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Govt launches consultation on definition of advice

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The Treasury has launched its consultation on amending the definition of advice so that consumers only receive regulated advice when they are offered a personal recommendation for a specific product.

In the consultation paper the Treasury says there are currently two ways of defining advice.

The UK defines regulated advice as “advising on investments”, as set out in the regulated activities order. This definition is broader and less specific than the definition used in Mifid, which is based on a firm giving a customer a personal recommendation.

The definition change was recommended in the Financial Advice Market Review and announced in this year’s Budget.

The consultation says: “FAMR found the Mifid definition is clearer for firms and consumers and is also much easier for firms to build into their compliance processes.

“The consultation proposes to amend the wording in article 53 of the regulated activities order to reflect the text set out in Mifid, so that consumers only receive ‘regulated advice’ when they are offered a personal recommendation for a specific product.”

The consultation sets out the cost of full regulated advice for consumers who have straightforward financial needs might outweigh the benefits, or it might be uneconomic for firms to provide those customers with advice.

It says: “Currently, firms are reluctant to offer guidance services to these consumers, increasing the risk of them making poor investment decisions on their own. A key reason for this reluctance is uncertainty around what constitutes regulated advice and what does not.”

The consultation also considers the costs and benefits of the proposal, saying firms that currently carry out activities covered by both definitions of advice and firms looking to enter the market to provide guidance services will be impacted.

The consultation closes on 15 November.

Any change would be made through an order under the Financial Services and Markets Act 2000. It would also require secondary legislation.

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. Why are they talking about products- a personal recommendation could be to do nothing? To make gifts? To take some action?- shouldn’t the definition be the difference between explaining factual options and the customer making own choice versus using advisor knowledge to make a specific recommendation to take some action with your finances?

  2. A lot could be achieved by allowing customers to specifically limit the boundaries of advice they want and the advisor being able to do this without fear of liability for what they didn’t do? We would obviously need to show this was customer driven rather than advisor driven more effectively than we have in the past and those seeking to get round the rules to the customers detriment- I would make it mandatory to record all discussions so we can prove honesty and transparency. Part of the reason we have these cumbersome rules is that we still have poor practice across some businesses.

  3. It would clearly need to be watertight, at the moment recommending any course of action renders you liable, whether you transact the business or they then do it themselves. FOS tend to find against advisers where there are any grey ares, and where there are not.

    As an adviser charging fees for advice, if I have not recommended a product does that mean I have not given advice? For example, if I have negligently overlooked something important which then causes consumer detriment, I should be held to account. This smacks of regulatory dilution to open up the distribution channels, defeating the objectives of RDR.

  4. This is navel gazing gone mad and most likely at an eye watering cost.

    Advice is for a specific product, where the professional adviser gets paid. (More later). Guidance is for non-specific suggestion – do nothing, buy an ISA, Invest in a pension. Don’t borrow money – either pro bono or for payment. If a specific fund is recommended then this is advice. However some firms bend these rules to breaking. I have heard of one very large and successful firm using the terms “If I were you” or “I have X in my portfolio” to give specific advice and pretending that it isn’t.

    In the paragraph above concerning an adviser being paid for advice. The exception here is that (for example) if I advise my wife (for no fee) to buy the Bloggins World wide fund and specify the precise amount, I hardly think the FCA will come round to clap me in irons. But it is advice. Also many of us know full well that this sort of thing goes on in pubs up and down the country. The difference here is that the ‘adviser’ isn’t getting paid for the advice, nor is he/she doing it as a full (Or even part) time career.

    This has always been a fraught topic (by those in charge). I recall many years ago having to walk out of a meeting and come back in and wait for the client to mention the topic of a unit trust before I could talk about it.

