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The last word on independence

With the party conference season coinciding with the Mortgage Day countdown this year, Liberal Democrat leader Charles Kennedy must surely be the only person asked about the meaning of independence and independent status more times than the AMI helpdesk.

Of the main areas of confusion arising from FSA regulation, the criteria for independent status is right up there at present. This situation hasn&#39t been helped by frequent mis-statements of the rules in the trade press. So if you&#39re still unsure what you must do to qualify for this significant label, let me try to shed some light.

The FSA&#39s rules for independence (expressed in MCOB chapter 4.3.7) originate largely from its rules for the IFA sector. Thousands of column inches in the pink press have speculated on the impact of depolarisation and independence as a brand in the investment and life markets in recent years.

That this would be extended to our own sector came as no great surprise. What has became evident, however, is the enormous confusion over what must be done to qualify to use the word independent.

Ultimately firms must meet two key requirements in order to use the word in relation to the advice and services they offer.

Firstly, independent firms must offer products from the whole of market or, if limited to a lender panel, from a panel which is genuinely &#39representative of whole of market&#39. Indeed, many members who have prepared for AR status have been pleased to find that this option is open to them.

Note that lip service will not be sufficient here. The FSA&#39s regulatory reporting programme (compulsory for all authorised firms and networks) will gauge just how representative a firm has been in selecting providers over a set period. Consequently, firms who regularly review the lenders used will be able to wear the independent label more convincingly than those who do not.

But it is the second requirement for independence that has caused most confusion – commission and fee disclosure. In addition to meeting the whole of market criteria independent firms must offer their clients the opportunity to pay a fee for their services.

The FSA itself hasn&#39t helped matters here, as its examples of how this will work in practice do not outline every possible opportunity for presenting methods of payment to clients in the IDD. Examples such as that in MCOB infer that firms can either (i) charge no fee but receive a commission payment from the lender or (ii) charge a fee for the firm&#39s services but receive no commission, but it is equally permissible for a firm to charge a fee and accept commission from a lender. The key is to disclose this to the client.

While it is important that the regulatory boundaries are clearly marked it is equally important that firms are allowed to decide upon their preferred method of remuneration on a commercial basis. Firms who are still unsure about independent status have no time left to apply these rules. As always, members can call AMI for guidance.

I should know but I don&#39t

Q: What are the main differences between the MCCB and FSA approaches to training and competence?

A: The FSA&#39s rules for training and competence are set out in two sections of the Handbook:

• TC1 – Commitments These are the high level commitments applying to all staff associated with a regulated activity

• TC2 – Rules and guidance There are many major differences here. The FSA approach makes it clear that it is for each firm to decide on the appropriate standard for its T&C. Whilst this may give flexibility it must not be taken lightly.

A firm must be able to justify its training and competence scheme and should build this in the wider context of the FSA&#39s rules and requirements, in particular:

• Principle 3 and the other high level principles

• Systems and Controls (SYSC 3)

• Threshold conditions – satisfying the regulator that a firm&#39s affairs are conducted soundly and prudently, including assessments of management and staff.

• The Fit and Proper Test for Approved Persons -assessing suitability of staff members performing controlled functions.


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