You are here: Home - News -

FCA tweaks guidance on what constitutes ‘advice’

by: Scott Sinclair and Carmen Reichman
  • 22/01/2015
  • 0
FCA tweaks guidance on what constitutes ‘advice’
The Financial Conduct Authority (FCA) has set out its final definitions of regulated advice and personal recommendations in retail investment, in a move it hopes will help firms develop 'low cost' distribution models with confidence.

The regulator consulted on the terms last year following confusion among advisory firms and other stakeholders in relation to ‘simplified’ advice, decision trees, model portfolios and how the Financial Ombudsman Service (FOS) would treat complaints.

Clarity was necessary, it said, because it felt uncertainty may be preventing firms from developing products or services, particularly low cost online advice or execution-only investment models.

Its final paper is largely identical to the suggested guidance on which it consulted.

Clarity?

One persistent area of confusion centred on a difference in the definitions of regulated advice under the Markets in Financial Instruments Directive (MiFID) and under the Regulation Activities Order (RAO), both of which the FCA applies in the UK. While the former requires advice to be of a personal nature, the latter does not.

Respondents to the consultation suggested the definitions should be aligned, but the FCA said the difference permits firms greater freedom to develop advice or information-only models.

On model portfolios, the regulator stated that, when a model portfolio is re-balanced, a firm will be acting ‘with discretion’. This means firms must ensure each trade is suitable for the client.

Meanwhile, the regulator said the use of decision trees does not in itself determine whether a firm is providing regulated advice or not. For it not to constitute a personal recommendation, the decision tree 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”, it added.

Another issue preventing firms from developing new advice models, according to the FCA, is how the FOS would determine liability in the event of an unresolved complaint.

It said the Ombudsman has already made its position clear: that if suitability has been demonstrably assessed, or some effort to ‘know the customer’ made, the case would be assessed like full advice. If it hasn’t, the FOS will ‘expect customers to be responsible for their own choice’.

Elsewhere in its final guidance, in a minor change, the FCA has promised to remove all reference in future to ‘limited’ advice, which will now in all circumstances be referred to as ‘focused’ advice.

Definitions

The FCA has restated its definitions of ‘personal recommendation’, ‘regulated advice’ and ‘generic advice’.

Under the MiFID definition, regulated advice is a personal recommendation relating to one or more specific investments. Otherwise it is generic advice.

Information which might be construed as advice, but not relating to specific investments and delivered to the general public or to existing customers in the form of a newsletter, will likely not be considered regulated advice. An example of this is a blog on the potential upside in a particular sector.

The FCA’s suitability rules only apply where a personal recommendation is made.

The regulator has produced a glossary of its terms which it said it hoped would provide clarity.

 

FCA terminology explained

Appropriateness   The requirement on a firm in COBS 10 to assess the
customer’s knowledge and experience in the relevant
investment field to determine whether they can proceed with a purchase of a complex MiFID product.
Execution-only A service consisting of the execution and/or reception and transmission of client orders relating to particular financial instruments at the client’s initiative. The firm does not give any advice on investments or assess appropriateness.
Focused advice Advice focused, at the request of the customer, on the provision of personal recommendations relating to a specific need, designated investment, or certain assets. The FCA explains further: Simplified advice and focused advice are similar in that the advice process is focused on one or more specific needs. The key difference between focused and simplified advice is that the former involves the client stipulating the boundaries of the service they wish to receive, whereas with simplified advice the firm is setting out the boundaries of the service it provides.
Generic advice Advice or information that does not relate to a particular investment or does not otherwise meet one of the characteristics of regulated advice.
Limited advice A term used to describe focused advice. (no longer used)
Model investment portfolio A service which provides access to a pre-constructed collection of designated investments that meet a specific risk profile sometimes offered with a periodic rebalancing of investments to maintain a consistent asset allocation.
Personal recommendation A recommendation relating to taking certain steps in respect of a particular investment, made to a person in their capacity as an investor or potential investor (or their agent), which is presented as suitable based on a consideration of the person’s circumstances.
Regulated advice Advice relating to a particular investment given to a person in their capacity as an investor or potential investor (or their agent) and relates to the merits of them buying, selling, subscribing for, or underwriting (or exercising rights to acquire, dispose of, or underwrite) the investment.
Simplified advice Advice that is limited to one or more of a customer’s specific needs and does not involve analysis of the customer’s circumstances that are not directly relevant to those needs.
Suitability The test in COBS 9 that a firm must apply before making a personal recommendation in relation to a designated investment to a customer. The test also applies to a firm that manages investments.

There are 0 Comment(s)

You may also be interested in

  • RT @specialistsols: Do you want to attend a high quality specialist lending event with great speakers, content & exhibitors? Don't just tak…
  • RT @specialistsols: Voting opens next week for #BSLA2019 - get in touch with lorraine.francisco@ae3media.co.uk if you want us to create som…
  • RT @VickyHartleyMS: Help to Buy is ‘another time bomb waiting to go off’ – Star Letter 30/11/2018 - Mortgage Solutions https://t.co/YDaTNeI…

Read previous post:
Countrywide USE
Countrywide’s performance reveals mixed mortgage market sentiment

Countrywide's network of advisers arranged 70,526 mortgages last year, 16% more than 2013 but Q4 house exchanges reflected recent market...

Close