A former senior City watchdog has warned the Solicitors Regulation Authority that it is being ‘hoodwinked’ into liberalising rules relating to financial advisers.

The SRA is set to reveal whether it will relax a rule requiring lawyers to refer clients to wholly independent advisers. Arguing that current regulations are too prescriptive and incompatible with outcomes-focused regulation, the SRA wants solicitors’ clients to be offered the choice of advisers who are contracted to sell financial products.

However, David Severn (pictured), head of retail investment policy at the Financial Services Authority from 1998 to 2004, said the SRA had ‘allowed itself to be hoodwinked’ by those who claim the current rules do not accord with an outcomes-focused approach.

‘The fact is that there is a false dichotomy here,’ he says in his submission to the SRA consultation. ‘Any regulator should be prepared to use the tools that best meet the needs of a particular case.

‘A regulator should not abandon the use of one tool simply so that it can slavishly adhere to a general approach in its regulatory style. In the present case there is a key client protection issue at stake.’ Severn says biased advice, contingent on making sales, would offer less protection to clients.

Solicitors, he warns, could suffer reputational damage if the clients they refer experience an inferior service as a result.

To perform a referral with due diligence, Severn says solicitors would have to conduct a ‘considerable amount of research’, determining the limitations of a restricted financial adviser and explaining those limitations and their consequences to clients.

Severn recommends that if the rules do need to be changed, solicitors should be required to refer clients to more than one firm, of which at least one would be wholly independent. The SRA is due to announce its plans on 17 October but has already stated its preference for scrapping rules requiring referrals to wholly independent advisers.

A consultation paper released last month admitted the proposal was ‘controversial’ but said the lawyer and client would work together to decide whether an independent or restricted adviser would be the best choice.