In the last issue, I covered what advisers need to know about offering advice under the proposed Financial Services Authority (FSA) rules. However, with more and more of the market opting not to give advice, and simply provide the client with information to enable them to choose the most suitable product, the FSA’s proposed rules on non-advised sales for standard mortgages have a huge relevance to a number of advisers.
The easiest way of describing what constitutes ‘non-advice’ is to look at the definition of ‘advice’. The regulatory definition of advice is that it is given to a person in their capacity as a borrower, or potential borrower. It has to be advice on the merits of the borrower entering into a particular regulated mortgage contract, or varying the terms of a mortgage in such a way as to vary the borrower’s obligations under that mortgage.
In the FSA’s view, advice requires an element of opinion on the part of the adviser which steers, or is intended to steer, a borrower or potential borrower in the direction of one or more particular mortgages. In effect, it is a recommendation for a course of action. Information, on the other hand, involves objective statements of facts and figures and is not advice.
The provision of information relating to one or more mortgage products may involve one or more of the following:
• an explanation of the terms and conditions of a mortgage product;
• a comparison of the features and benefits of one or more mortgage products with another;
• the use of scripted questions that filter out non-suitable products and identify a range of products that appear to match the client’s needs;
• tables that compare the interest rates and other features of different mortgages;
• leaflets or illustrations that help borrowers to decide which type of mortgage to take out;
• the provision of product leaflets that match the products identified by the client.
Many respondents to CP146 were concerned that the use of filtering questions could lead to advice. The FSA states that: ‘Guiding a person through scripted questions or a decision tree should not, of itself, involve advice.’ However, where firms must be careful is when the combination of advice, which in isolation may be properly considered generic, with the identification of a particular or several particular products, crosses the boundary into full regulated advice.
This is an extremely grey area. The FSA tries to clarify this by saying: ‘The critical factor is likely to be whether the process is limited to, and likely to be perceived by the borrower as, assisting the borrower to make his own choice of product which has particular features which the borrower regards as important. The questioner will need to avoid providing any judgement on the suitability of one or more products for the borrower.’ Basically this means the adviser must ensure they do not direct the customer to a particular product, or allow them to think that advice has been given.
The proposed rules on non-advised sales are actually very simple and are broken down into three main requirements.
The first requirement if an adviser decides to provide non-advice is that they must ensure that all the questions asked of the client about their circumstances and needs are scripted in advance.
Second, an adviser must ensure that any staff using the scripted questions are:
• trained in the use of the script;
• trained in the difference between what constitutes a personal recommendation (advice) and what does not;
• instructed not to give a personal recommendation unless they meet the training and competence requirements for advisers.
Finally, the adviser must take reasonable steps to ensure that there is adequate supervision of staff to ensure that a personal recommendation is not given, and staff using scripted questions adhere to the script in all material respects.
The FSA provides no guidance on the type and extent of the scripted questions to be used. The questions must be written by the firm according to the service and the process they intend to follow. Basically the questions need to narrow down the products available to the client, so that the client can make a choice.
There is no guidance on how many products the choice should be reduced to but it is generally felt that a choice of at least three would be sufficient. When providing information on a selection of products, the adviser must ensure that the selection is fair and unbiased. A selection based on cost, whether this is over the initial term or the whole term is the easiest way of complying with this requirement.
There are different training and competence requirements for individuals who do not give advice and those that do. In short, individuals who are only involved in the giving of non-advice, are not required to pass an approved examination. Those involved in supervising those individuals and writing the scripted questions are surprisingly also not required to hold a mortgage qualification although there are exam requirements for lifetime mortgages.
An adviser must make, and keep up to date, a record of the scripted questions used. If the script is changed, a record of the old script must be kept for at least a year.