Financial Advice - A friend in need

The Financial Services Authority (FSA) is a huge organisationtyFelicity. working party at the English ICA. responsible for regulating financial services firms ranging from international merchant bankers and city traders to small-town independent financial advisers.

The Treasury is currently consulting on the extent of this remit. At its smallest, it could exclude all chartered accountants and other professional advisers providing low-risk investment services. At its widest, it could include not only professional firms that hold an investment business authorisation from their professional body, but all firms which advise any incorporated business or its shareholders.

So where does this leave small investors who might ordinarily lean on their accountants for personal investment advice? Take aunt Agatha, who dutifully contributes a quantity of money to her nephew. He uses it to build up a business in which she becomes a minority and inactive shareholder. Who should protect aunt Agatha? Who should she go to for advice when her nephew later either decides to ask her for more money or proposes selling the company on, perhaps to someone of whom aunt Agatha has no knowledge?

She has a range of protections under insolvency or company law, but these are all fairly drastic and unlikely to promote harmonious family relations.

Also, she needs to discuss whether they are necessary or desirable. Probably she would prefer to consult her financial adviser – the person who has prepared her tax returns over many years and set up family trusts for her, for the protection of her children.

Current Treasury proposals are that this advice should be available only from an adviser who is regulated by the FSA. We are not yet sure how many chartered accountants will seek regulation by the FSA. It will without doubt be relatively expensive when compared with regulation by the Institutes of Chartered Accountants as a recognised professional body.

What will aunt Agatha do when her chartered accountant informs her that he is not authorised to advise her on her investment in her nephew’s company, and cannot even discuss it with her?

As a first recourse, she might approach her local independent financial adviser – she knows he has an authorisation from the FSA, and therefore is presumably knowledgeable in these matters. No joy – the local independent financial adviser has an authorisation from the FSA which extends only to the sale of packaged products, such as pensions, savings accounts or insurance policies. Wisely, she informs aunt Agatha that she has no knowledge or experience of the affairs of private companies and is unable to help her.

Aunt Agatha’s next recourse might be to approach her bank manager. She may be startled to find that he is about 20 years younger than she anticipated, but she still carries on with her enquiry. Again, wisely, the bank manager informs her that he has no knowledge or experience of the matters and will have to seek an appointment with a specialist from head office, with the proper experience and training.

This is not what aunt Agatha needs. What she needs is a professional adviser with whom she is thoroughly familiar and who will be able to discuss the situation in a relatively informal way. He or she would recognise that aunt Agatha remains ultimately responsible for the decisions she makes but would offer some useful guidance on the commercial norms and implications.

If aunt Agatha cannot speak to her accountant, her final recourse may well be her priest, spiritualist adviser or coffee-morning companions. Alternatively, she may approach her nephew. And however good their family relations, that advice will not be independent.

The FSA will have enormous accumulated experience in the regulation of the merchant banks, city traders and independent financial advisers. This does not mean that it has, or should acquire, experience in regulating small firms of chartered accountants advising on the financial affairs of small companies, whether to their managers or to their outside shareholders.

This experience is already held by the Institutes of Chartered Accountants.

The FSA has enough to do in ensuring that the selling of investment products is handled right and advice in quoted shares is given by those qualified to do so. Advice on private company shares is outside their experience and they should not be diverted from their already mammoth task to cope with it.

It is tempting, but unhelpful, to adopt the simple ideological position that everyone advising on shares should be authorised by the FSA, no matter how small the company. Aunt Agatha is better served by being able to discuss things with her chartered accountant without him or her having to seek expensive additional authorisation from the FSA. The institute’s ethical requirements are, after all, already quite stringent. Individuals should not be denied their natural protector, whether he is regulated by an old-fashioned professional body, or the new improved FSA.