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Bans, bans and more bans

07 December 2011

For the fourth time in as many weeks, the FSA has curtailed the selling of a product under the guise of guidance.

The FSA has issued for consultation proposed amendments to its existing guidance on distributor influenced funds (DIF).  The FSA says amendments are required by the RDR.

The draft guidance emphasises that firms holding themselves out as independent must ensure that all advice they give is suitable, following a comprehensive and fair analysis of the relevant markets in an unbiased and unrestricted manner, in the customers' best interests and "in accordance with conflicts of interest requirements".  The FSA then goes on to say that given the inherent conflicts of interest involved with DIFs, "we would question whether an independent firm could meet its obligations to act in the best interests of its client and provide advice in an unbiased manner if it recommends a distributor influenced fund".

FSA Principle 8 requires firms to manage conflicts of interest fairly but the detailed rules in SYSC10 do not require firms to prevent all conflicts.  Firms must manage conflicts to ensure that there is no risk of prejudice to clients and, if it is impossible to manage a conflict to ensure with reasonable confidence risks of damage to the interest of clients will be prevented, firms are then required to disclose the conflict before acting for the client.  Yet the FSA is now relying on presumed conflicts to say that an independent firm is unlikely ever to be able to recommend a DIF.

commented previously on the FSA using guidance to ban products under its existing rules, while Parliament is still debating whether or not it should be given the power to ban products in the new Financial Services Bill.  The new provision is controversial, not least because it will inhibit competition. In this case, the restriction on competition is particularly stark.  The FSA is creating an unlevel playing field – independent financial advisers cannot recommend DIFs, but restricted advisers still can.