The choice to remain independent or offer restricted advice after the RDR could have implications for UK advisers when servicing clients with needs in the offshore arena.
To remain independent after 31 December, UK IFAs will need to advise on all products that are suitable for their clients’ needs. IFAs are not required to have in-depth knowledge of every financial product under the sun, but they must take a whole of market approach based on the concept of ‘knowing your customer’.
If the customer base includes expatriates; UK residents who work overseas or high-net-worth clients who already hold unregulated collective investment schemes, some IFAs may be uncomfortable or unfamiliar with all the potentially suitable products and structures. Advisers who provide a restricted advice service could also need another solution for customers with requirements that fall outside their expertise.
One potential solution is a referral or outsourcing arrangement with a specialist offshore adviser firm. But to be in line with the intention of the RDR, this needs to be in the best interests of the customer, not a way of offloading some of them to maintain a particular regulatory status.
AES International provides financial advice to expats around the world. Chief operating officer John Viney says: “The spirit of RDR is intended to be client-centred, designed to achieve fairer outcomes for clients, namely through a more transparent charging structure. Best business practice dictates that client outcomes should be at the heart of everything your business does, which is why we believe exporting UK best practise is key to the long-term future of our profession.”
Viney feels that UK advisers should not be getting around the RDR by outsourcing to a jurisdiction with less stringent regulation, as this can be seen as an attempt to circumnavigate the protection that the RDR is designed to give clients.
But he says that where the client has a legitimate need, advisers have every right to outsource certain types of advice to international advisers that are properly regulated.
Viney says: “UK IFAs are rightly concerned about offshore practise, and introductions to any offshore companies should be made with great caution. UK IFAs need to be conscious of appropriate regulation requirements, qualifications, experience, and capital adequacy.”
Advisers should also ensure that arrangements with offshore firms do not invalidate their PI cover.
AXA Wealth International director of offshore proposition Simon Willoughby says outsourcing of specialist product advice was mostly logical and to some extent vital under the more polarised regimes of the last 25 years.
“However, in a post-RDR world the case for advisers outsourcing advice to maintain a specific regulatory status is less clear. The new regime allows for independent and restricted advice to live alongside each other in a way that has not been possible within the lifetime of most UK advisers. For example, a predominately onshore focused advisory firm can achieve independent advice status for its core client business, yet still present a credible offshore offering via a series of restricted connections.”
Willoughby says the client’s physical location and where the advice is being provided from are important considerations.
He says: “The distance between the client and the outsourced adviser potentially begins to challenge ‘know your customer’ requirements and the quality of advice that can be provided in such circumstances.”
He points out that if the outsourced advice is being provided from another jurisdiction, the standards the adviser is required to operate under may not equate to those in the UK.
Federation of European Independent Financial Advisers chief executive Paul Stanfield sees the use of offshore specialists as simply using another professional for specific and relevant expertise.
Stanfield says: “I don’t see why it would or should affect the independent status of the UK IFA. There is arguably more likelihood that a restricted adviser could need the assistance of an international or non-UK IFA. But I would expect that the regulatory implications are similar, if not the same, as for any referral to another adviser or professional, which takes place quite a lot already in the UK. Where the situation differs is probably in the referring adviser gaining sufficient comfort about the regulatory status and expertise of the international adviser.”
Offshore specialists Strategic Wealth and Gibro Wealth have recently teamed up to help UK advisers deal with non-UK and sophisticated high-net-worth clients, helping IFAs to stay independent, or move to the restricted advice model. The firms are licensed and regulated both in the UK and in Gibraltar and say their range of services enable clients to receive whole of market advice, while UK advisers receive an ongoing income and retain control of the client relationship.
Strategic Wealth managing director and founder of Gibro Wealth Steve Whittam acknowledges that some advisers may be wary of using an offshore specialist, pointing out that IFAs don’t like to feel belittled by other IFAs. But he feels these arrangements can bridge IFAs’ gaps in knowledge for areas such as QROPS and QNUPS.
Whittam says: “IFAs need to understand products available in the EU to prove they are whole of market but most don’t know what QNUPS are. We are in the position that we can guide the IFA or take that responsibility away so the adviser can carry on with what they are good at. Responsibility for the underlying investment will remain with the IFA but responsibility for the product wrapper and advice will pass to us.”
But Arch Financial Planning managing director Arthur Childs believes that few UK IFAs will want to risk their own reputation by outsourcing to advisers in another country. He says that as offshore firms do not offer the same level of protection as UK regulated firms, clarity would be needed on who is responsible for the advice given.
“The recent actions of the FSCS over KeyData and Arch Cru investments seems to have caused a number of PI insurers to remove themselves from the market and will make an IFA firm think twice about allowing the sale of any offshore product – even if the other adviser firm is supposedly taking responsibility for the advice.”