The difference between regulated advice and mere guidance is not difficult to grasp. So it is concerning that FCA chairman John Griffith-Jones felt compelled to say in a speech earlier this year that new technology had made the divide between regulated advice and guidance more blurred.
He said: “The problem is exacerbated further by the remorseless march of technology. Rules that were designed for the paperwork era do not necessarily work for the online one. The distinction between advice and guidance, once reasonably clear, has become much greyer with the advent of platforms and the potential of robo-advice.”
My sense of concern was exacerbated further by LEBC director of public policy Kay Ingram’s recent piece in Money Marketing, which outlined six key features that “easily” distinguished advice and guidance from each other.
With respect to Griffith-Jones the distinction between advice and guidance is not difficult. And with respect to Ingram, the features she listed made the distinction look much more difficult than it is.
Two key elements
Regulated advice consists of two elements. First of all, the statement in question has to be advice. Only if it is advice does the next question arise: is it regulated under the FSMA and FCA rules?
So, how does one distinguish between advice and guidance? The usual situation is that one person (A) is suggesting to another (B) what that latter person should do. The Collins’ English Dictionary definition of advice is a “recommendation as to appropriate choice of action; counsel”. That is not difficult to grasp.
In a relatively recent case concerning whether an adviser had given advice or not, the judge said:
“The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of that information to the client’s investment decision, or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient. In both these scenarios the information acquires the character of a recommendation.”
The judge added: “To attempt any greater definition of the giving of advice in an investment context would be unwise and is probably impossible. I suggest, however, that the starting point of any inquiry as to whether what was said by an IFA in a particular situation did or did not amount to advice is to look at the inquiry to which he was responding.
“If a client asks for a recommendation, any response is likely to be regarded as advice unless there is an express disclaimer to the effect that advice is not being given. On the other hand, if a client makes a purely factual inquiry, such as ‘what corporate bonds are currently yielding X%?’ or ‘how does this structured product work?’ it is not difficult to conclude that a reply which simply provides the relevant information is no more than that.”
The question then is: has A given B advice or just provided guidance? Essentially, if the information being passed on to B is accompanied by a comment or value judgement on the relevance of that information to what B has to decide, the comment or value judgement is what makes the whole statement into some advice. The fact the advice may be delivered automatically by technology does not make any difference. It follows that if it is not advice, it will be guidance – which is not regulated.
Once the conclusion is that the statement does amount to advice, the next question is whether or not that advice is regulated by virtue of the Regulated Activities Order. Under Article 53 of the RAO, advising on investments is a regulated activity if the advice is given to a person in his capacity as an investor or potential investor, or as the agent for such a person, and the advice is on the merits of, inter alia, buying or selling a particular investment.
Provided the advice is not given to a person in the required capacity, or does not relate to the merits of buying or selling a particular investment, it will not be a regulated activity. Again, that is not very difficult to understand.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk
FAMR working group to recommend keeping ‘advice’ and ‘guidance’
The terms “advice” and “guidance” should be kept but come with an explanation of the difference between the two, the Financial Advice Market Review’s working group is set to recommend.
Money Marketing understands the group’s report, which is due to be released in the next few weeks, will not call on the FCA to scrap the words altogether because there are no clearer terms available.
But the group wants wording introduced during the advice and guidance process to clarify what each term means, such as whether there is Financial Services Compensation Scheme protection.
Read more on this story here.