View more on these topics

Peter Hamilton: When does information become advice?

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk

Most professional financial advisers know when they are giving advice but the line between what is and is not advice is not always easy to draw.

Like all professionals, the financial adviser is under a duty imposed by ordinary law to exercise care when giving advice. However, unlike most other professionals, financial advisers are also under a number of duties imposed by FSA rules to make sure advice is suitable for the client.

There are many firms that sell financial products without giving advice. For example, banks sell various types of structured products without advice. When things go wrong, the client will say he or she was given advice to enter into the transaction but the firm may maintain that the transaction was execution-only.

The current definition in the FSA handbook of an execution-only transaction is: “A transaction executed by a firm upon the specific instructions of a client where the firm does not give advice on investments relating to the merits of the transaction and in relation to which the rules on assessment of appropriateness (Cobs 10) do not apply.”

The question of where to draw the line between advice and execution-only was considered by the courts in three cases last year.

In the first case of Rubenstein v HSBC, one of the issues Judge Havelock-Allan, QC, had to decide was whether the bank had given its customer advice. In 2005, the customer, Mr Rubenstein, wanted to deposit the proceeds of the sale of the family house somewhere where it would earn a good rate of interest and be accessible within a year.

Mr Rubenstein approached the bank for advice. The bank suggested he put his money in a single-premium bond. The bond was linked to a fund, the value of which fell substantially when Lehman Brothers collapsed. Mr Rubenstein sued the bank to recover his losses and said it had given him negligent advice. The bank said the transaction was execution-only.

The judge 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 that information to the client’s investment decision, or is itself the product of a process of selection involving a value judgement 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.”

He went on to say: “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. 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 enquiry, such as ’What corporate bonds are currently yielding X per cent?’, it is not difficult to conclude that a reply which simply provides the relevant information is no more than that.”

The judge decided that the bank had given advice and that it was negligent.

A month later, in the case of Zaki and Others v Credit Suisse, Teare J had to decide whether the bank had made a personal recommendation to the claimant to buy some structured products. The judge first noted that the bank was required by the FSA’s Cobs 9.2.1 rules to take reasonable steps to ensure a personal recommendation was suitable for its client.

The “first, and fundamental question” he had to decide was whether the bank made a personal recommendation. He said: “A recommendation is defined as advice on investments and advice is defined as advice on the merits of buying a particular investment”.

He added: “Advice on the merits of purchasing a structured product must refer to the advantages and disadvantages of purchasing the product. What may be regarded as an advantage for one client may not be regarded as an advantage for another and so Cobs provides that the recommendation (that is, advice on the merits) must be suitable for the client.

“However, advice on the merits is to be distinguished from the mere giving of information but what amounts to advice will also depend upon the context.”

The judge then quoted the FSA’s views in its perimeter guidance manual (PERG 2.7.15): “The context in which something is communicated may affect its character. For example, if a person gives information on share price against the background that, when he does, that will be a good time to sell, this will constitute advising on investments.”

He ended by saying: “Advice requires an element of opinion on the part of the adviser.” He too decided that the bank had given advice and therefore made a recommendation.

In regard to the above judgments and the definition, it is unlikely that a defence based on a transaction being execution-only would succeed in the absence of clear evidence. However, one such case was City Index v Balducci, in which Proudman J delivered her judgment a few days after the previous case was decided.

The background was that the claimant firm was claiming the sum of just over £313,000 plus interest. The debt was said to have been incurred by the defendant, Mr Balducci, in spread betting on the price of heating oil. That sum represented the negative balance outstanding on an account with the claimant.

Mr Balducci counter-claimed for the sum of $1.625m on the basis that his spread-betting losses were wrongfully incurred because the claimant unlawfully gave him advice relating to spread bets. The claimant offered its customers spread bets in financial derivative products. Trading was, or was supposed to be, conducted on an execution-only basis. Therefore, the claimant was not authorised to give advice, as opposed to information.

The customer was supposed to make his own trading decisions and trade at his own risk while the claimant’s role was limited to opening and closing spread positions on instruction and providing market information.

The judge found that the claimant had not crossed the line from providing information to giving advice. She said: “The whole tenor of the recorded conversations at this time indicates not only that there was no advisory relationship but that Mr Balducci did not regard the relationship as an advisory one”.

In a long relationship, such as existed between the firms and their clients in the last two cases, it requires great care on the part of the firm not to cross the line from information to advice. Not every firm is going to be able to avoid giving advice when trying to sell a product and the decision in the City Index case is more likely to be the exception rather than the rule.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk

Recommended

33

Keith Churchouse: RDR will not benefit consumers

I feel quite aggrieved by the RDR, even though I know as well as everyone else that nothing is going to stop it. This may sound a bit rich coming from someone like me who, in principle, is easily qualified to level six and has been using a fee-based model/ client-agreed remuneration for over four […]

6

Nationwide and Lloyds cut proc fees

Nationwide Building Society and certain Lloyds Banking Group brands have made cuts to their procuration fees. Money Marketing understands Nationwide has cut its proc fees for directly authorised intermediaries by two basis points, from 0.35 per cent to 0.33 per cent, but appointed representatives are not affected. Nationwide would not confirm the extent of the […]

OPM adds US high yield to fixed-interest range

OPM Fund Management has introduced a US high-yield und and a gilt futures short into the OPM fixed interest fund. The multi-manager wanted exposure to US high-yield corporate bonds in the portfolio because it sees value in this asset class. It has added the Allianz US high-yield fund, run by Doug Forsyth, to its fund […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. So where does the Money Advice Service sit with regard to advice then?

