• has clarified when a personal recommendation is given as part of automated advice and shares examples to illustrate the point.
• has sought to clarify the boundaries between different investment advice models as it launches a guidance consultation.
• also spells out what advice can be issued through different media, including social media.
The FCA stated it produced the guidance consultation paper because, while firms are clear on the requirements for full advice and for execution-only business, they are struggling to navigate the options in between such as simplified advice or limited advice services and sales without personal recommendations.
If a firm provides recommendations to the public generally this will not normally be a personal recommendation, the FCA stated, as suitability rules only apply where a personal recommendation is made.
For advice to be regulated at all, the FCA stated
• it must relate to a specific investment and
• must be given to the person in their capacity as an investor or potential investor, or in their capacity as agent for an investor or potential investor, and
• relate to the merits of them buying, selling, subscribing for or underwriting (or exercising rights to acquire, dispose of or underwrite) the investment.
If it does not have all of these characteristics then the FCA stated it is generic advice and is not regulated.
For example,
• advice to a customer to buy shares in specific stock is advice about a specific investment and so is regulated.
• Advice to buy shares in the oil sector or shares with exposure to a particular country is generic advice because it does not relate to a specific investment.
However, the FCA adds caveats to this.
• Advice that purports to be generic may in fact be regulated depending on the context and the overall circumstances, the regulator warns.
For example,
• advising someone to invest in one geographical area or sector would be regulated advice if there is also an associated recommendation for a particular investment.
Christopher Woolard, director of policy, risk and research at the FCA, said:
• “We want to ensure we have innovation in the advisory market and new, lower-cost options available.
• “Today (11 July), we’re aiming to address some of the barriers that firms have identified to offering new, streamlined advisory products.
• “We believe that a healthy retail investment market is one in which there are a number of different distribution models to suit a broad range of investors. We want to give firms the confidence to innovate to achieve that.”
The regulator found that firms are being clear on the requirements for full advice and execution-only business post the introduction of the retail distribution review (RDR) in January 2013. However, they are struggling to navigate the options in between full advice and execution-only. For example,
• simplified advice or limited advice services and sales where personal recommendations are not made but involve guiding the client in some way.
The FCA said that for advice to be regulated at all, it must relate to a specific investment and must be given to the person in their capacity as an investor or potential investor, or as an agent for an investor or potential investor.
It must also relate to the merits of them buying, selling, subscribing for or underwriting the investment.
If it does not have all of the following characteristics then it is generic advice and is not regulated, the FCA concluded, citing the following examples:
– Advice to a customer to buy shares in ABC plc or to sell Treasury 10% 2014 stock is advice about a specific investment and so is regulated.
-Advice to buy shares in the oil sector or shares with exposure to a particular country is generic advice because it does not relate to a specific investment.
-Advice on whether to buy shares rather than debt is generic advice and is not regulated.
-General advice about financial planning is generic advice and is not regulated.
-Guiding someone through a decision tree where they make their own decision, would not normally be advising on investments.
Decision trees
Decision trees involve using a form of sequenced, scripted, questions prepared in advance to gather information from a customer with a view to either providing a personal recommendation or regulated advice or facilitating the customer selecting a financial instrument themselves.
Where this is facilitating customer choice, the process of going through questions will usually narrow down the range of options that are available to the customer to choose.
Effectively, the City watchdog stated a decision tree is a tool that helps deliver advice, which may be generic advice or a personal recommendation, depending on the questions asked and the solution presented to the customer.
Hence, the FCA warned the use of a decision tree does not, in itself, determine whether a firm is providing regulated advice or not.
The FCA also said firms must consider whether the process is likely to be perceived by the customer in helping them to make their own choice of product.
For it not to be considered to be a personal recommendation, the decision tree and, where relevant, the person asking the question it contains, would need to avoid making any judgement or assessment that would result in one or more products being identified as ‘for’ a customer, whether as a result of information that the customer provides or otherwise, the FCA argued.
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