The FCA’s long-awaited guidance on simplified advice fails to create the clarity needed for firms to develop simplified advice models, experts warn.
Last week, the regulator published the findings of its thematic review into simplified advice and non-advised sales, alongside a guidance consultation which aims to clarify the boundaries of simplified advice.
The paper defines five different types of advice models: execution-only, execution-only for complex products, simplified advice, limited or focused advice and full advice.
But experts say the FCA’s intervention fails to address the way the Financial Ombudsman Service treats complaints and the financial viability of simplified advice models – the biggest barriers preventing firms from developing simplified advice offerings.
Apfa director general Chris Hannant says: “The paper defines a range of technical distinctions but the big question remains: if a firm develops a simplified advice model, what happens when they end up at the FOS with a client who claims they received full advice?
“It does not alter the underlying concern that firms will be held to a different standard than the FOS claims – that is the barrier I hear from firms over and over again.”
The FCA says it is aware of this concern and the FOS should treat complaints about simplified and limited or focused advice in a way that “recognises the nature of the service”.
But it goes on to quote the FOS website which says it already judges the appropriateness of simplified or basic advice “in the specific context in which it was given”.
Hannant says: “The message from the FCA is to trust the FOS to do what it says it will but the problem is the experience of firms is often very different to what the FOS says.”
4 Pump Court barrister Peter Hamilton adds: “What the paper says about the FOS is not very helpful. The FOS will continue to apply its fair and reasonable test to each individual case.”
The paper proposes to keep the QCF level 4 requirement and suitability rules for simplified advice and limited advice.
It says the suitability requirement applies to all personal recommendations, no matter how they are delivered.
However, the regulator says: “It is important to note the suitability requirement is flexible and allows firms to develop a simplified process dependent on the product and type of customer for which it is intended.”
The paper says the information a firm must obtain will vary from case to case and that the more complex and high risk the product, the higher the threshold.
But Pinsent Masons legal director Tobin Ashby says this does not give firms enough clarity.
He says: “One of the major perceived problems with simplified advice has been the requirements around suitability and compliance are the same as for full advice.
“The FCA is at least now saying it is not expecting suitability standards to be the same as for full advice but it is very much focusing on subjectivity.
“Therefore, it will be difficult for firms to set their own boundaries and assess the level of risk they are taking on.”
The paper discusses a number of issues which have been raised by firms as barriers to developing simplified advice propositions.
These include whether a customer who believes they have received advice would be treated by the FCA and FOS as having received full advice.
It says while the investor’s perception of the service “is very important”, it is feasible the customer could be wrong.
When outlining limited and focused advice, the FCA says this would involve a customer approaching a firm with a specific objective, for instance, to find out what they should do with their existing with-profits policy.
It says the firm would need to explain to the customer their other financial needs will not be addressed.
But the regulator says a “duty of care” remains. This means if an adviser realises the customer has a family and no protection policy, they would be expected to highlight that need to the customer.
EY financial services senior adviser Malcolm Kerr says the paper “raises as many questions as it answers”.
He says: “It does not help firms develop anything that is really compelling for the consumer.
“It does not take any of the costs out of the process. Why would an adviser want to give focused advice? It will be almost as costly, is only giving the client part of their service, and is still likely to uncover other issues outside of that specific area.”
Independent compliance consultant Adam Samuel says: “This paper adds nothing and it solves nothing. It is really only collating the existing rules in one place.”
The paper also confirms that firms offering a simplified advice service cannot call themselves independent, which experts say may act as a further disincentive.
Ashby says: “This is a clarification but I am not sure it is a welcome one. There will be advisers who feel they could still be independent while advising in a more focused way.”
In its thematic review findings, the FCA warns non-advised brokers using investment ‘best buy’ lists risk misleading customers if they fail to properly disclose the research into the products.
The consultation also warns non-advised firms who use information to “influence” or “persuade” customers risk straying into regulated advice.
It says while information does not generally constitute advice, it can do so if it is provided on a selected basis.
Kerr says he is disappointed the FCA has not given firms more flexibility on the distinction between advice and information.
He says: “I had hoped the consultation would make greater reference to the guidance guarantee announced in the Budget.
“I would like to see a completely new model which is linked to guidance and allows firms to do more without straying into full advice.
“There is a good chance that simplified advice will now be overtaken by guidance – this paper could be the nail in the coffin for simplified advice.”
Some experts have even suggested the FCA’s guidelines will see Chancellor George Osborne’s guidance guarantee – and those who deliver it – become regulated.
Hargreaves Lansdown head of pensions research Tom McPhail says: “The FCA’s papers pose some fundamental questions regarding how TPAS and the MAS might be able to deliver the guidance guarantee promised in the Budget, given that this guidance now seems to fall within the FCA’s definition of regulated advisory activities.”
Tom Kean, director, Thameside Financial Planning
This guidance is hopeless and the industry will not be able to work with it with any confidence. The FCA needs to go to the coalface and see the realities of trying to set up one of these models before it can provide anything helpful. We need more prescriptive guidance.
Tim Page, director, Page Russell
By telling firms that they have a duty of care to look at other areas when providing focused advice, the FCA is saying that firms are still open to the risk of the FOS widening the scope of the advice retrospectively. This will reduce the appetite of firms, particularly independent ones, to get involved in simplified or focused advice.
The FCA says this consultation aims to help firms understand how all the various pieces of legislation on the line between execution- only and advice fit together. It sets out the existing rules on what is and is not a personal recommendation, including past FSA guidance on simplified advice and the definition of investment advice in the EU’s markets in financial instruments directive.
The FCA says this will help firms better understand the options for simplified advice but it was utterly confusing. All it showed was that between them, the European and UK authorities have created a hopelessly complex situation. And that complexity itself is enough to blind the market. Forget the idea that consumers are fed up with the industry and do not want to engage with simplified advice – it is such a horrible regulatory landscape that the industry has no confidence in operating in it.
This paper does not go far enough. You will not find a single distributor firm that says: “This is what I have been waiting for, I can go ahead and hire people and take advantages of the opportunities in this market.”
I would like to see independent advisers being able to offer a simplified service – that they cannot just shows the independence rules are too
onerous and the market will be worse off for it. What the market truly needs is more simplicity. I would like to see the Cobs rules pruned back to the essentials. Only when there is greater simplicity of UK and European rules will simplified advice be able to find a way forward.
Richard Hobbs is an independent regulatory consultant