    They are not regulated by the FSA but agree to abide by UK law.

    I quote from their terms and conditions under their disclaimer

    “3.4 We are not liable for any damages (including, for example, damages for loss of business or loss of profits) arising in contract, tort or otherwise from the use of or inability to use: the Money Advice Service website, associated publications, the advice given by our advisers via the Money Advice Line and/or face-to-face sessions or any material contained in them, or from any action or decision taken as a result of using the Money Advice Service website, associated publications, the Money Advice Line and/or face-to-face sessions.”

    So based on that are they giving advice and how can they then claim they are not liable to that advice or am I reading this incorrectly?

    Time someone took them to task on exactly what they are doing and that they are providing and why are they not regulated like everyone else?

    If we put such clauses in our terms and conditions I am sure the FSA would be on us like a ton of bricks, but the FSA and the MAS seem to be far from abiding by UK law as they claim in my view, but no one does anything about it because not even the Treasury Select Committe can do anything.

    It is a disgrace.

  2. So advice such as –
    ‘get out of your contracted out scheme,its no good’
    ‘all endowments are bad so cash yours in’
    ‘you should only go into an ‘in house’ avc schemes as the FSAVC is bad for you’
    ‘pay off all your debts and consolidate them into one’
    ‘take a loan against your house it will provide a number of good tax benefits and you can invest the rest for a life time income’
    ‘the product you bought that had been recommended and authorized by the FSA is now bad(retrospectively)
    and finally all the ‘advice’ given by journalists and so called ‘gurus’ ,can they be held responsible and sued??
    Ok Mr Hamilton, where do we start and who doe go for with any chance of success?

  3. Grey haired broker 7th April 2012 at 2:29 pm

    When I want a mortgage I will go to a Bank to see a person with “Mortgage Adviser” on his/her badge who will only give me information not advice…..what a joke!

  4. Annoymous – Just to answer some of your comments above – what the MAS gives is information and guidance and is not a regulated activity – therefore does not require or attract FSA Authorisation or regulation. Yes advice is in the title (personally i think we all need to get over this fact and move on!) – but in-line with the definition of advice (or a personal recommendation to give it its correct title) what they give does not fall within the definition anyway – for a start they dont provide opinion or present anything as “suitable” for any particular person (as KYC is not collected)

    The media are also Excluded (under FSMA) from needing to be authorised as long as the “advice” they provide is not the primary purpose of the newspaper/article/feature. Tip sheets on the other hand do require Authorisation.

    I hope this requires some clarification around the points raised above.

  5. The FSA’s actions are not only a disgrace. They are doing the UK economy in financial services a dis-service. After all they have been civil servants subjected to McKinseyfication and this affects their greedy attitudes towards IFA’s and other individuals doesn’t it? From another Barrister called to the Bar at Middle Temple Hall in November 1978.

  6. @Nickobobinus

    Of course, those who give advice must be ‘advisers’ and advisers need to be authorised.

    It is revealing that in a world where the regulator implores us to use plain English they commit the cardinal sin of misrepresentation and, because they are unaccountable, they get away with it.

  7. As Alan Lakey says for me when you claim you are offering a “Money Advice Service” then I beleive if you aksed consumer what they would mean they would beleive they would be getting “advice” if you used that service.

    For a regulator that comes down hard on anyone giving advice when they are not regulated I find it incomprehinsible they can allow the MAS to call itself and advice service and even more so that they are “unregulated”.

    It is a complete mess and Nickobobinus is taking a very legalistic view and not one I believe a normal consumer would take. And how doew he explain in their terms and conditions when they say as I have mentioned in my earlier post when they claim they are not responsible for “the advice given by our advisers” ? Sorry but to me that implies they are giving advice even if they arn’t responsiblem for it so you could say it is meaningless. It is like giving a guarantee on a car but then saying you are not responsible for it. Only an unaccountable organisation could get away with that.

    Has anyone asked consumers what they think the Money Advice Service provides I wonder ?

    MAS is just a folley if you ask me and the cost of providing this advice to consumers is massive and if it is only “guidance” then they would have been much better paying well qualified IFA’s the actual cost per consumer which if the figures I have seen are correct works out at nearly £1,000 a time. £86 Million with a target to reach 88,000 consumers)

    Madness to spend our money this way.

    No accountability, not regulated by the FSA , and a guaranteed income as wel all have to pay. Yes they sure know how to handle other peoples money don’t they and provide value for money!!

    Has anyone actually established what sort of value they are providing to consumers and is it in excess of what it is costing us all?

Leave a comment