The implementation of the RDR was widely predicted to lead to a surge in execution-only business, with advice less accessible to the mass market. This prediction appears to be coming true, as Hargreaves Landsdown’s recent results have shown.
This issue is attracting the interest of the “new” regulator, the FCA. Rory Percival at the FCA has said that the regulator will be looking closely at this, and that a “no advice” disclaimer will not act as a get out jail free card for firms.
Rather, the FCA will look at the substance of the transaction and if it looks like advice, then the FCA will consider it to be advice, regardless of any disclaimer.
I do not consider the FSA’s overall approach on this unreasonable – firms should be clear about what service they are intending to provide and all parts of that service, not just the disclaimer at the end, must be consistent with that. If not, firms are asking for trouble.
This is consistent with guidance that has appeared in the FSA Handbook at PERG for many years around the difference between information and advice.
Perhaps what is missing at this point is some more specific guidance from the FCA aimed at the burgeoning execution-only market.
The FCA is going to look at this issue more closely as part of a Thematic Review in the third quarter of this year.
The most constructive thing for firms to do would be to lobby strongly now for that review to result in some specific guidance for this part of the sector. Such guidance would be consistent with the FCA’s stated approach of being more proactive than the FSA and trying to prevent problems before they happen, rather than just reacting after the event.
One key issue that firms should also bear in mind is that in most cases it is unlikely that a legal test would be applied to this issue.
In reality, most claims or complaints would end up with the Financial Ombudsman Service who may consider the legal position, but are certainly not bound by it.
The FOS’ statutory duty is to decide cases based on what they consider to be “fair and reasonable” in the circumstances of each case.
This gives the FOS very wide discretion and a judicial review (the only way to challenge a FOS Final Decision) of a FOS Decision based only on the fact that the FOS has not applied the same approach as the courts, would be doomed to fail.
The FOS and the FCA will openly pursue a consistent approach to these matters – this is confirmed by the Memorandum of Understanding between the two bodies – and so, ultimately, it is likely that the FCA will be driving overall policy on this issue, not just its own but the FOS policy and approach as well.
It is therefore crucial that the FCA clarifies its position sooner rather than later, preferably with specific guidance, and that it does not fall into the trap of its predecessor by waiting for a drop in the market to cause client losses, and then assuming that firms must be at fault and expecting those losses to made good.
In genuine execution-only services an element of “caveat emptor” must apply and “consumers should take responsibility for their decisions” as clearly stated at s5(2)(d) of the FSMA 2000.
Alan Hughes is partner at Foot Anstey