Out-Law News 5 min. read
04 Apr 2013, 3:07 pm
Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.
This week the Financial Conduct Authority (FCA) replaced the Financial Services Authority (FSA) as the UK's financial conduct regulator with a mandate to bring about change, having already declared that it will "be much more proactive, acting earlier and more decisively."
While speculation abounds as to what is foremost on FCA Chief Executive Martin Wheatley's mind, one suggestion has been that the apparent confusion surrounding the distinction between independent and restricted advice will be tackled as a priority. Certainly, more clarification in this area would be a positive development. Although it appears that Martin Wheatley's hints suggest that any change will only likely come as a result of an RDR post implementation review that is possibly two years away, this year’s promised thematic review into 'description of services' may provide the FCA with an earlier opportunity to address the issue.
Platforms, particularly those following direct to consumer (D2C) and business to business to consumer (B2B2C) models, will also be looking to the FCA to address the related issue of defining the border between simply providing information and investments tools, and giving advice.
Of course the FSA already tackled the issue of distinguishing 'independent' from 'restricted' some time ago, publishing finalised guidance last June. So whilst we wait for the FCA to confirm when and how it will further address these issues, we thought that a re-cap of the FSA's last held position may prove helpful, as would a discussion of the border between what is advised and what is non-advised.
Independent advice
The concept of independent advice centres on the giving of personal recommendations that are 'comprehensive', 'unbiased', 'unrestricted' and which 'represent a fair analysis of all retail investment products capable of meeting the needs and objectives of clients.' The FSA in its guidance however, indicated that the 'unrestricted' criterion is a qualified one – it is possible to take into account only a restricted product range and still be considered an independent adviser in some circumstances.
The FSA outlined that "if a firm can identify a common relevant market across all of its clients that does not include certain retail investment products, it would not need to consider such products when giving independent advice". The examples given were:
But the FSA also stated that it is not enough simply to claim that you are a 'specialist' in order to ignore categories of investment products and still maintain the independent label. While, for instance, a firm could specialise in the retirement market, the mere fact that it has a specialism would not mean that it could rule out in advance advising on particular retail investment products simply because normally they would not be considered relevant to retirement objectives if they still met the specific needs of particular clients.
The FSA also took the view that if there is a correlation between a firm ignoring a particular product and that product being excluded from cover under its professional indemnity insurance, the firm could find itself in regulatory trouble. But if a firm could demonstrate through its analysis framework that while such a correlation exists, the product due to its high risk nature for example, would never be suitable for its clients, it could avoid complications.
The origin of a product should not be seen as a reason to ignore it. Failing to consider products "manufactured outside the UK but widely available to UK consumers" could bring into question an adviser's independent status, the guidance noted.
Restricted advice
If a firm cannot (or chooses not to) demonstrate the above, it may need to label its services as restricted. But the FSA made clear that while restricted advisers can restrict their product range, they cannot advise in a vacuum and not compare the products they recommend with a client's existing assets. The guidance set out that "if a firm can only recommend certain products, then we would not expect to see it giving advice to clients to transfer their investments to its restricted product set unless this was in the best interests of the client".
The FSA also said: “Where a firm providing restricted advice chooses to limit their product range to certain range of investments or providers, there will be clients for whom this is not suitable. It is not acceptable for a firm to make a recommendation for a product that most closely matches the needs of the consumer, from the restricted range of products they offer when that product is not suitable.”
The FSA further gave direction on the effectiveness of disclosure obligations in communicating restrictions of product range to clients. It said that firms need to think less about constructing well worded disclosure documents and more about practically ensuring that clients can "easily identify" any product range restrictions and "easily confirm" whether services are appropriate.
In addition to disclosure documents, an independent adviser restricting its product range may have to "ask initial questions of prospective clients to determine whether their investment objectives and needs align with that of its target market."
Non-advised
The current rules provide that, amongst other criteria, advice is 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."
D2C platforms in particular need to be clear on where the line is drawn between making personal recommendations and simply providing information. And B2B2C platforms need to consider when provision of non-advised services through an advised channel may create the perception that personal recommendations are being made. The questions to be asked are: in what circumstances will risk assessment tools or the generation of a model portfolio be viewed as a recommended course of action? While simply comparing the benefits and risks of one investment with another may not constitute a recommendation itself, what is the status of a best buy list or other provider promotions?
Some time ago now, the predecessor to EU body the European Security and Markets Authority, the Committee of European Securities Regulators (CESR), provided guidance that remains useful in answering these questions. CESR noted that it is not enough to explicitly disclaim responsibility – a recommendation may be implicit or inferred from action. "If buying the financial instruments identified in a model portfolio is positioned as the appropriate action for the investor to take, the overall service might be viewed as a personal recommendation," it stated in a consultation paper.
The CESR also took the view that the way in which an adviser (or a platform) filters information is a matter that should be given close attention by firms providing execution-only services. While CESR did not conclude that filtered information automatically constitutes advice, it did emphasise that the determinative factor is the extent to which any filtering process influences a client's decision-making. Any opinion or apparent judgment suggesting a course of action that a client should take may render the provision of filtered information a personal recommendation.
When the FCA turns its attention to providing further guidance, it would be helpful if it takes what has already been said one step further, and provides its own view, together with practical examples, of what it believes will amount to providing opinions and making value judgments.