Advice or guidance? That is the question

The Retail Distribution Review (RDR) brought many benefits to the UK pension industry, but it also created an advice gap, resulting in consumers with the smallest funds struggling to access advice at a suitable price

By Justin Corliss, Business Development Manager

The Financial Advice Market Review (FAMR) produced in March 2016 aims to remedy this, with August’s CP17/28 providing an update on the progress.

This includes:

  • Guidance on personal recommendations
  • Answers to questions raised by advisers in response to GC17/4 on what constitutes a personal recommendation
  • Guidance on dealing with insistent clients
  • Guidance arising from experiences of the FCA’s advice unit
  • Handbook changes arising from recent amendments to the definition of advice on retail investments

What does it mean?

From 3 January 2018 new legislation will take effect, stating advice must take the form of a personal recommendation.

Regulated advice currently consists of two elements for the purpose of Article 53(1) of the Regulatory Activities Order (RAO):

  • Advice which constitutes a personal recommendation, and
  • Any other regulated advice within Article 53(1) which does not amount to a personal recommendation

CP17/28 refers to the latter as guidance. Guidance in this instance is not referring to the provision of factual or generic information as this already sits outside the definition of regulated advice. Rather, guidance is taken to mean supporting consumers making financial decisions but stopping short of making a personal recommendation. It is proposed that the same rules should apply to firms providing guidance as apply to other firms providing non-regulated advice. Such as:

  • The Principles for Business
  • Client’s best interest rule
  • Fair, clear and not misleading rule

Putting this in context

Chapter 4 of CP17/28 sets out the FCA’s guidance on whether a service is a personal recommendation. Annex 1G of CP17/28 provides a list of examples to help advisers with this. In addition it directs advisers to FG15/1, which lists the five tests to determine whether a service is a personal recommendation.

What is clear from CP17/28 is the FCA’s ambition to increase consumer access to guidance, and to help advisers identify what constitutes a personal recommendation. Helping advisers understand what can be provided via guidance without being considered a personal recommendation, and the additional regulatory burden this carries, may go some way to solving this issue.

We will investigate the issues raised in relation to the advice unit and insistent clients in an upcoming article.