FCA issues final guidance on what constitutes retail investment advice

Out-Law News | 22 Jan 2015 | 5:28 pm | 2 min. read

The UK's City watchdog has issued new finalised guidance on what it considers to constitute the provision of regulated retail investment advice and personal recommendations.

The Financial Conduct Authority (FCA) finalised guidance (47-page / 741KB PDF) updates and finalises the FCA's position on retail investment advice as previously set out in the July 2014 guidance consultation, and it includes a range of examples designed to help businesses understand its approach.

Clarity on the regulator's interpretation is important because the provision of retail investment advice, particularly where it constitutes a "personal recommendation", is a heavily regulated activity. Businesses operating in the retail investment advice market have been calling for further guidance from the FCA amidst uncertainty over whether certain practices in the industry fall subject to the rules.

Financial services regulation expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA's latest interpretation of what is and is not regulated advice is based largely on pre-existing guidance. He said the existing guidance had generally been interpreted in a cautious way by businesses operating in the retail investment advice market when launching new services. The expert said firms may have wanted the FCA to "go further in its interpretation" of the retail investment advice rules in its finalised guidance, "especially in the context of innovative online propositions".

"The cautious approach has not realistically come as a surprise and ultimately the regulator has not changed its position to any substantial degree," Ashby said. "The FCA has also made it clear in its responses to feedback that it is not intending to provide any further interpretation on the difference between providing information and regulated advice." 

"The good news is that the FCA has listened to feedback that it should provide more guidance on the difference between merely providing information and regulated advice," Ashby said. "The examples provided originally were a useful way to communicate the FCA’s views and now contain more information on the FCA’s interpretation. I think the effort the FCA has put into this is indicative in my view of the more open approach of the regulator." 

"The FCA regards the flexibility between the EU MiFID rules and those in the Regulated Activities Order as enough for firms to create different propositions and it has not looked to allow for any flexibility outside the regulated space. Firms will need to assess their own advised, and non-advised, propositions against this finalised position, as there is unlikely to be any further flexibility in this area now," he said.

One issue that the new FCA guidance paper addresses is the use of 'decision trees' by financial services companies. Decision trees are used by some firms operating in the retail advice market as a way of gathering information from prospective investors to help deliver advice. However, the FCA said that the use of decision trees does not, per se, constitute the provision of regulated advice and said there are factors which will sway whether their use by businesses is within the scope of the regulatory regime.

"The key considerations are: whether the decision tree process is limited to assisting a person to make his own choice of product; and whether the decision tree process is likely to be perceived by the customer as assisting them to make their own choice of product, taking into account the features that the customer regards as important," the FCA said. "For it not to constitute a personal recommendation, the decision tree and, where relevant, the person asking the question it contains, would need to avoid making any judgement or assessment that would result in a single product or a list of products being identified as suitable for a customer, whether as a result of information that the customer provides or otherwise."

"However, it is entirely reasonable for a decision tree to provide a range of options for the customer to consider, though firms would need to guard against presenting these options as suitable for the customer," it said.