The FCA has published a consultation paper as part of its work to implement recommendations made by the Financial Advice Market Review.
One of the initiatives to emerge out of the review was the creation of the FCA Advice Unit, which gives feedback to firms developing automated models for low cost advice, and low cost discretionary fund management services. It spans investment, pensions, protection, mortgages, general insurance, debt and guidance services.
To date, 17 firms have been accepted into the Advice Unit.
As part of its latest FAMR consultation, the FCA has set out a number of case studies to provide clarity around its rules for online advice and guidance models.
Here are some of the most relevant case studies for advisers:
- Clients with uncertain investment needs
A firm is using an automated advice service to provide personal recommendations, and wants to serve clients who do not have a clear purpose for investing, for example, they have a very broad objective such as “saving for a rainy day.”
To what degree do the rules on suitability allow the firm to provide personal recommendations to clients where there is some uncertainty around the purpose and time period of the desired investment?
The FCA says: “A firm needs to obtain such information as is necessary to determine that a personal recommendation is suitable for the relevant client.
“A firm will need to have sufficient information about those factors that are relevant (e.g. that all the money invested will be needed in three years’ time).
“Our rules are clear that information about a client’s investment objectives should include, where relevant, information about the length of time for which the client wishes to hold an investment and the purposes of the investment. A firm which does not obtain sufficient information to enable it to recommend a product which is suitable for the client must not make a personal recommendation.”
- Assisting a client with automated advice
A firm providing an automated advice service intends to use staff that are not QCF level four qualified to assist (but not provide personal recommendations to) clients. Could direction by staff to an online process be seen as giving advice?
The FCA says: “If a staff member does nothing more than direct a client towards an automated advice service this is unlikely to be a personal recommendation. However, if the staff member’s interaction with the client goes beyond this, then the firm should consider whether this could be a personal recommendation by referring to existing guidance.”
- Identifying clients unwilling to take any risk with their capital
As part of a firm’s online DFM service the client is asked questions to establish tolerance for risk. The firm is unsure whether the risk profiling definitions of capture clients for whom investing is unlikely to be suitable. Is a firm always required to identify clients who have zero risk tolerance?
The FCA says: “A DFM must only take decisions to trade which are suitable for the client. To determine suitability, the firm will need to obtain the necessary information regarding, amongst other things, the client’s financial situation, including their ability to bear losses and their investment objectives, including their risk tolerance.
“Firms should ensure they have a robust process for assessing the risk a client is willing and able to take, including identifying clients who are best suited to placing their money in cash deposits because they are unwilling or unable to accept the risk of loss of capital.
“We consider it would be poor practice for a firm not to filter out customers who were unwilling to risk capital loss. However, we do not prescribe how firms establish the risk a customer Is willing and able to take.”