Out-Law Legal Update
Individuals advised to check whether they can still claim entrepreneurs' relief
Out-Law Analysis | 22 Sep 2014 | 4:59 pm | 6 min. read
Dealing with customers on a non-advised basis, particularly through online models, has become very important for many firms following the RDR. For some firms, this activity is about pursuing the commercial opportunity of a direct-to-consumer strategy, in the context of the advice gap left by RDR. However, a non-advised strategy has also become necessary in many cases to deal with existing clients originally brought to the firm by a financial adviser, but who are now ‘orphaned’ as they no longer have an adviser.
The Financial Conduct Authority (FCA) has published a consultation paper that it says is aimed at "clarifying the boundaries and exploring the barriers to market development" of retail investment advice (56-page / 705KB PDF). But it ultimately does not provide the kind of clarity that many firms may need.
What does the guidance mean for non-advised propositions?
When the FCA introduced its thematic review into the non-advised and simplified advice distribution channels in late 2013, it said that it wanted to “take an early look at whether non-advised and simplified advice models” were “delivering good outcomes for consumers”.
As the regulator’s review developed its thinking seemed to change and “non-advised” models feature little in the papers issued in July 2014, despite its original statements. The regulator’s attention has become principally focused instead on what is a personal recommendation and what is not.
As a result a provider firm that does not want to provide regulated advice but does want to provide helpful guidance to direct and orphaned customers will have been left wanting more from the regulator.
Guidance and examples
Guidance from different sources is consolidated in the FCA’s papers and this is useful. The additional indications provided by way of working examples in the guidance consultation will help firms and their advisers in interpreting how some of the rules and guidance affect them. However, the examples focus almost entirely on whether or not particular approaches constitute personal recommendations. Indeed, almost all of the scenarios suggested conclude that they would be “likely” to involve regulated advice, “depending on the circumstances”, with all that this means for ensuring firms have the right regulatory permission.
Context and circumstances
In its guidance consultation the FCA uses the term “recommendation” as synonymous with regulated advice.
“Regulated advice includes any communication with the customer which, in the particular context in which it is given, goes beyond the mere provision of information and is objectively likely to influence the customer’s decision whether or not to buy or sell," it says.
The FCA draws the concept of advising on the merits of buying or selling a particular investment as widely as possible, with the only caveats being the rather nebulous one that it will depend on “context” or “circumstances”. The FCA does not outline what contexts or circumstances might mean regulated advice is or is not being given. It feels like a missed opportunity to help firms and customers deal with some of the unintended consequences of RDR and it is a pity that the regulator has not taken the opportunity to explore further in these papers what useful activity can still be non-advised.
Confusion of concepts and terminology
The position for any firm wishing to clarify its proposition is not helped by the range of different terminology that applies to some very similar concepts. A guidance paper that seeks to provide clarity does nothing to demystify the many terms used to describe advice and guidance.
There is even some new confusion added to the existing concepts of what constitutes advice. The definition of advising on investments focuses on “a particular investment”, yet the FCA, for example in relation to decision trees, seems keen to extend this to being “one or more particular retail investments”. That kind of distinction can make a significant difference to the way a proposition is targeted.
Firms are also asked in the guidance consultation to consider whether their advice process is “likely to be perceived by the customer as assisting them”. The FCA does accept that customers may not always be correct, but for firms to tailor their arrangements to allow for all different individual customers’ perceptions feels like an impossible task.
Loose interpretations of the existing legal formulations and vague references to subjective customer perception simply add to the confusion for firms and customers alike and if the objective is to provide more clarity, the guidance currently fails in these areas.
The material deals only at a very high level with descriptions of when generic (non-regulated) advice, for example by tools or information that help with budgeting and financial planning, might become regulated.
The guidance consultation, and particularly the examples, suggest that anything beyond basic, quantitative, information is “likely” to involve providing regulated advice. For example, sharing any qualitative assessments with customers will be likely to require an advice permission and compliance with the applicable conduct of business rules.
Firms will need to consider seriously whether a retail advice permission is needed in relation to any proposition that offers any qualitative judgment or opinion on investments, whether or not aimed at particular individual investors or investors generically. This is where the “context” and “circumstances” become so important. The risks of carrying on activity without that permission that is subsequently deemed to have been regulated activity, and so in breach of the prohibition in the Financial Services and Markets Act of 2000, are high. The decision on whether or not to apply for a retail advice permission, particularly for firms that do not already have a permission to carry out other regulated activities, may however be a significant one in terms of additional complexity, cost and capital requirements.
Liability and disclaimers
Firms will also want to weigh up the impact on the liability profile of their business of taking on a role as an ‘adviser’ to its clients. The papers emphasise the fact that the suitability rules in the conduct of business rules COBS 9 only apply where a personal recommendation is made.
This is not the same of course as saying that investments on which advice is given, without a personal recommendation, do not have to be ‘suitable’ to investors. Advising on investments still involves advising an investor on the ‘merits’ of buying or selling an investment, even if the specific rules from MiFID do not always apply. A firm might be potentially liable to investors who have placed reliance on the information or guidance provided to them in whatever form.
Whilst liability for guidance might be mitigated by the use of appropriate disclaimers that advice is not being provided, it would be difficult, and arguably inappropriate, to limit liability for providing regulated advice that customers are entitled to rely on.
The FCA warns, as would be expected, that disclaimers that do not reflect the reality of the services being provided will be ineffective. With the range of different concepts in this area however, from 'execution-only' and 'non-regulated guidance' to 'regulated advice that is not a personal recommendation' and 'personal recommendations' to name a few, disclaimers that the customer will be sure to understand may be difficult to create.
Why the change in remit?
As the FCA says in its guidance consultation, “providing definitive guidance on whether something is regulated advice depends not only the facts of the individual case, but also the context”. This ultimately seems to be the explanation for why the FCA changed the remit of its review and consultation. Further, to focus on the difference between regulated advice and 'non-advised' activity would have been to look at what should and should not come within the remit of the FCA. On the evidence of these papers, it seems that the regulator has not been keen to look hard at what it should not be regulating and will need more encouragement if it is to do that.
Can any useful guidance be non-advised?
The wide interpretation of regulated advice set out in the paper and lack of guidance on what “context” or “circumstances” are relevant makes it more likely that firms will choose the additional regulatory burden of the advice permission for activities that might previously have been regarded as ‘non-advised’ activity. Firms who are simply trying to make the best of the aftermath of RDR and the resulting advice gap in providing a sensible service to their customers may see this as an unfair result.
The FCA has asked for views on whether a sufficient range of examples has been provided and for input on other areas where greater clarification is needed. Firms could use the consultation as an opportunity to push for greater clarity from the FCA on what assistance can be given without an advice permission being required. Examples of models providing helpful guidance for customers in a non-advised context might be put forward for the regulator to consider and possibly even include in its own guidance. If the FCA can be encouraged to think further about this kind of practical solution to the advice gap, direct customers should end up with better and more useful choices for how to make their investment decisions.
Tobin Ashby is a financial services expert at Pinsent Masons, the law firm behind Out-Law.com. This article first appeared in a white paper by Pinsent Masons addressing different aspects of the FCA's consultation.
This is part of a series looking at recent FCA consultations. You can also see our analyses of 'Project Innovate'; digital technology; social media and financial advice; barriers to providing simplified advice online and FCA guidance on the regulation of advice.
Out-Law Legal Update
Individuals advised to check whether they can still claim entrepreneurs' relief