FCA seeks to understand platforms' shift to execution-only

Out-Law News | 29 Jan 2014 | 11:55 am | 3 min. read

The Financial Conduct Authority (FCA) is assessing why many retail investment platforms have shown a preference for providing non-advised services over services that streamline and automate financial advice. 

The regulator said it has identified "significant growth" in the provision of non-advised services by platforms and, alternatively, in the provision of 'simplified advice' in light of forthcoming changes in regulation. It is currently in the middle of a thematic review into the effect this shift in business models is having on investors.

In an email to Out-Law.com a spokesperson for the FCA has said that the regulator will be asking "Why have firms opted for non-advised distribution models over automated simplified advice models or not taken up simplified advice?".

In advance of the rule changes, which come into force in April, the FCA has liaised with 10 larger platforms to understand some of the challenges those businesses have faced in adjusting the way they operate to the new regulatory regime.

"Ahead of the implementation of the [Retail Distribution Review (RDR)] we spoke to firms and trade bodies to better understand the likely impact of the reforms on their business models," the FCA said in a statement. "A number of firms wanted further clarification on delivering streamlined advice to customers with simpler needs and smaller amounts to invest. As a result of those talks we published guidance on simplified advice in May last year."

"But the conversation with firms isn’t over. As part of the FCA’s new approach, we are taking an early look at non-advised and simplified advice investment sales to ensure that consumers are getting the right outcomes and provide any necessary clarification for firms. We’ve already had constructive discussions with a number of trade bodies and are very interested to hear from firms on how the market is developing to help inform our work," it said.

Some platforms allow consumers to make investment decisions directly on the platform without the aid of advice. These 'execution-only' platforms will generally not be allowed to receive payments from product providers, except in some very specific circumstances under rules which are due to take effect from 6 April.

A two-year hiatus will apply to so-called 'legacy' assets that were bought on the platforms prior to that date. By 6 April 2016 platforms will be required to ensure that they adhere to the new regime for all of the assets purchased via their service, whether legacy or not.

There has been uncertainty among some platform operators about the extent to which information they display that describes financial products will be caught by the regulatory criteria that renders the display of information as the provision of retail investment advice.

However, platforms expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA is likely more focused on establishing whether the non-advised market is functioning to consumers' benefit in the first place.

"The industry is calling out for clarity on the distinction between advice and guidance and for a useable simplified model that will allow them to provide more cost-effective mass-market advice, to fill the post-RDR advice gap," Ashby said.

"Some early indications from the regulator on its thematic review into non-advised sales and simplified advice are that they will be considering the fundamental questions of whether these models address customer needs, as well as the current regulatory position. This is not surprising in itself, but people hoping that a solution to the advice gap will come from the review may need to prepare themselves for some disappointment and further uncertainty," he said.

'Simplified advice' is a term used to describe where an adviser provides a personal recommendation to assist consumers in making straightforward investment choices. The provision of simplified advice is different from the provision of basic advice, which encompasses advice on stakeholder products using a process that involves putting pre-scripted questions to the client.

The FCA said its thematic review into the non-advised market involved looking into whether simplified advice is good advice for consumers, and whether they are getting the right product for them. Despite it involving less complexity, businesses that offer simplified advice are subject to the full regulatory framework on adviser charging and professional standards.

The regulator is scheduled to report on the outcome of its thematic review in the second half of this year.