The Financial Services Authority (FSA) has clarified that advisers who only advise on passive investments do not meet the requirements needed to call themselves independent.
In its final Retail Distribution Review (RDR) newsletter, the FSA said it had received a number of enquiries about whether an advisory firm can meet the independence rule if it only recommends passive investments.
However the watchdog said that a firm's review process should always start with the consideration of the whole of the relevant market in an unbiased and unrestricted way.
It did state that it may be that passive investments are suitable for a large number of a particular firm's customers, in which case a firm would be expected to be able to prove that was the case.
Where firms recommend passive investments, they must ensure that the recommended investment is suitable for each individual client and not assume that passive investments are suitable for all of its clients, the FSA said.
However the FSA said it does not consider passive investments a "relevant market" because they do not "comprise all retail investment products which are capable of meeting the investment needs and objectives of a retail client".
In cases where a firm is using a panel, if a firm's panel were to consist mainly of passive investments because, after regular review, the firm decides that other products are unlikely to be suitable for the majority of its clients, it should be able to evidence this decision and the justification, the FSA said.
The firm would need to be able to advise on investments other than passive investments if that would be in the best interests of a particular client.
To do this, its advisers would need to maintain an awareness of what is and is not included in the panel, so they can identify clients for whom, if necessary, an off-panel solution would be suitable.
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