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Nic Cicutti: Tragedy of Govt’s new advice definition

Nic Cicutti

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 nic@inspiredmoney.co.uk

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. Spot on Nic. We had a client – if that is the right word – where we recommended he should not move his pension but remain where he was. When we invoiced him for the work which meant he did nothing, he went spare. If it transpires later that he should have moved, does this mean he has no protection as the advice was not regulated? It is nonsense.

  2. There is hardly any difference between the current definition of advice and the proposed Mifid version – the issue seems to be “why have two slightly different” but as Mifid is an EU rule perhaps the better response would be “Why bother”. I agree that the definition of “advice” should be widened and surgically should include “do nothing, keep what you have, you don’t need a new one”!

  3. “surgically” should be “specifically” in my previous post.

  4. Completely agree and have been saying this for a long while- advice can’t just be product sale related- that said there should be a line where guidance stops ‘these are generic options and pros and cons’ and advice starts ‘taking account of your circumstances you should take this action…’ but we need to stop this being product sale related still- RDR put advice on the map rather than products- so hopefully everyone will think about this more holistically- just as advisors should be doing.

  5. Using a medical analogy, a doctor would be called to account not just for prescribing the wrong medicine but also making a poor diagnosis or failing to undertake a full analysis in the first place – perhaps missing an illness completely and offering no treatment. Given the focus on outcomes, a product transaction would only be an input to this. This also seems to cycle back to the simplified or focused advice debate as to whether a full fact find can be limited instead to just a specific topic without detriment to the consumer. Or do you regulate products to immunise consumers from the worst effects but not the sales process. Each option seems to be too narrow or too wide, too expensive upfront or potentially expensive over time.

  6. Just a thought but could this planned narrowing of the definition of advice being promulgated to make it easier for the Banks to re-enter the market?

  7. Happy to let Paul Lewis describe the information he dispenses as advice, providing he is happy to accept the financial consequences of recompensing the client when that advice causes consumers financial loss. That does not mean that Paul Lewis gives poor advice/information, simply that circumstances change and when consumers lose money they look for someone to compensate them.

    That is the real issue about the definition of advice, it has to give advisers a clear statement of what they should be responsible for. The wider the definition, the more comprehensive the records need to be, the longer the advice process becomes the more consumers are repelled by the process.

    If you look at the ‘aunt’ example, you are asking a mortgage adviser to be responsible for advising on property speculation where the potential loss far exceeds any reward. if the adviser raises money and the speculation fails, there is liability, if the adviser suggests no action and someone else is successful there could be liability.

    The sensible adviser business decision is to walk away. Is that the desired outcome?

  8. Yea the Lewis chap is a total idiot who talks utter claptrap. For a start is he an authorised registered adviser ? If not he cant actually give advice at all can he !!

  9. Nicholas Pleasure 29th September 2016 at 4:36 pm

    Is this about VAT do you think? Financial inter-mediation is VAT exempt but if only the product sale is regulated advice then arguably this is the only thing that is exempt meaning that the majority of our time is spent doing things on which VAT should apply. And this comes from the Treasury – who’d have thought?

  10. Nicholas Pleasure 29th September 2016 at 4:42 pm

    It does strike me that the FCA and its predecessors have broadly made up regulation on the hoof and refuse to listen when inconsistencies are pointed out and rules are proved to be unworkable. They have now ended up in a situation where it is clear that no-one knows what they are doing any more and every additional pronouncement has yet another unintended consequence. For example, if Nic’s example is no longer ‘regulated advice’ does my PI insurance cover it?

    Basically consumers just want fairness and an end to all the scams. The FCA seems incapable of delivering anything other than extra red tape. How’s this for a simple solution…If it’s given by a regulated adviser it is ALWAYS regulated advice. If the person is not regulated then neither is the advice. Only regulated advisers can arrange regulated products. Would this be workable?

