Last week HM Treasury opened a consultation into the definition of financial advice: one of the key issues identified in the Financial Advice Market Review. Firms are reluctant to provide any detailed (non-advised) guidance to investors as they are afraid it will be construed as advice under the regulatory system, with the business then held liable for not meeting the required standards.
By amending the definition of advice the Government hopes to address this issue, giving firms more certainty on the regulatory boundaries and, in doing so, reducing the number of financial decisions made by consumers without any guidance at all. Having read the consultation and considered other guidance already available, a few key points arise:
- The consultation itself says very little that was not in the FAMR final report. That was published in March so it is disappointing to see nothing has really moved on in the six months since. Why was this consultation not opened immediately after, saving six months?
- The key proposal is to amend the definition of advice to be consistent with the narrower Mifid one. This means that to constitute regulated advice there must be a “personal recommendation” made. The current definition does not require a personal recommendation and so is potentially far wider reaching
- As important as amending the definition of advice will be the guidance and illustrative case studies that have been promised alongside it. The FCA will have to try very hard to provide clarity and certainty if these changes are to encourage a significant shift in firms’ behaviour
- In this respect, I have some concern given the current guidance in the PERG section of the FCA Handbook on mortgage advice, which attempts to perform a similar function. The current definition of mortgage advice is similar to the wider definition of investment advice, and the guidance provided by the FCA is so woolly it is not surprising firms are uncertain where the advice boundary lies (particularly with regard to “scripted questioning”). The FCA talks a lot about a firm needing to advise on a particular regulated mortgage contract from a particular provider to constitute regulated advice but muddies the water significantly by making statements such as:
- “The combination of advice, which in isolation may properly be considered generic, with the identification of a particular or several particular regulated mortgage contracts may well, in the FCA’s view, cause the person to be advising on regulated mortgage contracts.”
- “In the FCA’s opinion… information is likely take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation.”
- “Whether or not scripted questioning in any particular case is advising on regulated mortgage contracts will depend on all the circumstances. If the process involves identifying one or more particular regulated mortgage contracts then, in the FCA’s view, to avoid advising on regulated mortgage contracts, the critical factor is likely to be whether the process is limited to, and likely to be perceived by the borrower as, assisting the borrower to make his own choice of product which has particular features which the borrower regards as important.”
- “The FCA considers that it is necessary to look at the process and outcome of scripted questioning as a whole. It may be that the element of advice incorporated in the questioning may properly be viewed as generic advice if it were considered in isolation. But, although the actual advice may be generic, the process has ended in identifying one or more particular regulated mortgage contracts. The combination of the generic advice and the identification of a particular or several particular regulated mortgage contracts to which it leads may well, in the FCA’s view, cause the questioner to be advising on regulated mortgage contracts.”
- It is also important to bear in mind that even where guidance does not constitute regulated advice, firms will still be subject to the overriding FCA Principles (for example, treating customers fairly) when providing that guidance. FCA enforcement action can be based on breach of principles only (and this is likely to be an increasingly popular approach by the FCA where rule breaches may be more difficult to identify). So avoiding regulated advice is no guarantee of avoiding FCA action. The regulator should also provide guidance on this issue and address it head on.
The FAMR final report also promised a clear framework for firms wishing to focus on just one particular area of a consumer’s needs and give advice on that area only. However, we have heard nothing on that yet. Clear guidance in that area could go a long way to providing firms with the certainty they need to move into that market.
The consultation closes on 15 November and I would encourage as many firms as possible to respond with their views and emphasise the need for absolute clarity if this change is to make a real difference.
Alan Hughes is partner at Foot Anstey LLP