Consumer insurance contracts law: Recent Irish legislation diverges from UK position
Out-Law Analysis | 01 Aug 2014 | 12:46 pm | 5 min. read
Introducing its thematic review into the non-advised and simplified advice distribution channels last year, the FCA said it wanted to "take an early look at whether non-advised and simplified advice models" were "delivering good outcomes for consumers”.
Some eight months later two FCA papers have been published: one on the "boundaries and exploring the barriers to market development" and the other providing the results of the thematic review. The latter is headed "Purchasing investments without a personal recommendation or with simplified advice". "Non-advised" models are not a significant feature of either paper, despite the original pronouncements.
Firms have until 10 October to respond to the guidance consultation, which the FCA describes as "the first stage". The regulator asks for any other areas for clarification and other barriers to services falling short of full advice and whether the guidance and examples provided should be included in their Handbook and Perimeter Guidance.
Here, we provide high-level comment on the papers and look at some key points for firms in reviewing these papers and considering their response to the consultation.
The FCA has used its report on the thematic review to set out information on how firms should approach distribution to customers without a personal recommendation, or using simplified advice. Suggestions include research to identify target markets and considering how customers behave in particular circumstances in designing sites for the purchase of investments. Call centre training and monitoring, to help staff avoid giving unintentional personal recommendations, is another example. Whilst much of the report may not be news to firms operating in this area, there are useful suggestions and some indications of the FCA's thinking that make this short paper worth reviewing.
The FCA's scope for changing the advice landscape has always been limited by the twin boundaries of the Regulated Activities Order, which defines the activity of "advising on investments", and the Markets in Financial Instruments Directive (MiFID), an EU law, which put the "personal" into recommendations. A large part of the guidance consultation is a summary of the existing UK and EU guidance in this area and it is useful for this to be one place. However there is no sea-change in the paper and its limited effect is perhaps reflected best in the fact that it is simply a guidance consultation and that no new rules are proposed.
Whatever happened to non-advised?
Any firms waiting for clarity on the line between non-advised activity and the regulated activity of advising on investments will be disappointed by these papers. The initial proposal of looking into how non-advised propositions served customers has been all but ignored, with attention focused instead on what is a personal recommendation and what is not.
A provider firm that does not want to provide regulated advice, but is keen to provide helpful guidance to customers, will still be looking for clarity from the regulator on its thinking. The lack of detail on the approach to non-advised propositions means there is little in the papers for firms simply trying to service their existing clients who no longer have an adviser by providing helpful information and guidance.
Indeed, the tenor of the guidance consultation and particularly the examples provided in section 5 is that anything beyond basic, quantitative, information is "likely" to involve providing regulated advice; put another way, sharing any qualitative assessments with customers will be likely to require an advice permission and compliance with the applicable conduct of business rules. It is a pity that the level of this likelihood has not been explored further in these papers and some firms will still be looking for much more direction from the regulator.
The papers do emphasise the fact that the suitability rules in COBS 9 only apply where a personal recommendation is made. Of course, this is not the same as saying that investments on which advice is given, without a personal recommendation, need not be 'suitable' for investors. Firms should note that advising on investments still involves advising an investor on the 'merits' of buying or selling a particular investment, even if the specific rules from MiFID do not always apply.
Terminology and confusion
A guidance paper that seeks to provide clarity succeeds in adding confusion into the wide range of terminology used to describe advice and guidance. The definition of advising on investments focuses on "a particular investment", yet the FCA (in relation to decision trees for example) seems keen to extend this to being "one or more particular retail investments". It would be helpful to see a clearer view on whether providing a choice of investments at the end of a guidance process requires an advice permission, despite the legal formulation.
Firms are also asked to consider whether their advice process is "likely to be perceived by the customer as assisting them". This subjectivity, also mentioned elsewhere in the consultation, places a reliance on individual customers' thoughts that will surely be impossible for a firm to assess across its customer base. It is hoped that the consultation process will lead to some clarification of the regulator's view on such a subjective approach, to try increase certainty for the industry and their customers.
The FCA warns, more than once, of ineffective disclaimers that do not reflect the reality of the services provided. It is in any case becoming increasingly hard to see how a disclaimer can be drafted in a clear way for customers when trying to cover the concepts of "execution-only", "non-regulated guidance", "regulated advice that is not a personal recommendation" and "personal recommendation". That is before adding "simplified", "focused" and "limited" advice (not to say guidance) in a set of papers that have done nothing to slim down the terminology surrounding advice. It is hard to escape the thought that if the Chancellor gets confused, what hope have mass-market consumers?
The use of examples in the guidance consultation should be helpful to firms in distinguishing where personal recommendations may and may not be made. Again, though, there is little here for firms just wishing to guide, but not 'advise' in the regulated sense. Almost all of the scenarios suggested conclude that they would be "likely" to involve regulated advice. 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 may want to put forward examples of their own to differentiate between different approaches they might take.
Some examples on social media might also be helpful, as social media's likely importance in the future of financial services seems under-served by the four paragraphs of focus in the consultation.
Suitability and independence
For firms intending to offer personal recommendations to their clients, the papers also focus on simplified advice. In the guidance consultation, the regulator points out that the suitability test is qualified by referring to the nature and extent of the service provided and so the requirements for simplified advice may be less than for full advice. Although this is a helpful hint, the existing difficulties for firms seeking certainty in assessing their model and its risks do not appear to have changed significantly following the publication of these papers. What price for some objective guidelines?
Meanwhile, independent advisers are left having to cope with how to deal with an existing customer who asks for simplified advice on a specific investment, as it is made very clear that simplified advice is only possible in a restricted model.
Firms have an opportunity to continue the dialogue with the FCA following this "first stage" and there should be keen interest in doing so. However much additional clarity can be achieved through this dialogue, something that will not change is that context is everything and each situation or proposition will still need to be considered carefully. Leaving the last caveat to the FCA from 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".
Tobin Ashby is a financial services regulation expert at Pinsent Masons, the law firm behind Out-Law.com.
Consumer insurance contracts law: Recent Irish legislation diverges from UK position