  11. Advice is a word, its meaning is I believe to impart knowledge (don’t have a dictionary to hand).

    The word on its own means just that. If you than add another word, such as Regulated, Unregulated the meaning becomes something totally different. It has far reaching implications and also different values. So I would argue that it is the meaning of the full wording that needs to be addressed and the consumer educated to understand the difference and the consequences.

    Paul Lewis can give advice, but he is not regulated. It could be very good advice, but if it is not, the consumer, the end user has no protection, as they acted themselves on this advice. Paul can give his advice in the knowledge there is no consequence as he is not liable.

    A regulated adviser gives the same advice, it turns out it was not correct, poor advice, then the client has protection. The regulated adviser is fully accountable for the advice and the liability.

    It is not the word adviser/advice that needs looking at, all parties are right in what they are saying. The issue is what does the words “Regulated Adviser”, mean and what should be expected by the consumer.

    Before long we will be looking into the meaning of life the universe and everything. If you know what I am referring to (hitch hikers guide) the answer was 42. When questioned the replay by the computer DEEP THOUT was, you where not clear with your orininal question.

  12. Sam Caunt ~ You should have demanded payment of your fee before starting work or at least have given your client/prospect an estimate of what it would be (with a 10% +/- allowance either way) and got him to sign a legally binding fee agreement. If he wasn’t happy with that, show him the door. That’s what solicitors do and is my policy too.

    As for the definition of advice, a personalised recommendation seems to be a reasonable starting point, though I suggest it should be a written personalised recommendation because anything less is just talk. So, if Mr X does something off his own bat that subsequently goes wrong but then tries to blame an adviser with whom he merely had an undocumented chat, the first requirement from the FOS will be: Prove it.

  13. I think this is a very fair observation. As I am now not regulated, but because of my history am still approached by various people for ‘advice’, I have to be very careful to know where the boundaries are. I can give generic guidance – which usually involves setting out various basic alternatives and an explanation of what they entail. I am often pushed to go further, but am mindful of the limitations.

    However there are grey areas, as I have said before. I certainly give my wife advice. For example, not only to buy an ISA, but also precisely what should be in it. I have also done this for my sister. We all know of instances where the bloke down the pub actually provides advice.

    I would have thought that another point of demarcation would be that the definition of advice also depends on whether the giver of this advice has a pecuniary advantage in providing it. If it is given for free then perhaps that puts a different light on things.

    I do however think that some journalists do sail close to the wind. Indeed does a ‘tip sheet’ or article constitute advice? If it doesn’t – why not? It sets out a precise recommendation and the writer is remunerated for doing so – true not from the purchaser of the product, but that might be beside the point.

    I would be interested to hear expert views, but at all events isn’t this all rather navel gazing? The definition, if it is to work successfully, needs to be concise, clear, unambiguous and brief.

  14. A simple dictionary definition of advice is “information given to enable an individual to make a decision” Most professions work to this definition, “I will advise you so that you are able to make an informed decision” Advice should not be based on the outcome but whether or not the advice enabled the client to make an informed decision.

    For example whether buying an annuity or moving into FAD will produce the best outcome cannot be predicted at the time of the decision. This should be made clear to the client and that they must make the final choice and our sole responsibility is to help them them make an informed choice

  15. TJ — A very reasonable proposition but the FOS has a different view, with which we have no choice but to go along. In this game, outcomes are EVERYTHING, however unpredictable they may be.

  16. I really don’t remember hearing of too many FOS complaints which are non-product related so to me it should be only product related as this is where the Humungis majority of complaints lie. We seem to be getting so hung up on this issue that when the regulators/government decide to go down the route they have, it is a great benefit to us. How many crooks are going to get paid to recommend the client do nothing? I would say none. For those who do purely charge for the time/work involved if the personal recommendation is not to have a product, then you could (if you are so inclined to do so) charge a lower fee. Under the new definition (if it is enshrined) surely it will be a beneift us? If the personal recommendation is to buy X, Y or Z product then current rules/regs/liability apply. Do not look at a reprieve from the regulators as a negative.

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