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Recognising the boundaries set by FCA paper FG15_1

Steve Bailey of ATEB takes a considered view of FCA Final Guidance paper, FG15_1 on Retail Investment Advice and highlights inherent risks and key action points for financial adviser firms

The FCA has published a Finalised Guidance document FG15_1 Retail investment advice: Clarifying the boundaries and exploring the barriers to market development, which it hopes will clarify the different types of sales models, the boundaries between them and the associated regulatory requirements. It is relevant to all financial provider and intermediary firms arranging investments and also includes additional information and guidance for firms using social media.

To download the FCA document CLICK HERE

The paper describes what constitutes a personal recommendation in relation to retail investments and conversely what does not. It also discusses what scope there is for firms to provide a range of services in relation to those products. The paper gives useful links to other reading materials and it draws together aspects from other recently issued guidance documents, for example the ‘FG 12_10 simplified advice’ and ‘FG 11_05 establishing the risk a customer is willing and able to take’.

It contains some valuable guidance but not enough to cover every scenario and the FCA states: “We have tried to cover a range of sales processes that we have seen operating in the market, but obviously we cannot cover every possible variation”

I think the FCA is sending all the right signals here and they are clearly keen for firms to develop innovative distribution models. They go on to explain there are options for firms that sit between execution-only and full advice. “We believe that there are no regulatory barriers to providing these alternatives.”

The FCA is aware 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. Whilst there is no doubt innovation will help plug the ‘advice gap’, firms will need to read carefully and consider wider aspects of regulation and guidance before proceeding.

Key points to consider in your firm

The 47-page document is difficult to summarise, but there is some very useful content that all advisers and principals should understand, we have highlighted a few issues for further consideration below:

I thinks it’s fair to say, by now, most people know the basic difference between information and advice, however, what may not be so well known is that the circumstances, emphasis and timing in which information is provided can make it regulated advice. As such the paper explains, that information (to remain as such) should be provided on a balanced basis so as not to influence or persuade.

The paper makes it clear that detailed FCA suitability rules only apply where a personal recommendation is made, so it’s important that firms understand what constitutes a personal recommendation. That said, it may not always be obvious when a personal recommendation is being made; the paper highlights ‘implicit’ recommendations. For example, a recommendation may be presented with a statement such as ‘people like you buy this product’ or, ‘this is what I would do if I were you’. Such a statement gives the customer the impression that the product would be suitable for them. To help clarify the circumstances when a personal recommendation is being given by investment firms, the Committee of European Securities Regulators set out five key tests that need to be met for a service to be a personal recommendation. The FCA has replicated these tests in a flowchart in Annex A and examples set out in Section 4 aim to show the line between what represents a personal recommendation and what does not. These areas are a must read for all firms.

The paper defines terms such as Focused, Generic, Limited and Simplified Advice and includes a term Full Advice that, although not defined, presumably means all aspects of a person’s circumstances including debt and protection needs are considered.

There is a useful table on page 22 that summarises the different distribution models, potential limitations and conditions associated to each. The FCA confirms that firms can provide a service that focuses on a specific need of the customer and which does not require a full advice offering.It’s worth noting that although firms are able to limit the scope of a service, the depth of the suitability obligation cannot be limited. Firms would need to outline the level of service they will provide and what they will not be providing – that way the customer is clear about the level of service they are receiving. The million dollar question remains unanswered though, how much information should firms obtain as part of their fact find? The FCA has confirmed this will depend on both the scope of the advice and on the circumstances of the customer.The paper also points out that firms cannot ignore identification of wider customer needs just because the advice is focussed; there remains a duty to use reasonable skill, care and diligence when providing advice. That is not to say they have to deal with that need, but it would be right in their professional capacity to highlight what they have observed so that the customer can decide what to do.

If a firm provides simplified advice (which is a type of restricted advice) in addition to independent advice, it should not promote itself as a provider of independent advice for its business as a whole (nor would it be appropriate for the firm to include the word ‘independent’ in its name).

Where an individual is involved in delivering a focussed or simplified advice process, the training and competence requirements for anyone making personal recommendations to customers through the process are the same as for a fully qualified retail investment adviser.

What constitutes a non- advised sale?

Although the paper does not include a definition of non-advised, for me the ‘Holy Grail’ non-advised sales model could be broadly defined as follows:

“The customer is guided through a journey (in a balanced and non-persuasive manner) which ends in the customer acquiring a product that is suitable for them (although the firm cannot give them the impression it’s suitable or tell them it’s suitable at any time otherwise it would probably be a recommendation) and the customer alone has genuinely made all the decisions unassisted (and this matches their perception of the process) that has led THEM to select the Product(s) (or Provider(s)), the firm gets paid for the service and the customer takes full responsibility for their own actions… amen!”

Of course, firms will probably (either inadvertently or deliberately) provide a steer and or add a weighting to their process to help guide customers in the direction they want but that could be storing up a host of future problems.

Can you use disclaimers?

The paper makes an interesting point regarding the use of disclaimers. For example, if a firm stated that its product would suit a particular customer’s needs, including a disclaimer saying that this was not advice, the FCA explain this would not necessarily change the basic nature of a communication and it may still constitute a personal recommendation. As such a disclaimer will not be enough on its own: the material must prominently and clearly explain the nature of the service and the risk that the customer will end up with unsuitable products.

There is also useful guidance on what constitutes model portfolios and what is considered in practical terms to be re-balancing and discretionary management. The paper highlights the requirements of COBS 9 (Suitability) in particular and the need for firms to act within their permissions.

The paper also discusses some additional aspects arguably outside of the control of the firm.

In a judgement of the Supreme Court in Plevin v Paragon Personal Finance Limited, the court held an assessment of fairness required a wider range of considerations, most of which would not be relevant to the application of the relevant regulatory rules. So firms could find themselves being compliant but still be unable to defend a complaint. Automated processes, including simplified, focussed and non-advised, could at some future date result in systemic misselling and the risk lies with the potential for the problem to repeat many times over.

The individualised approach of the Financial Ombudsman Service presents a challenge for firms. Many perceive the Financial Ombudsman Service to be inconsistent in their approach and therefore, in theory, this makes it difficult for firms to plan or anticipate. The FOS stating that it would consider the nature of the service and look at cases in context is positive news though.

Research and take advice

The paper is useful and is definitely a step in the right direction. My advice for any firm looking to move into the simplified or non-advised market place would be to research things thoroughly. A well thought through process could take months to develop though, and should involve the right level of expertise and input. Take your own counsel; do not rely on other firms’ judgement or compliance. ATEB would recommend at least two external reputable compliance opinions and at least one legal view. These opinions should be documented in-depth. Ensure that you discuss your plans with your PI insurers and make sure they fully understand the model and are committed to your ideas over the longer term.

Ultimately, however the success of new innovation still comes back to ‘Judgement’. It will be the skill of the architect/designer and approver applied today that will determine tomorrow’s headlines.

Sales models can be complex and risky so firms actively involved in these markets need to have an in-depth and thorough understanding of the barriers. It is important to note that independence could be compromised if firms don’t recognise the boundaries.

Ironically, firms will have to form an opinion based on the finalised guidance and the FCA Handbook on whether particular information and the way it is communicated is non-advised or a personal recommendation.

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