When is a non-advised sale legitimately not advice?
There are two alternatives to advice: non-advised and execution-only. In theory it is nice and simple: if you make a recommendation, you are giving advice and must jump through all the relevant regulatory hoops this entails; if you do not make a recommendation and either just give advice or process a request, you have not given advice.
But how easy is to stray from a non-advised or execution-only sale to giving regulated advice? Too easy, according to the watchdog.
The Financial Conduct Authority’s June board minutes revealed concern over ‘non-advised’.
In particular, there was consensus on the need for a clear distinction between advised and non-advised sales, particularly where non-advised models could be “misconstrued” as advice.
In addition, the regulator questioned whether the continuation of commission payments for non-advised retail investment sales created potential risks.
So what checks and due diligence must advisers perform when undertaking non-advised or exec-only business to ensure they do not fall foul of the rules and open themselves up to claims that they have actually provided advice (and potentially not done so adequately).
Non-advised
The FCA defines a ‘non-advised’ sale as giving objective information to a potential customer, but leaving them to decide how they wish to proceed.
In principle, then, if you do not give a recommendation or opinion on which of a range of products is best suited to the client, the process would be non-advised. Perhaps, though, it’s not as black and white as that.
The FCA states that a characteristic of an ‘advised’ sale is explaining why a particular product or provider would meet the customer’s demands and needs.
This means you don’t have to give a specific recommendation to be classed as giving advice, you can – in the FCA’s words – “inadvertently” give advice by explaining why one option might be well suited, or by simply answering questions from a client such as ‘what do you think?’ or ‘which one is best?’.
Another potential problem area is ‘decision trees’. These are often cited as being a way of allowing clients to come to a decision independently based on their requirements, but the FCA board minutes specifically mentioned processes involving decision trees when highlighting models that could be “misconstrued” as advice.
So what can you do? Well, you can give general information, as long as you ensure the client is aware of the myriad product solutions available and is able to assess the merits and drawbacks of each.
You can also give generic advice that a client should buy a certain type of product or take out a particular type of policy, as long as you do not mention a specific provider or product option.
Non-advised, given properly, obviously involves less liability than an advised sale, but is not without some element of risk. For example, while giving ‘generic advice’ you’d be safe from complaints over the performance of a particular product, if the type of product is wrong in principle you’d still be liable for the ‘advice’ to go down that route.
As for the remuneration of non-advised sales, as it stands an adviser can continue to receive commission on such business. Given the concerns raised by the regulator, how long this will continue is another matter.
Execution-only
The FCA describes ‘execution-only’ as “a transaction executed by a firm upon the specific instructions of a client where the firm does not give advice on… the merits of the transaction and in relation to which the rules on assessment of appropriateness (COBS 10) do not apply .”
However, the Financial Ombudsman Service says in a technical note on its website that “in certain circumstances, the appropriateness test required under COBS 10 could apply even for execution-only sales”.
In a recent Fos decision an execution-only decision saw Fos find against an adviser from Manchester-based Care Asset Management, who followed through on a client’s ‘execution only’ instruction on the Keydata Secure Income Plan.
It seems the adviser shot himself in the foot as he wrote to the client stating that “commission would be received for advising in this matter”. This highlights how careful advisers need to be when communicating with clients.
The Fos says in general that it sees problems with the misuse of execution-only as some advisers have used this to negate regulation, for example for the inappropriate sale of investment products.
The Markets in Financial Instruments Directive introduced an “appropriateness” test for non-advised sales, including execution-only. This means that the business has to ask the consumer for more information to help it decide whether the consumer has the “necessary knowledge and experience” to understand the risks involved in the transaction.
All of this means that in addition to being absolutely clear with the client that they do not need – and are not receiving – any advice, you also need to ensure that you are confident the client is sophisticated enough to make their own decisions.
If the client is deemed not to have the necessary “knowledge and experience”, any agreement signed by the client may not be worth the paper it is written on. By processing a request from such a client, you could be liable for having given ‘advice’.
The Fos also warned that it will pay more attention to an execution-only complaint if the investor is inexperienced and has no connection to the investment industry.
In terms of the agreement, according to the Fos “clear and credible” evidence is needed for execution-only sales. Customers need to sign a statement that details:
• they are aware the transaction is execution-only;
• they have not asked for or received advice;
• it is their decision alone to take out the investment; and
• the business is taking no responsibility for the product’s suitability.
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