Regulatory certainty paves the way for to firms take bold steps forward
It is an exciting time in the retail advice sector. The FCA appears to be fully engaged in considering the advice gap and how to fill it, and its initiatives are (broadly) being welcomed by the profession.
The Treasury’s response earlier this year on amending the definition of regulated advice forms a vital part of these initiatives. The change, which brings the definition in line with Mifid, will come into effect on 3 January 2018. It will mean that:
- Regulated firms will not be providing “regulated advice” unless they make a personal recommendation to a client to take a step (buy, sell, hold, etc.) in relation to certain regulated investments. Essentially this narrows the definition of what
- Unregulated firms will continue to be subject to the current, broader, definition of regulated advice, which does not require a personal recommendation.
This is a direct result of the Financial Advice Market Review, which found firms were reluctant to develop mass-market propositions, often incorporating the use of technology, as they considered the regulatory burden when giving regulated advice to be too costly to make it profitable.
It is therefore designed to give firms more clarity on when they can provide information and guidance that does not constitute regulated advice, and encourage the development of mass-market propositions needed to increase consumer engagement with their finances, albeit without providing regulated advice.
When advice is non-advice
So far so good. It must be right that a different test applies to regulated and unregulated firms. Completely unregulated advice would almost inevitably result in the next misselling scandal, which would not be subject to the scrutiny of the FCA or covered by the Financial Ombudsman Service and Financial Services Compensation Scheme.
But what does this mean for regulated firms? Yes, they may not be giving regulated advice but any proposition based on information and guidance will still constitute a regulated activity (arranging), potentially be a financial promotion and therefore be subject to various FCA rules and principles.
The whole point of applying a different advice test to regulated firms is to keep such “non-advice” within the regulatory perimeter. The FCA (and the FOS) will still have a number of tools available to them to hold firms to account for such non-advisory services. For the FCA, the most obvious of these are treating customers fairly (principle 6), conducting business with due skill, care and diligence (principle 2) and communicating with clients in a way which is clear, fair and not misleading (principle 7).
The regulator has increasingly relied on breach of these principles when taking enforcement action in recent years, either in addition to breaches of rules or as an alternative where rules have not obviously been breached.
I see the latter as potentially more controversial. If an area or practice is common and predictable, then the FCA, as a competent regulator, should make rules to provide certainty and clarity to firms, rather than rely on principles open to (retrospective) interpretation.
The next step
Misleading financial promotions can also be the basis for claims and complaints, and indeed have been in the past where it was clear no advice was given.
This may be one reason why we have not yet had a game-changer emerge in this sector of the market. Firms really need that confidence about how they will be held to account for any proposition they launch.
The FCA’s recently released latest guidance consultation on FAMR (GC17/4) may be the next significant step. It deals with various issues, including how firms may provide streamlined advice and non-advised services.
The regulator is always going to err on the side of caution when providing guidance but GC17/4 does give some useful pointers on when authorised firms will be deemed to be making a personal recommendation and the full suitability requirements apply, as well as when a firm may not meet that test, meaning full suitability requirements do not apply (albeit other FCA rules and principles will still apply as indicated above).
Once finalised, the guidance in GC17/4 will not be a get-out-of-jail- free card for firms, but it could help tip the balance of risk/reward in favour of those that wish to launch new propositions in this area.
The FCA is also expected to publish useful information generated by its Automated Advice Unit, which is advising a small number of firms on specific automated advice propositions. Such projects inevitably involve significant upfront cost, so the FCA should be looking to publish this information sooner rather than later, otherwise the market could become dominated by big firms before any smaller firms have an opportunity to dip their toe in the water.
All the above is very exciting – not least because any steps towards increasing the number of people actively engaging with their finances can only be a good thing for the advice sector. But there will be some devil in the detail: it is all about clarity and providing enough of that to get firms comfortable with the risk of embracing these new opportunities.
I am looking forward to reading the upcoming publications from the FCA and seeing where this takes us in this brave new world. I believe this further guidance will be crucial in giving the profession the confidence to take the next bold steps forward
Alan Hughes is partner at Foot Anstey LLP