4th July 2012

FSA Guidance brings welcome clarity to ‘ethical’ or ‘sustainable and responsible investment’ market

FSA Guidance brings welcome clarity to ‘ethical’ or ‘sustainable and responsible investment’ market

The recent FSA Finalised Guidance paper FG12/15 ‘Retail Distribution Review: Independent and restricted advice’ (June 2012) has brought welcome clarity to the world of ‘ethical’ or ‘sustainable and responsible investment’ advice and is likely to help fuel its success post 1 January.

Ethical/SRI advice is mentioned at least six times in this relatively brief paper and clarifies issues of relevance to all advisers.

FG 12/15 sets out that offering independent advice is a ‘personal recommendation’ and that recommendations must be relevant to the individual client. It specifies that markets cannot be by-passed because they do not fit advisers’ standard processes or tools.  It also explains that as long as advisers operate within the rules it is possible to be independent and to focus entirely on a specific or ‘relevant market’ such as ethical/sustainable and responsible investment. 

In section 2.6 the paper quotes COBS 6.2A, which says that a relevant market should ‘comprise all retail investment products which are capable of meeting the investment needs and objectives of a retail client’ the paper then adds that ‘For example, if a client indicates that they are only interested in ethical and socially responsible investment… their relevant market would exclude non-ethical investments…’. 

Specifying that a ‘relevant market’ is set by the client’s needs ‘not product or service types’  section 5.5 develops this point, saying that advisers may need to go ‘off panel’ for areas such as ethical investment/SRI.  The paper explains, ‘For example if a client wants ethical investments and a firm does not have a product on its panel that is consistent with this preference, we would expect the firm to review the market for a suitable ethical product’.   This compliments the wider context – the requirement to offer ‘…comprehensive and fair analysis of relevant product markets’ (section 2.2).

For ‘specialist’ advisers sections 2.6 to 2.18 help clarify their position.  Section 2.8 says that if a firm can identify a common relevant market across all of its clients independent advisers can narrow the range of products they offer advice as, ‘…To not consider certain retail investment products, the firm would need to be able to market itself in a way that attracted only the intended type of clients, and only take on the intended type of clients...’.  However, they must market themselves with care and clients need to be able to ‘… self select with a degree of accuracy’ (2.12).

FG 12/15 also  reiterates the requirement for all advisers to consider clients on an individual basis –and to consider the entire relevant market.  Section 2.11 talks about tasking ‘initial questions’ of all clients.  2.12 then adds ‘a firm should be able to easily confirm whether its service is appropriate for each new client, ie that it can consider all of the products within each client’s relevant market.’ As such even  a specialist adviser would be expected to consider the entire ‘relevant market’  for each client once their needs have been confirmed.   

Section 2.13 then lists a small number of example relevant markets in which an adviser can specialise which may be viewed similarly to the above; Islamic finance, trusts and charities and pension income specialists.

In all cases advisers are expected to offer advice based on the needs of the clients - not on the basis of the tools they use.  Section 5 discusses advice tools - such as panels, platforms, model portfolios and discretionary investment service . 

Section 5.13 (Model Portfolios) specifies ‘… For example, a client may have preferences about the types of investments they wish to make, such as ethical or socially responsible investment…’ , adding in section 5.14 that ‘if any aspect of the model portfolio is not suitable or consistent with the client’s investment needs or objectives, then either 1) the model portfolio should not be recommended, or 2) the model portfolio should be tailored so that it is suitable…’

This paper clearly brings to the fore the need for questioning of all clients on areas such as ethical/sustainable and responsible investment in order to  identify which markets are relevant to their individual needs.   This in turn should open the door to greater expansion of this market as panel, platform and model portfolio providers in particular look for ways to help advisers meet client needs post January 2013.

For more detailed analysis this paper see the sriServices blog. The sriServices website also a range of information on the SRI market including the new ‘Adviser Guide to SRI’ produced in collaboration with Rayner Spencer Mills and the (free) easy to use Fund EcoMarket adviser database tool which uses a unique system of ‘SRI Styles’ to help advisers to identify relevant ethical and SRI fund options effectively.  The tool also includes a simple client SRI fact find questionnaire.

Julia Dreblow
Director, sriServices
www.sriServices.co.uk

FSA/FCA