The FCA has recently published a guidance consultation on retail investment advice. Part of its objective is, as its subtitle makes clear, to clarify the boundaries between advice and information. One of the questions the paper addresses is over the extent to which firms can offer advice being limited in its scope, that is, simplified advice.
But although the paper mostly explains the issues well, it is clear the issues are complicated and have not become simpler since the FSA’s paper on simplified advice, published in March 2012.
Complications are inevitable because, first, the FCA’s rules are complex, second, the ordinary law also applies to what is going on and, third, the facts of each case will inevitably be different.
The starting point is to decide whether the client is being given advice or simply information. That is important because different rules apply depending on whether the answer is advice or information. In a High Court decision in 2011 in the case of Rubenstein v HSBC, the judge had to decide whether the bank had given Rubenstein information or advice when it had sold him a single-premium investment bond. The judge decided it was advice.
He said: “The key to the giving of advice is that the information is either accompanied by a comment or value judgement on the relevance of the information to the client’s investment decision, or is itself the product of a process of selection involving a value judgement so the information will tend to influence the decision of the recipient.”
The judge went on to say that the starting point was to ascertain what the client wanted: if it was advice, then it was almost inevitable that is what he got. But if the client was clearly only asking for information, and the reply was limited to answering the question, it is likely no advice was given.
Other High Court decisions illustrate that simply because the client claims he was given advice does not mean that was so. Thus in the case of City Index v Balducci, decided soon after the Rubenstein case, the claimant offered its customers spread bets on financial derivative products. The customers were supposed to make their own trading decisions and trade at their own risk. The claimant’s role was to operate the system by opening or closing positions on instructions. This was made clear by its risk warning which said the claimant was prohibited by the FSA from giving advice, subject to clearly spelled out exceptions. Balducci had been spreadbetting on the price of heating oil over a period of two years and had run up substantial losses with the claimant which it was seeking to recover in court.
His defence was that he was acting on the claimant’s advice and it was the claimant’s fault that he had made those losses. The judge had no difficulty in deciding the claimant had not given advice. He said, “not only… was there no advisory relationship but… Mr Balducci did not regard the relationship as an advisory one”.
Can advice be automated?
The FCA rightly says it can. Thus, in a decision in 1998 Re Market Wizards Systems, the question was whether a computer software system gave investment advice.
When a current price and certain other information was entered into the system and then processed, the system generated a “buy”, “sell” or “hold” message in relation to a particular stock.
The judge held it was giving advice and was not simply a tool for analysing the market. The principle is this case will apply to a decision tree. If the result of the decision tree process amounts to advice under the rules, the rules on advice will apply.
Once it has been decided that what is being given to the client is investment advice, the next question is whether it also amounts to a recommendation. If it is, then the rules on suitability apply and that is true even if the advice is limited or focused in any way – although, of course, the limitation will affect the extent of the advice.
Under the ordinary law which applies all the time, an adviser is required to advise with due skill, care and diligence. If he is giving information to his client who is relying on him, he must take care that what he says is accurate and reasonably full.
In other words, he must not mislead by what he says or by what he does not say.
This high-level view is enough to make good the point that even if one is giving limited or simplified advice, the issues involved are indeed complex. It is difficult to be clear about how the rules will apply in the cases close to the border between advice and information.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk