Platform 'decision trees' not clear on whether investment advice is being offered, says regulator

According to minutes published from a meeting of the Financial Conduct Authority (FCA) Board at the end of June, the regulator is worried that consumers using tools such as 'decision trees' – a tool that can help consumers to evaluate the potential outcomes of particular investment strategies – may interpret such tools as offering financial advice.

"[The FCA Board] discussed ... the need for a clear distinction between advised and non-advised sales, particularly those non-advised models that could be misconstrued by customers as advice (such as decision trees)," according to the recently published minutes from its 27 June meeting.

D2C platforms offer consumers the ability to invest in financial products, such as stocks and shares, without doing so through a financial adviser. Whether a D2C platform is itself said to be offering retail investment advice through the information it displays is a critical issue, particularly as the provision of retail investment advice has been subject to stricter regulation since the end of last year.

Under the Retail Distribution Review (RDR) regime, financial advisers are required to inform clients whether they are providing advice on an 'independent' or 'restricted' basis, and they are prohibited from receiving commission from product providers or fund managers for recommending to clients that they invest in particular products or funds. In the case of advised sales, advisers can only be paid for their services by their clients. Those rules do not apply to 'execution-only' platforms, which do not offer advice when allowing investors to select which products or funds to invest in.

The current rules provide that, amongst other criteria, advice is said to be given where a personal recommendation is "presented as suitable for the person to whom it is made, or is based on a consideration of the circumstances of that person." Earlier this year Rory Percival, the FCA's technical specialist, said that "the customer’s perception is a very key determinant" of whether information provided about retail investments constitutes advice.

"It is a pity that the minutes released by the FCA do not record any detail of the discussion that took place on advice," financial services law specialist Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said. "It is not clear from the minutes whether the FCA are now considering taking action to clarify the position, or whether they were simply discussing that firms should make clearer disclosures to customers. It would have been very useful to have a better indication of where the FCA’s thinking is on the distinction between advice and non-regulated guidance."

"As mass-market advice seems to have become commercially unworkable for many businesses, D2C is rapidly becoming a key alternative. It is normal that customers will want a level of guidance on how they should go about investing themselves and firms will naturally be keen to help with this. The problem for firms currently is that, without a greater level of certainty on the distinction between regulated advice and non-regulated guidance, firms are finding it hard to assess the risk of providing the help customers are looking for," Ashby said.

The Board meeting minutes also revealed that the regulator is looking into whether commission payments made in relation to non-advised retail investment sales, as permitted under the RDR regime, has "created potential risks".

Among the other points raised by the Board in its meeting was whether "poor consumer outcomes" would arise from its decision not to set an "end-date for the payment of trail commission on pre-RDR business".

'Trail commission' refers to ongoing payments made by product providers to advisers whose clients invested in their assets.

However, under the RDR regime trail commission payments between product providers and advisers for retail investment products invested in after 31 December 2012 are banned. Trail commission arrangements on so-called legacy assets which were invested in prior to the RDR are permitted, though.

The way the RDR regime has been implemented is due to be the subject of a full review next year whilst some of the individual points raised in the meeting are to be looked into as a part of "thematic reviews" to be designed by the FCA's executive and reported to the Board in the first quarter of next year, the minutes said.