The recent statement by FCA chairman John Griffith-Jones that the divide between guidance and advice has become hard to define exposes a worrying lack of understanding of the value of regulated advice.
Regulated advice can be easily distinguished from guidance. The six main features that set them apart are:
- The scope of advice versus guidance
- The responsibility accepted by the firm for the consequences of advice
- The knowledge and training required of practitioners
- Financial redress available to the consumer
- Funding of industrywide consumer safeguards
- Avoidance of conflicts of interest.
Regulated advice has to be given in the context of a full understanding of an individual’s circumstances. The requirement for an adviser to know their client is at the heart of the FCA’s conduct of business rules. Advisers have to offer solutions suitable for the individual, having taken into account all those circumstances.
In other words, advisers are required to seek to resolve financial conflicts for consumers and help them prioritise their actions. If they fail to do this or get it wrong, they are held to account by the FCA.
Guidance givers are simply required to answer the specific questions they are asked and to offer generic information. They are not held to account for gaps in the individual’s planning, nor is the quality of their guidance monitored externally.
Advisers also take responsibility for the implementation of advice. In the event best execution is not achieved, they are responsible for redressing any consumer shortfalls. Guidance givers cannot tell a consumer what to do; only what is possible. With this in mind, they bear no responsibility for the fulfilment of their guidance.
Regulated advisers are required to demonstrate attainment of a minimum level of qualifications and to maintain their technical knowledge through continuing professional development. The firms employing advisers are required to continuously test this knowledge, to provide suitable training and to monitor the advice given to ensure it remains up to date and suitable. There is no specific requirement for guidance givers to have any given level of professional qualification or ongoing training.
Regulated advisers are required to have a procedure in place that allows for a fair and thorough investigation of any complaints. If this process fails to satisfy the consumer, the adviser has to submit to and pay for the Financial Ombudsman Service to review the complaint. If the ombudsman finds in the consumer’s favour, the adviser has to pay redress.
Guidance givers are not subject to the scrutiny of the ombudsman and dissatisfied consumers cannot claim any financial redress from them.
When someone acts upon advice, the firm giving that advice takes responsibility of it forever. This has to be backed up by adequate professional indemnity insurance, capital adequacy and the Financial Services Compensation Scheme funded by a levy on all participating firms. Regulated firms also pay fees to the FCA to cover oversight and monitoring of advice standards.
Guidance givers are not required to accept responsibility for their guidance, to maintain insurance cover nor to contribute to the FSCS levy or the costs of the FCA. So long as the information and guidance they give does not breach advertising standards, they have no ongoing responsibility to the consumer.
Conflicts of interest
Regulated advisers charge consumers agreed fees for their service and those fees reflect the costs of maintaining a trained workforce, providing PI cover, paying for the FSCS and FCA fees, as well as the levy to support the Government sponsored guidance service.
Guidance services do not charge the consumer because they do not provide the same service. Nor do they contribute to the costs of consumer protection agencies. Some guidance services are subsidised by a levy on regulated firms; others are paid for by commercial advertising and product placement deals.
Guidance givers are allowed to use commercial advertising to fund their service and are not required to point out this conflict to the users of their services. Regulated advisers are not allowed to receive any secret payments from third parties, nor to have any conflicts of interest with clients.
I hope this summary will assist the FCA in better understanding the differences between advice and guidance, and help it see why the latter cannot work as a low-cost substitute for the former without risking some consumer detriment.
Kay Ingram is director of public policy at LEBC