AdviceClinic
How to refer a client to a financial adviser
There are a variety of ethical and compliance elements to consider when referring clients to a financial adviser. Here’s what you need to know
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When an AAT licensed accountant, bookkeeper or firm wants to refer a client to a financial adviser, they must consider their duty of care to the client and provide them with objective advice. It’s also vital they check whether the nature of the referral they wish to make is regulated under the Financial Services and Markets Act 2000.
Indeed, referrals to financial advisers are knotty subjects, and even the method of referral could attract difficulties. This is down to the possibility of conflicts of interest, or the perception of possible conflicts of interest.
“You can only really refer a client to a financial adviser for general business advice,” explains Adam White, professional standards officer at AAT. “You are permitted to provide the client the details of a financial adviser because the client will then approach the adviser. You cannot give the details of the client to the adviser as there’s a risk it could appear as though you’ve made a restricted referral.”
He adds that all referrals must be very clearly documented in writing to help prevent future issues.
There are a variety of reasons why clients may wish to speak to a financial adviser, such as investments, pensions, mortgages or insurance products, all of which are products regulated by the Financial Conduct Authority (FCA).
You cannot give the details of the client to the adviser as there’s a risk it could appear as though you’ve made a restricted referral.
Safeguards
Above all, AAT urges members to check before offering or providing any financial services that fall outside the scope of the accountancy and bookkeeping services approved under their practising licence. There are many financial services that require another authority, such as the FCA, or a designated professional body (DPB) to regulate the firm for such regulated services by law. AAT sets out these services here.
There is a misconception when AAT identifies instances of members undertaking regulated services without the necessary authorisation during its practice assurance reviews and that it is AAT policy that they cannot undertake these regulated services. This is not the case. Instead, it is a statutory requirement of the Financial Services and Markets Act 2000.
Crucial to any potential referral is the question of whether it meets objectivity criteria, and whether or not the financial adviser is independent or restricted.
Independent versus restricted
Fundamentally, independent financial advisers (IFAs) can recommend products spanning the whole of the market. This means that their advice is unbiased and unrestricted. Restricted advisers can only recommend products from certain providers. In some cases, they will recommend products from a single company.
“If a person is an IFA, theoretically they can give objective advice as they are not restricted to any number of companies and products,” White explains. “If you refer a client to a restricted adviser, obviously that’s thornier because of the fact that, if they are restricted, they may not offer products that are in your client’s best interests. In addition to advising your client that this is a restricted adviser – because they should know that – there are ethical considerations because the objectivity is under question, particularly if there is a commission involved.”
Commissions
A major element to consider when referring a client is the question of commission. Under UK and common law, commissions for referrals are payable to the client, unless they give permission for their referee to retain it.
“You have to inform your client how much you stand to receive; you have to seek client permission to retain that.” White explains. “While you may have a warning in your letter of engagement that from time to time you may receive commission income, that’s a blanket notification and isn’t sufficient to say the client has given informed consent. The client has to know the amount and frequency of such income.”
No blanket referrals
If members enter into a joint venture with an IFA, they cannot rely on them to ensure their own compliance with the law and the fundamental principles of AAT’s Code of Professional Ethics.
Members have an obligation under the code to comply with relevant laws and regulations and avoid any action that may bring disrepute to the profession. Ethical behaviour in respect of commissions is set out in section 240 of the code.
If you have any questions about this subject, please contact AAT’s professional standards team at aatstandards@aat.org.uk
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