What the FCA needs to understand about advice vs guidance

Ingram-Kay-LEBC-2017-CUT

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.

Responsibility

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.

Qualifications

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.

Consumer safeguards

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

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Comments

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

  1. I’m trying to work out whether after nigh on 30 years of regulation, I should be worried that this distinction has still not been understood.

  2. I have so many issues with this polemic that I honestly don’t know where to start. I find it quite disturbing that this has been written by an organisation’s public policy director.

  3. The confusion is, to an extent, self-inflicted. Nobody is arguing that ‘regulated advice’ isn’t different from ‘guidance’. The difficulty comes because the financial services sector is trying to claim that ‘advice’ = ‘regulated advice’. For those, like me, who are in the business of advice, but not regulated advice, that’s causing the problem.

    • Hi Gareth, advice v regulated advice v guidance is a very important issue for advisers. I understand we some commentators are confused by the emotions that the words provoke from advisers, Paul Lewis wrote an article a few months ago lambasting advisers for their aggressive desire to own the word “advice”. To the public and all those outside of the regulated arena the words have very similar meanings.

      However, I would argue that advisers have every right to cry foul when non regulated individuals or companies use the word advice in the financial services sector. This is because regulated advisers pay a very heavy price to provide regulated advice to clients. If you aren’t paying this price then you can not and should not use the term advice. In addition the term “advice” in a regulated context comes with so many implications for clients that it is important that the regulator actively policies the use of the word. With this in mind I am not sure how you can be in the business of providing advice but not regulated advice.

      • I give advice about benefits entitlement, accountants give advice about tax, CAB advisers give advice about lots of things, debt workers give advice about debt issues. These are all financial advice but they’re not regulated advice. Why should all other advisers stop using the word?

  4. Well written
    Polemic?

  5. Well, its all very factual…….

    Well Kay, what “you” need to know about the FCA is………. they don’t care about what you, or anyone else thinks, they don’t have to care, they respond with the line….. our rules are “very” clear you misinterpret them.
    They do not really care for the consumer, they know full well, without the massive miss-selling scandals (they conveniently let slip the net) Connought, lifemark, PPI, etc etc etc they would all be out of a job, which I am led to believe at last count, a very high percentage are paid over £100,000 a year in salaries, let also not forget the massive employee benefits, and an open budget to pay for it all.
    The very thing Kay you need to get straight in your mind is…. FCA accountability, and the ability to have it or not when the mood or need presents itself.

    Oh and with regards to John G Jones, go have a quick google on HBOS and Co-op and his role at KPMG, you will then come to the conclusion, that advice and guidance is not the only thing that may escape his understanding

  6. Sorry Kay
    Still not right. You can be highly qualified and provide guidance. (True many who do so are not)
    Those who provide guidance are far less likely to have a conflict of interest.
    Your other points are valid. Redress & safeguards, although these may be available via common law for guidance.
    The main and most important difference is that advice can recommend specifics and arrange for products.

  7. Michael Johnson 14th March 2017 at 3:45 pm

    I would suggest that the key issue is the distinction between “advice” and “guidance” is entirely lost on consumers. They want advice, but often do not know it, and usually do not want to pay for it. In addition, when given guidance, many think that they have actually received advice. Given that this is the age of the customer, the distinction between advice and guidance should be ditched. Most consumers would be none the wiser.

  8. It’s a bit uncharitable to criticise, but the article needs to be put through a plain-English-iser. Could this be precisely why Advisers are so misunderstood?

    Take: “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.”

    Can that not just be reduced to “Advisers need professional qualifications and adhere to a formal CPD scheme. Guiders don’t.”

    As for the point of this article, I do have to say that those at the FCA looking at this theme will find it all a bit patronising. They do know what advisers do. One of the problems around “advice” is the public’s perception. Google’s defaul for its meaning just about sums up the problem with the word advice, which covers a lot of different nuanced meanings.

    advice
    ədˈvʌɪs/
    noun
    noun: advice; plural noun: advices

    1. guidance or recommendations offered with regard to prudent action.
    “my advice is to see your doctor”
    synonyms: guidance, advising, counselling, counsel, help, direction, instruction, information, enlightenment; More
    recommendations, guidelines, suggestions, hints, tips, pointers, ideas, opinions, views, facts, data;
    informal info, gen, dope, the low-down, the inside story
    “the charity offers support and advice to people with mental illness”
    2. a formal notice of a financial transaction.
    “remittance advices”
    3. archaic
    information; news.
    “the want of fresh advices from Europe”

    I think it is time to come up with something much clearer and more acutely defined than “advice” for “advice”. Perhaps “planning” or maybe “personal financial plan” – just some thing that gets away from the word advice which has myriad meanings and about a zillion synonyms.

  9. The difference between advice and guidance is, whatever the FCA wants it to be. You all must have noticed how the FCA has its own definition of quit ordinary things e.g. Promotion,advise guidance etc. however it wants certain sectors to offer guidance like the CAB for instance. Mentioned in the article is how advisrers are on the hook for the advice until they die. Whilst the FCA has a limit on complaint against of only 12 months, as you know it can take 5 years or more for acomplaint to emerge, so it doesn’t matter if they move the goal posts. Even the complaints commissioner doesn’t want to know. When did the industry agree to that and why, no comment please Mr Lewis you have never been part of this world, you just seek to damage it.

  10. The issue with advice is that no one can take full responsibility for the advice they give. It gives customers an over expectation of what can be achieved. “I asked you to tell me what I should do. I followed that advice but it turned out that I would have been better off with another option. I am holding you responsible for my loss.”

    Would you be prepared to work on that basis?

  11. It all misses the point. It doesnt matter what FCA says. FOS will decide what advice is or isnt. Whilst Kay’s article is excellent It misses some real life issues.

    Client returns having had full advice and asks for Guidance which is given by that part of the adviser’s business . Client then treks off to FOS and demands that he has had advice not guidance and anyway the adviser knew all about them and should had stopped them doing what ever guidance told them to.

    Its not proving that you gave guidance Its proving that you didnt give advice.

    I have a FOS case where the adviser told the clients 7 times in writing not to take an action . The client did it anyway elsewhere. The client then ran a FOS case against the adviser when the advice he didnt give went pear shaped. FOS accepted the case and we are 6 month into their deliberations

    • The FOS can only prognosticate on Regulated advisers and I think your comment was from that perspective.

      Non regulated people giving guidance don’t fall within the jurisdiction of the FOS.

  12. I think Garry is right- this isn’t a FCA issue- it is what happens if you get a complaint and what FOS do- but that shouldn’t stop us embracing the concept and offering it clearly to our customers if that is what they want and need.

    • It matters a hell of a lot what the FCA think and legislate …… time and time again they lead us down a merry path only to find we are in pans labyrinth, most of the time not knowing our arsenal from our elbow …… the FOS probably the same, so they make up the rules as they go along
      It is then a FCA issue….. if they choose not to apply common sense and turn into the riddler….crikey the clues on 321 were easier to work out…they fall foul time and time and time again I would hate to ask one of these FCA morons directions to any town out side London …..you could end up anywhere

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