  5. There is a big problem with the definition of “financial advice” and it is not the one identified in this consultation document. The current legal definition of financial advice dates back over 30 years to the 1984 Gower Report when the financial services landscape was completely different to today (pre platform and pre internet). That old definition is extremely restricted in that it refers only to specific product advice (i.e. recommending a provider and a specific product from their range). Most clients would define ‘advice’ far wider than this. There is a clear need to modernise the legal jargon in line with customer expectations. This consultation is about aligning the current restricted definition more closely with even more restricted European legislation. Why bother?

  6. I agree with the above comments and I do hope that the professional bodies will be responding to the consultation on behalf of members.

  7. Agree with you, Geoff Sharpe. I know an adviser who was complained against by the widow of a man who’d ignored repeated (written) recommendations to effect life cover to protect his mortgage. Thankfully, said adviser was able to produce records of his ignored advice.

  8. Strange this one, as it does not involve joined-up thinking; it just plays to the gallery (of the likes of financial journalists and blokes down the pub, the latter of whom has no paper trail and thus no liability anyway).

    As Geoff Sharpe observes, financial advice (and guidance) is about much more than product specifics and as such needs to carry liability. If one is to be able to do everything bar suggest and sell the products, then there would seem little point in being regulated, qualified and paying the associated costs and thereby being liable for your advisory processes (regulated or otherwise).

    ‘From our discussion you have £500 of available funding and inadequate pension provision, therefore I suggest that you seek out a suitable pension plan for your needs with an appropriate company!’…Advice or guidance?

  9. Why don’t we ask consumers what they think advice is or isn’t?

    Let’s also ask them to tell us what protections they think they should get for accessing information/guidance and advice

  10. People already frequently think they are getting advice when they aren’t…. widening the scope for what isn’t classed as advice (IMO) means that even more will think they’ve received advice when in reality they’ve made the decision themselves and therefore carry the risk and liability for the decision being bad.

    A lack of consumer understanding leaves the door wide open for those who are not regulated but have products to sell (typically on commission) to take advantage and those who want to take advantage clearly won’t be all that keen to disclose the fact they aren’t regulated, the products aren’t regulated and the wonderful, 8% p/a guaranteed property investment in Cape Verde or wherever probably doesn’t really exist (and if it does, it’s not worth the price said investor is about to pay for it).

  11. I think it is brilliant, fantastic, profitable and inexpensive way to provide a service to the mass market, whilst being a very profitable addition to what we all do now. The big plus is that we do not have the current liabilities for doing so. It should be very easy to manage if you do it right – on paper (or electronic means) with a lot of it being a pre populated template. It may take a little bit of thought from outside the “regulated box” we have been used to up to now (but not a lot of thinking). Here is my vision of how it could work for something simple like an ISA:
    Do the initial meeting as now – but much shorter – to establish facts/goals etc. Short “fact find” to establish the need(s), do risk profile as we do now. Confirm your scope of work to be done, your fee and get signed client/fee agreement. No need to do it in any set order as it is unregulated activity and as long as the person knows what the fee is for and agrees it before you go off, you have been up front/transparent and he/she knows what it will cost.

