What’s the definition of advice anyway? Compliance Doctor Lee Werrell discusses FG15/1 – Retail Investment Advice: Clarifying the Boundaries and Exploring the Barriers to Market Development
Have you ever started a discussion on a subject and suddenly found that the subject was greater than you had anticipated? Clarity around what is regulated and nonregulated advice has been a long time coming – and what a plethora of areas are impacted by FG 15/1 (www.fca.org.uk/static/documents/finalised-guidance/fg15-01.pdf).
First, a little history. During 2013 the FCA investigated the extent to which there’s a distinction between their own expectations of firms, on the one hand, and the firms’ comprehension of precisely what is required of them on the other. Or what was identified as the ‘expectations gap’.
This ‘expectations gap’ project considered how any misalignment of understanding might impact the accessibility to products and services offered to customers and the extent that this is influenced by insufficient clarity around their rules, their implementation in addition to their supervision.
The main question the respondents asked was: Could this ‘expectations gap’ imply that firms are shying away from providing professional advice which could benefit customers for fear of falling foul of the rules?
Next, the project identified three main areas for more work:
- • Clarifying the advice boundaries (the subject of this paper).
• How the FCA might give firms more confidence to produce shorter, more useful disclosures to customers about their products.
• How the FCA provides guidance for the industry, and ways in which this supports confidence and innovation in products and services.
The Result of the Investigations, and Other Influences
As a result, the main objective of the current paper is on what is (or is not) a personal recommendation with regard to retail investments, and just what scope there may be for firms to provide a selection of services regarding those products.
- The paper covers the issues of clarifying the current regulatory landscape on personal recommendations in relation to retail investments – and, in response to requests from the industry, also bringing together in one place the existing guidance that is available to firms from the FCA (particularly on simplified advice) and from the Committee of European Securities Regulators (CESR) and the European Securities and Markets Authority (ESMA).
Mapping Out the Scope of the Task
To explain these better, the FCA provides detailed example scenarios and offers a view on whether it thinks the examples illustrated amount to regulated advice or not.
- The regulator believes that the well-functioning retail investment market needs different delivery mechanisms to become fully effective for a wide range of potential investors. The issue for the FCA would be to make sure that these kinds of methods deliver good outcomes for customers within a practical and commercially acceptable way that is also viable for firms.
- Recently the FCA also launched Project Innovate, an initiative designed to support new and established businesses across the financial sector to obtain innovative ideas which are in the customer’s interests into the market. More information on Project Innovate is set out in a different publication that is available via the FCA’s website. (www.fca.org.uk/firms/firm-types/project-innovate)
- The FCA has now found out that, while firms are clear on the requirements for full advice and for execution-only business, they may still be unclear how to navigate the alternatives in-between – such as simplified advice, or limited advice services, or sales without personal recommendations that involve guiding the customer in some manner. Section 3 of the paper therefore aims to describe the requirements for giving the various kinds of service and simplifies exactly how the regulator refers to the different options.
Confusion Over The European Dimension
By drawing together the guidance from the Committee of European Securities Regulators (CESR) along with the European Securities and Markets Authority (ESMA), as well as the non-Handbook guidance previously provided by the FSA, the paper provides a single point of access for companies that want to provide services with or without personal recommendations.
- The FCA states that it is aware of feedback from both customers and the industry that a deficiency of clarity could be inhibiting the creation of different investment sales models. This could restrict customers from engaging with investments. The regulator says that that it is important to be clearer around the concepts of ‘regulated advice’, ‘generic advice’, and ‘personal recommendation’.
Key Findings: (Tony, big heading please)
What is Regulated Advice under the Regulated Activities Order?
In this area, the FCA provides some valuable clarity and examples.
- “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.”
- If it does not have all of these characteristics, then it is generic advice and is not regulated. For example:
- • Advice to a customer to buy shares in ABC plc or to sell Treasury 10% 2014 stock is advice about a specific investment and so is regulated.
• Advice to buy shares in the oil sector or shares with exposure to a particular country is generic advice, because it does not relate to a specific investment and is not regulated.
• Advice on whether to buy shares rather than debt is generic advice and is not regulated.
• General advice about financial planning is generic advice and is not regulated.
• Guiding someone through a decision tree where they make their own decision, would not normally be advising on investments.
When Could Generic Advice Become Regulated Advice?
Contrarily, the common understanding of generic advice takes a little more explanation.
“Generic advice is a broad term that covers advice or information that does not relate to a specific investment or does not otherwise meet one of the other characteristics described in the examples above, and so is not a regulated activity.”
There are times when generic advice is given with regulated advice (for example, a personal recommendation on a retail investment), the generic advice becomes part of the regulated advice, i.e., generic financial planning advice that also involves advice on the merits of investing in a particular product with a particular provider would be captured. So, advice that purports to be generic may in fact be regulated depending on the context and the overall circumstances.
This can be a little confusing – so, by further example, “advising someone to invest in one geographical area or sector would be regulated advice if there is also an associated recommendation for a particular investment.” This is regulated advice on the back of generic advice.
What is the Difference Between ‘Information’ and ‘Investment Advice’?
The FCA states that:
“The difference between ‘information’ and ‘investment advice’ is the element of opinion or judgement on the part of the adviser, either in person or, for example, online. Regulated advice involves recommending a course of action or making a judgement on the merits of exercising a right (e.g. to sell or buy).”
So, generally speaking, giving someone information, and nothing more, does not involve giving regulated advice – i.e., giving facts about the performance of investments, the terms and conditions of investment contracts, or the price of investments, does not involve regulated advice if the investor is left to exercise their own opinion on what action they may wish to take. However, the circumstances in which information is provided can make it regulated advice, such as if information is provided on a selected rather than balanced basis so that it influences or persuades, this may be regulated advice.
Further examples are given in the paper, which is a good attempt to clarify these concepts and there is a good section on “Tests that determine whether MiFID investment advice has been given.”
Further points of interest for advisers are;
• Decision Trees and their use
• What is an ‘implicit’ recommendation?
• Obtaining customer information
• Personal recommendations and automated sales processes
• Advice through public media
• Social Media
Read It For Yourself
To be truthful, this paper is too detailed to précis here, and I would encourage all advisers to be aware of the contents as I think this will be a key referral document in months and years to come. (http://www.fca.org.uk/static/documents/finalised-guidance/fg15-01.pdf).
Read, study and internally digest.