'Execution-only' platforms must ensure they do not offer investment advice, regulator says

Rory Percival, the City regulator's technical specialist, said that 'execution-only' platforms can legitimately exist in a post-Retail Distribution Review (RDR) retail investment market. He said that those platforms can display information about financial products and the risks of investing as long as they are "careful" that the information does not constitute advice, according to a report by CityWire.

"A lot of the execution-only mechanisms we see today are not as simple as 'here is a list of products and funds, take your pick'," Percival said. "Firms do need to be careful. The way they structure that could be that they put all this information together and it could turn out to be an advised process in mistaken form. One easy test is if it looks and feels like advice then it probably is advice from a consumer's point of view."

Platforms are online services that allow financial advisers to manage their clients' investment portfolios. Some platforms can be used by customers directly.

Major changes to the regulation of the retail investment market are set to come into effect from the end of this year, following a review of the industry by the UK's Financial Services Authority (FSA). The regulator has set new rules on the way the market players, which include financial advisers, fund managers, financial product providers and platform providers, can be paid for their services in a bid to remove product or provider "bias" and deliver greater transparency over charges consumers face when using platforms.

Under the new rules, a platform service provider must disclose to the client any "fee or commissions" it will receive from fund managers or other product providers in relation to a retail investment product. This information must be provided in good time before concluding the business, or if that is not possible, as soon as practicable thereafter.

FSA guidance states that a platform service provider that accepts a fee or commission must pay due regard to its duty to act in the client's best interest and to communicate with the client in a way that is clear, fair and not misleading "and ensure that it presents retail investment business to professional clients and retail investment clients in an unbiased manner".

Similarly, an adviser using a platform service to arrange or advise on investments "must ensure that it uses a platform which presents its retail investment products in an unbiased manner". When selecting and using a platform service, the adviser must pay due regard to its client's best interests. Firms advising on retail investment products must clearly describe their services as either "independent" or "restricted". This declaration must be provided to client investors in writing in good time before providing the service.  

In the industry an increasing number of companies are choosing to move to an 'execution-only' model platform. Those platforms are non-advised and are not affected by rules on adviser charging. The adviser charging rules prohibit those giving financial advice from receiving payment for those services by anyone other than their clients. However, 'execution-only' platforms are permitted to earn a commission on sales from product providers, unlike platforms that do provide advice services.

"We don't have problems per say with execution-only becoming more a more popular form of distribution," Percival said. "Obviously, there are a number of concerns and risks that will fall out of that development. One is that the main onus is around disclosure."