Let me introduce you to this investment, I mean to this financial advisor. When does an introducer become an advisor?

8 January, 2018

There is a misconception in the financial services sector that introducer firms escape the need for regulation. The reality is that it is difficult for introducers not to stray into activities that require authorisation. In most cases, the business models of these firms involve the promotion of particular investments for commission. 

The recent action taken by the FCA against Avacade Limited and Alexandra Associates for promoting high risk unregulated investments such as tree plantations to consumers is indicative of the FCA finally tackling the problem of unregulated introducer firms.

There has been a sharp increase in the number of introducer firms and individuals that are facing regulatory action from the FCA. In particular, the FCA has taken action against introducers who have deceived customers about their authority to provide regulated financial activities and those who have advised consumers to move money out of their pension into high risk unregulated investments.

Although claims are still brought against authorised firms, the FCA’s focus has shifted to holding the introducers themselves accountable.

For firms

For authorised firms, accepting business from unauthorised introducers is a minefield. Proceed with caution.

The ‘general prohibition’ at s19 Financial Services & Markets Act 2000 (FSMA) states that a person must be authorised to conduct any regulated activity. There is case law which suggests that an introducer even filling in part of a fact find would amount to ‘arranging deals in investments’ under the Regulated Activities Order 2001 and the introducer would therefore require separate FCA authorisation.

Previously, the FCA warned authorised firms that are permitted to engage in regulated activities, not to use introducers who do not meet its regulatory requirements. An authorised firm may ultimately be responsible to consumers and face regulatory action if the unregulated introducer gives unsuitable or negligent advice.

Under s27 FSMA, if an authorised party enters into a transaction with a client as a consequence of something said or done by an unregulated introducer, in breach of the general prohibition, the client can be entitled to his or her money back from the firm plus compensation. 

For consumers

The warning for a consumer is to never enter into any investment on the strength of a recommendation from an unregulated adviser.

Unregulated introducers are not permitted to make recommendations to consumers, nor advise them.

Signs that you, as a consumer, may have been given regulated financial advice are:

  • if you have already been persuaded to invest in a pre-determined investment before you seek advice from an independent advisor;
  • if other consumers who were ‘advised’ by the same introducer have invested in the same investment group;
  • if the introducer received any benefit, financial or otherwise, for you investing in a specific project; and/or

If the introducer conducts risk questionnaires with you or uses an authorised firm’s Firm Reference Number to obtain information about your consumer policy information.