    You could have pre-populated templates for ISA’s, pension’s etc. on your computer. Fill this out with some personal blurb and a generic action plan to create and send a professional looking written report to the person. For example:
    “Dear Joe further to our meeting of xx yy zz, you told me you wish to invest over the longer term to generate a lump sum/buy a car/school fees (whatever) but are unsure what options are available to do this. This report should let you have sufficient information in order to let achieve your goal/objective and how to go about doing.
    You should look at investing in an ISA as you have yet to use your annual allowance and this is a very tax efficient method of saving over the medium to longer term. Provided you meet the qualifying criteria you are currently allowed to invest £15240 per annum and there are no shortage of ISA providers and ISA types to choose from. First you should decide whether to invest all in a cash ISA, all stocks and shares ISA or a mix of the two.
    To help you choose which could be the right type for you, you need to consider the amount of risk you are comfortable to take and are financially able to cope with to achieve your stated aim.
    You will recall as part of our meeting we discussed risk along with what it means. To provide you with a report on this we completed a risk questionnaire and I have attached the resulting report based on your answers. Your report shows you could have a medium (or low or high whatever) attitude to risk along with a description of what this actually means this in plain, easy to understand language. If you feel this is accurately reflects your views you are ready for the next step. Use a search engine/financial press/internet to find an ISA provider you feel suits you.
    Explain to them that you have had your risk profile assessed and ask your chosen provider for a list/link of funds appropriate to your risk profile if you decide a stocks and shares ISA is for you. They should be happy to provide this information as this is purely factual and you must choose your own fund(s). You should then request the providers’ customer brochure and Key Facts document which will provide you with all the information you need to decide on an ISA appropriate to what you fell is correct for you. Read the documents carefully and if you are happy with everything you can apply to the provider of your choice to set the ISA up for you. You should read the communications from them and look at your valuations to determine that it continues to do what you hoped it should. If all goes according to plan you have yourself a nice
    lump sum in years to come.
    I hope you have found this to be helpful in planning how to start the process of achieving what you want to and if so I look forward to being of help to you in the future for other areas you feel I can assist you with.
    Please be aware this is a generic action plan with only factual information to allow you to make an informed decision for yourself, no personal recommendation has been made. The consequence of this means that it is wholly your responsibility for ensuring the type of ISA you select, the fund(s) you decide upon and the provider of choice are all suitable for your needs. You will not have the protection available from the Regulator or Financial Ombudsman Service to complain to if things do not go according to how you though they should have gone. As long as you are aware of, and are happy to take this responsibility, then my role is finished for now.
    If, however, you prefer to receive full regulated financial advice and have me make a personal recommendation in order to be protected, I am happy to do so. We can discuss this service, we will agree a fee and I will do everything required of me to provide you with a suitable recommendation. If I do not hear from you within two weeks from the date of this letter/email I will assume you have decided to you do this yourself and I wish you well.
    Yours sincerely”

    There is no shortage of factual blurb you could beef out the action plan with (if that floats your boat). It depends who much you decide to charge for it I guess. The more you charge the more you may feel needs to go in it to justify your fee. it doesn’t matter as it will be up to you

    As I see it, the important thing is……..No regulated advice, no personal recommendations made so no liability. Just 45 minutes to an hour spent with the person establishing their needs and 15/20 minutes putting the action plan together and sending it. For me, I think £275 would be about right as a fee for what is involved. I could do 3 of these a day, reduce my regulated activities substantially, earn a very good living and have no liability issues (unless the person decides to become a client and goes for full regulated advice. In that case….. Ker-ching – Normal rules apply. I charge my normal fee and I could (but probably wouldn’t) deduct the £275 already paid. I would be more than happy to do this.
    It may not be everyone’s cup of tea, as there are a few advisers out there who could think this is below them…… No bother, I will gladly take the referrals from you. Skype/FaceTime are great inventions and mean no travel any further than my home office.

  12. fees for guidance 22nd September 2016 at 7:50 am

    @Marty Y – spot on!

  13. Good grief ! Really ?

    We need a full consultation and a change in legislation to state the blooming obvious !

    Then it is little wonder the financial services industry is in complete disarray ? the regulator is the treasury and the treasury is the regulator, the FOS runs around like Billy the Kid ignoring the law and doing what the hell they like ……. and the FSCS ? any-one remember the old B movie the Blob ? it will eventually consume all those who fail to run fast enough !

  14. One of the most common complaints about the FOS is its tendency to accept a complainant’s undocumented version of events over the adviser’s documented version. If this is to be addressed, should a particular investment go bad and a complaint about the basis on which it was entered into ends up with the FOS, the first response should be: Please submit documentary evidence of the advice you claim to have been given. If you have none, your complaint cannot be considered. Is that unreasonable?

  15. I would be very surprised if the end result was a narrower definition of advice. I have to agree with Nick Bamford. What is important is what the client thinks is advice. Currently the courts describe that as giving a “value judgement” on the investment. In that case my view is that anyone saying “in your shoes I would” would fall squarely into advice.

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