As financial professionals, maintaining client trust is paramount. However, conflicts of interest can arise when individuals or firms juggle both regulated and unregulated activities, often referred to as “wearing two hats.” This scenario is particularly relevant for financial planners who simultaneously operate as regulated financial advisers.
The Two Hats Scenario
In the world of financial services, conflicts of interest occur when a person or entity has competing interests or loyalties. This is especially true for professionals who provide both regulated and unregulated financial services. The key issue arises when activities from one role influence decisions or actions in the other, potentially compromising client interests.
Understanding the FCA Guidance
The Financial Conduct Authority (FCA) has clear guidelines to address this issue. According to the FCA Handbook, specifically in the SYSC section, firms are required to identify and manage conflicts of interest. Additionally, the FCA’s Perimeter Guidance Manual (PERG) provides specific insights:
- PERG 8.26.2: This section clarifies that if a person carries out an unregulated activity (such as financial planning) in a way that is part of or necessary for carrying out a regulated activity, the unregulated activity can become regulated. This means that financial planners who perform unregulated activities should be cautious if those activities lead into regulated ones, as they may inadvertently become subject to FCA regulations.
- PERG 8.26.5: Here, the FCA emphasises that firms should be aware of the scope of their regulated activities and avoid extending them unintentionally through related unregulated activities. This is crucial for firms that operate in both regulated and unregulated sectors, as the line can blur if not carefully managed.
- Annex 1 of PERG 8: This annex provides further clarity on what constitutes a regulated activity. If an unregulated activity is a preparatory step or an integral part of a regulated activity, it may fall under the FCA’s oversight.
Mitigating Risks and Managing Conflicts
To mitigate the risks associated with wearing two hats, financial planners should:
- Implement Clear Policies: Establish a conflicts of interest policy that outlines how potential conflicts will be identified, managed, and disclosed.
- Create Information Barriers: Utilise Chinese walls to separate functions and prevent the misuse of information. This is especially important when different roles or activities have competing interests.
- Disclose Potential Conflicts: Transparency is key. If a conflict arises that cannot be avoided, it should be disclosed to the client.
- Separate Supervision: Ensure that employees with potentially conflicting roles are supervised separately to avoid bias or undue influence.
- Stay Informed: Regularly review FCA guidelines and seek legal advice when uncertain about whether an activity falls within the scope of regulation.
Conclusion
The “two hats” scenario presents unique challenges for financial planners and advisers. By understanding the FCA’s guidance and implementing robust conflict management strategies, professionals can navigate these complexities while maintaining client trust and complying with regulatory expectations.
Could non-reg financial planning have a place in your tool kit?
Other advisers seem to think so:
“Many independent chartered and certified financial planning firms, mine included, have been doing this for years. It’s a well-trodden path that achieves much better outcomes for clients and reduces conflict of interest.” – Robin Medley.
“I think it’s perfectly feasible and one clear way is to have non FCA registered individuals performing the non regulated roles – ex chartered accountants with a private client background and private clients solicitors would be obvious examples of those who could shine at it. Those roles could also be a feasible way to a second career – particularly feasible as they could still generate fees and earn as they do it.” – Dave Robinson.
“Yes absolutely, the planning (non regulated bit) is in my view, the most important element.” – Nick Winter
Here’s another article on the why: https://bit.ly/3wfn9rz
Questions & Answers
Q: What is the “two hats” scenario in financial planning?
A: The “two hats” scenario refers to situations where financial professionals engage in both regulated and unregulated activities, potentially leading to conflicts of interest. For example, a financial planner might also act as a regulated financial adviser, creating a risk where one role might influence the other to the detriment of the client.
Q: Why are conflicts of interest a concern for financial planners wearing two hats?
A: Conflicts of interest arise when competing interests can affect the objectivity of advice or service provided to clients. In the context of financial planning and regulated financial advice, such conflicts can undermine client trust, damage the firm’s reputation, and even lead to regulatory issues if unregulated activities inadvertently fall within the scope of regulated ones.
Q: How does the FCA address conflicts of interest in financial planning?
A: The Financial Conduct Authority (FCA) addresses conflicts of interest through its Handbook. The SYSC section, particularly SYSC 10.1, covers application and identification of conflicts. SYSC 10.1A addresses insurance-based investment products and conflicts of interest. These regulations outline the requirements for identifying and managing conflicts, including establishing policies, creating information barriers (Chinese walls), and disclosing conflicts when necessary.
Q: What does PERG 8.26.2 say about unregulated activities becoming regulated?
A: PERG 8.26.2 states that an unregulated activity, such as financial planning, may become regulated if it is part of or necessary for a regulated activity. This means that financial planners need to be cautious, as engaging in unregulated activities that lead into regulated services may inadvertently subject them to FCA regulations.
Q: How does PERG 8.26.5 apply to firms engaging in both regulated and unregulated activities?
A: PERG 8.26.5 advises firms to understand the scope of their regulated activities and avoid inadvertently expanding them through related unregulated activities. This is especially relevant for firms operating in both regulated and unregulated sectors, as the boundaries can blur if not carefully managed.
Q: How can financial planners manage conflicts of interest arising from wearing two hats?
A: To manage conflicts of interest, financial planners should:
- Implement clear conflict management policies, covering identification, management, and disclosure.
- Create Chinese walls to prevent information from crossing between conflicting interests.
- Disclose potential conflicts when they cannot be avoided.
- Supervise separately those with potentially conflicting roles.
- Stay informed of FCA guidelines and seek legal advice as needed.
These Q&As should enhance the understanding of our readers and provide clear guidance on navigating conflicts of interest in the context of dual roles.
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