The middle ground between full financial advice and unregulated execution-only services still looks muddy even after the latest FCA finalised guidance

7 May 2015


It is interesting to note that despite the fact that the FCA published its Finalised Guidance on Retail Investment Advice (FG15/1) back in January, I still haven’t read any really positive pieces on it some four months on. Most, including a detailed summary of it published in FTAdviser on 22nd January, have been quietly scathing.

The problem is that the FCA has had to navigate, interpret and absorb a whole bunch of new regulations emanating from the EU, to put its guidance together. Most noteworthy of these Brussels-originated laws and regulations is MiFID II and the Regulation of Activities Order (RAO) which itself is linked to the UK’s Financial Services and Markets Act 2000 (amended 2013). It’s had to marry all these requirements with clear signal from the UK advice market that there was a market need fohttp://www.legislation.gov.uk/ukdsi/2013/9780111533826/contentsr access to simpler and frankly cheaper advice post-RDR requirements to end commission-based product sales.

To quote the FG (page 4): “We know that firms want greater clarity about how they can help customers to make informed decisions without stepping over the boundary into providing a personal recommendation.”

So once a personal recommendation has been made this is regulated. What the FG does do is lay out the three different types of advice where it judges personal recommendations are definitely given. In no particularly order they are:
1. Simplified Advice: where the provision of personal recommendation where the firm sets out limited nature of the service (i.e. Restricted) either face to face, by phone or electronically. That said the person designing the online system or interacting with the customer needs to be QCF Level 4 nevertheless. A ‘limited’ suitability assessment still needs to be conducted and product range offered is expected to reflect the limited nature of the suitability test (i.e. be simple products and in line with assessment of financial education of the customer). And if it all goes wrong they have access to the Financial Ombudsman and the FSCS. No formal appropriateness test is required.
2. Focused Advice: where there is a highly deliberate limiting of the range of personal recommendations sought by the client to suit their particular needs e.g. to seek recommendation on buying an ISA. Suitability assessment is the same as Simplified Advice requirement. Focused Advice offers a limited range of products reflecting the limited nature of the Suitability Assessment that is done in Focused Advice. A QCF Level 4 adviser is still required to offer Focused Advice.
3. Full Advice: which is fully regulated, independent or restricted, and will consider the full range of the client’s needs including their debt and protection needs.

Interestingly, regardless of the level of advice you plan to offer, you will still need lots of QCF level 4 certified advisers to deliver them. So you need to rely on smart processes and technology to deliver savings which you can pass onto your simplified advice customers because the manpower itself will be just as well qualified and therefore just as expensive as they were in the face to face only advice world pre-RDR.

As if this wasn’t complicated enough, if you look to situations where retail investment products are sold without recommendation, designated MiFID products (complex investment products), an Appropriateness Test still has to be conducted to ensure that consumers aren’t trading in financial instruments they don’t understand. And importantly if it all goes wrong under any circumstances consumers have recourse to the Financial Ombudsman Service (FOS).

The whole thing appears to hinge on whether a personal recommendation has been given and in an online world this becomes a very difficult line to avoid crossing. It also appears to be ‘circumstance specific’ if you read between the lines and is determined by how much you know about the customer.

To make it easier we took at the definition of what is not a personal recommendation. The FCA rules that ‘generic advice’ is not a personal recommendation. That makes good sense, generic or general advice might be something like advice on whether to buy shares rather than debt/bonds. It is the sort of guidance that is all over D2C platform sites. But if that same D2C platform was to lead you through a detailed decision-tree where customers are assessed for suitability and then led down a route to buy a specific investment product this would normally be classified as advice. However if no personal information is collected on the decision tree then it is probably still delivering generic advice.

But if, at the end of the process, the firm advises the customers to buy shares in a specific firm and sell Treasury 10% 2014 stocks for example, this too would be regulated. But if the firm advises you to buy shares in a specific sector or part of the world right now - this does not relate to a specific investment and is therefore not regulated. In other words if information is provided on a selected rather than balanced basis so that it influences or persuades, this may be classified as regulated advice.

Personal recommendations are made if they are well – personal. In other words if they are directed at an individual rather than just included in the monthly newsletter to all customers. The complexity is that this same newsletter could still be offering regulated advice and thus the firm offering it will need to be FCA authorised and bound by the FCA’s Principles of Business and COBS.

In our view FG15/1 is very tough to interpret with any certainty. But assuming you can penetrate it and decide to launch your execution-only online MiFID product service, for example, you still need to be aware that as the guidance says: “the difference between information and investment advice is the element of opinion or judgement on the part of the adviser, either in person or online.”

And as if that wasn’t worrying enough, the consumer who made a bad decision has recourse to the FOS who decides each compliant “on the basis of what it believes is fair and reasonable”. Would you bet your business on whether the FOS will come down in your favour when a customer brings a complaint to them?

Anecdotally, many people in the industry say that if the customers thinks they’ve received a personal recommendation then in the eyes of the FOS they generally have. So defining that middle ground between full advice and execution-only remains a futile exercise while the Ombudsman seems to work in splendid isolation from both the regulator and the industry itself.