FCA seeks to clarify what constitutes retail investment advice

Out-Law News | 14 Jul 2014 | 3:23 pm | 4 min. read

Platforms that allow prospective investors to use 'decision trees' to determine what investments to make may be considered to be offering regulated advice to those clients in certain circumstances, the UK financial regulator has said.

The Financial Conduct Authority (FCA) has issued a consultation paper on guidance that seeks to clarify the boundaries between what is and what is not a personal recommendation in the investment market, alongside the results of its thematic review into purchasing investments without a personal recommendation or with simplified advice. It said it recognised that the increasing use of technology and delivery of internet-based services, as well as the market impact of the Retail Distribution Review, had caused uncertainty within industry on what activities can be performed without triggering additional regulatory obligations that arise when personal recommendations are being provided to customers.

The FCA summarised the general legal test for determining whether retail investment advice is being delivered.

"For advice to be regulated at all, it must relate to a specific investment and must be given to the person in their capacity as an investor or potential investor, or in their capacity as agent for an investor or potential investor, and relate to the merits of them buying, selling, subscribing for or underwriting (or exercising rights to acquire, dispose of or underwrite) the investment," the FCA said in its consultation paper. "If it does not have all of these characteristics then it is generic advice and is not regulated." It also reiterated the requirements of a 'personal recommendation' under the European rules brought in by MiFID, which is narrower in scope than investment advice.

One online tool offered on some investment platforms are 'decision trees' that prompt users to answer questions about their investment preferences before guiding them towards potential investment opportunities that meet their profile. The FCA said that the platform providers could be said to be offering a personal recommendation depending on the information that the decision trees display.

"A key consideration in deciding whether a personal recommendation is given will be if the decision tree process involves identifying one or more particular retail investments for the customer, rather than providing a list of products meeting the customer’s criteria," the FCA said. "To establish whether an activity constitutes advising on a retail investment, firms must consider whether the process is limited to, and likely to be perceived by the customer as assisting them to make their own choice of product that has the particular features that the customer regards as important."

"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 one or more products being identified as ‘for’ a customer, whether as a result of information that the customer provides or otherwise," it said.

Platforms were also warned that displaying information about investments, such as about their price or performance, can be interpreted as retail investment advice in some cases.

"If information is provided on a selected rather than balanced basis so that it influences or persuades, this may be regulated advice," the FCA said. "If, for instance, share price information is given in circumstances which suggest that the firm is communicating that it is a good time to sell, then what appears to be the provision of information may, in fact, be advice. Providing definitive guidance on whether something is regulated advice depends not only on the facts of the individual case, but also the context."

The regulator said that messages posted on social media relating to investments may amount to the provision of a personal recommendation. It said the way providers select their target audience for the messages and the content in those messages will determine whether or not the communication constitutes a personal recommendation.

The FCA also warned financial advisers that they are likely to be prohibited from promoting themselves as providers of independent financial advice if they also deliver 'simplified advice', including via automated processes online.

'Simplified advice' is a term used to describe where an adviser provides a personal recommendation to assist consumers in making straightforward investment choices. The FCA said that the limited nature of the products offered via simplified advice models would generally mean that the advice being offered in those cases is 'restricted' and not independent.

In announcing the results of a related thematic review into industry's provision of simplified advice, the FCA warned platforms that they may need to publish the basis of the research they have conducted into financial products when displaying a 'best buy' list to customers. Failure to do so could result in those businesses being deemed to have misled customers, it said.

"A number of firms’ customer research had found that a proportion of their customers valued analysis of potential products and used it to help inform their decision-making," the FCA said. "This investment research tended to be carried out on either a quantitative, qualitative or combination basis. Firms then updated it periodically. Where firms produce this type of research for their customers, they should take account of the information their customers will need to understand this element of their service and ensure it is communicated to them in a way that is fair, clear and not misleading. Where firms do not make this clear, there is an increased risk of customers selecting their investments on an uninformed and potentially misleading basis."

The FCA’s papers are aimed at all firms involved in the distribution of retail investments, from platform service operators to those with customer-facing websites and call centre operators. The regulator’s consultation has asked for their views on a number of issues, including whether additional clarification is needed by the affected firms and if firms would find it helpful if the guidance were embedded in its handbook. The consultation ends on 10 October. Firms are encouraged by the FCA to review the content of its thematic review report as well as in its separate guidance consultation paper and consider the implications for their own distribution models.