What is regulated financial advice? If you believe the Treasury, the definition of advice should be restricted “so that consumers only receive ‘regulated advice’ when they are offered a personal recommendation for a specific product.”
Last week it issued a consultation document proposing to amend the wording of what constitutes regulated advice to align it with the findings of the Financial Advice Market Review. This found that the Mifid definition of advice, which focuses solely on the transactional element of advice, was “clearer for firms and consumers”.
This restrictive definition of what might constitute regulated advice ignores the huge potential impact that advisers can have on their clients’ financial decision-making when they do not make a product recommendation.
Let me give an example. My wife’s aunt Carol came round our house the other day, seeking what she described as “financial advice” on how to help her daughter and son-in-law buy a property they like. The young couple have fallen for a house in a poor state of repair, but comes with a restored barn that is actually liveable in. They want to keep the barn and sell off the house, but don’t have the money to buy both.
Aunt Carol does not have a huge pile of cash to lend, but she does live in a nice cottage without a mortgage. She wanted to know how she could release some of the equity in her property to help them with the purchase. After a discussion in which I suggested some issues I believed she needed to consider, I signposted her towards the Equity Release Council’s list of advisers in the area who could potentially help with her query.
The issue, however, is that any adviser may well be making advice that does not involve a product sale. For instance, the advice might be that this is not something aunt Carol and/or the young couple should be considering.
This could either be because it is an expensive way of borrowing money or because buying the property without any idea of what the unrestored house might fetch on the open market seems unrealistic and is fraught with danger.
This would be financial advice in my book. Yet the Treasury’s own position is that something that could have dramatic consequences for the finances of three people would only become regulated advice if it leads to the recommendation of an equity release product. That can not be right.
A few months ago, my fellow Money Marketing columnist Paul Lewis, the freelance journalist and presenter of BBC Radio 4’s Money Box programme, wrote an article in which he argued that virtually all the financial guidance he offers his listeners and readers is in fact advice and he should be free to describe it as such.
Paul’s comments were a rebellion on his part against the financial services industry’s attempts to “impose a monopoly” on the word “advice”. It is a common term which applied equally to the work he carries out on a day-to-day basis, he argued. By contrast, the word “guidance”, which Paul felt the industry was trying to straightjacket him into using instead, was far too “wishy-washy”.
My response at the time was that while Paul was perfectly entitled to use whatever word he wanted in respect of what he does, the reality was that the industry should at least try to continue to distinguish between advice and generic guidance, if only because of its impact on the regulation of financial advisers.
In other words, the term itself matters in the context of a regulated activity as well as the outcome of that advice, for example whether it leads to a product recommendation or a transaction.
What I did not make clear then was my view that my definition of regulated advice should also include recommendations to take action that are not related to a potential product transaction.
The whole essence of the RDR was that advisers should be moving increasingly towards a position where what they sell is not a product but their own advice, charging for the time expended to put that advice into effect.
If that is the case, then the FCA’s role should be to regulate the totality of that advice, not just the transactional element of it. Yet the Treasury’s position seeks to return advisers to a time where the product recommendation is the sole area that needs to be regulated.
Ironically, what the Treasury has done has been to completely ignore Paul’s common sense approach – admittedly one where regulation need not follow as a result of the activity being called “advice” – to a position where the definition is now being restricted to a very tightly-drawn set of criteria.
“The whole essence of the RDR was that advisers should be moving increasingly towards a position where what they sell is not a product but their own advice, charging for the time expended to put that advice into effect.”
Ultimately, advisers should be responsible to their clients for their actions, not just for recommendations with a potential transactional outcome but where decisions are made that may not involve a sale at all. The same applies to cases of negligence, where non-advice leads to consumer detriment. In the long run, regulating some forms of “advice” to a client but not others is not helpful to either advisers or their clients.
It is a tragedy that after years of intense debate as to whether advisers are becoming more professional by focusing on a much broader definition of advice that might be offered – and charged for – the Treasury is seeking to narrow the definition again.
Nic Cicutti can be contacted at firstname.lastname@example.org