily, the FCA ‘follows the money’ – despite much of the money having left the UK for warmer climes the money is not actually difficult to follow. There are obvious themes to the schemes – Holiday and Hotel Resort developments, Car Parks, other strange schemes, some of which do exist and some of which are straightforward scams, designed to convert people’s pension pots into profit for those involved. The schemes share several attributes – unregulated, illiquid and high risk, and often accompanied by a promise of returns way beyond what the real market can only dream of.

It is important not to tar all of these esoteric investments with the same brush. However, the methods by which many of these investments have manifested themselves in ordinary retail client investments is very concerning.

Firms need to realise that they must undertake appropriate due diligence on any firm seeking to introduce clients. Firms need to understand the processes by which the client is introduced and that they are responsible for ensuring that those processes comply with all the relevant regulations and all of this should be the basis for a formal Introducer Agreement.

Recommended action

• Read the alert and related background material;

• If you accept clients from introducers, ensure that you have an Introducer Agreement in place that clearly sets out roles and responsibilities of the introducer (i.e. to introduce and nothing else);

• Watch out for the warning signs:

– the introducer does things that only an adviser should do, such as completing a fact find, or assessing the client’s risk profile;

– the investment asset is pre-determined;

– the asset is unregulated, or illiquid, or high risk, or overseas;

– the introducer is connected with the asset in some way;

– most or all the business from the introducer goes into the same group(s) of investments.

If you come across this type of introducer scenario, report it to the FCA on 0300 500 0597.

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