Your IndustryJun 9 2016

Regulation dictating advice labels

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Regulation dictating advice labels

The regulator came up with the tags restricted and independent in a bid to ensure consumers understood the type of service they would receive.

Restricted advice was defined by the Financial Services Authority as a personal recommendation to a retail client in relation to a retail investment product which is not independent advice; or basic advice.

The FSA has required firms to explain in writing (and orally where non face-to-face) the nature of this restriction.

This includes an explanation about whether the advice is limited to retail investment products from a single company, a single group of companies or a limited number of companies.

But is the regulator right to come up with just two labels to brand the type of service you offer?

Derek Bradley, former financial adviser and chief executive of adviser forum PanaceaAdviser, says he believes it is the role of the regulator to determine various definitions of advice, whether this is independent, restricted, simplified or streamlined.

He comments: “With advice comes regulatory responsibility so yes, [regulation should dictate what advice means].

“Guidance needs some definition too, especially around regulatory responsibility - and as for robo-advice, perhaps a form of software contractual wording should apply?”

Richard Nuttall, head of compliance policy, and Liz Coyle, compliance policy manager for the SimplyBiz Group, say they would like to see “an easily understood definition” of different types of advice produced by the regulator.

It is critical there is a clear distinction between advice provided by a professional and guidance/advice, which may be generic in nature Gill Davidson

Ms Coyle says: “The limitation of guidance must be clear, as essentially ‘advice’ and ‘guidance’ in a non-regulatory financial services context mean the same thing.

“Although this seems like common sense, to date it has been the consumer’s interpretation of the service being offered that had led to redress when things go wrong.

“A clearer definition by the regulator(s), taking account of the ‘grey areas’ would be welcomed.”

Moreover, “in the spirit of transparency”, Gill Davidson, group regulatory director for Tenet Group, comments: “It is important the customer knows and understands what ‘advice’ means”.

Therefore, in terms of regulatory influence over what is and what is not independent or restricted advice, Ms Davidson believes: “It is critical there is a clear distinction between advice provided by a professional and guidance/advice, which may be generic in nature.”

In a Twitter poll conducted by FTAdviser, the majority of respondents believed the regulator should be responsible for designating what was, and what was not, financial advice.

Only 15 per cent believed the advice industry itself should have any say over what they believed the word ‘advice’ to mean.

Some control

Other respondents agree it is important to have some element of regulatory control but acknowledge the evolutionary nature of the advice market means there needs to be some element of flexibility over what is ‘independent’ and what is ‘restricted’ advice.

A regulator should set a “defined boundary for any given activity”, and the industry already has that, says Chris Hannant, director general of the Association of Professional Financial Advisers (Apfa).

However, he says the problem is not largely regulatory but common usage, as the latter determines the everyday sense of what individuals understand ‘advice’ to mean.

He explains: “Without getting into the finer points of [language and philosophy professor] Wittgenstein, in any everyday sense, ‘advice’ will be defined by common usage. That’s how language works.

“You do need a defined regulatory boundary for any given activity and we have that. The problem is we use ‘advice’ loosely to mean many things, from investment or insurance intermediation, to generic help.

“We - including the media - ought to be more precise about what is meant when we use a term.”

Indeed, as the FTAdviser poll suggested, more people thought the end consumer should have a say in what should be classed as ‘advice’ than the advice industry itself.

Keith Richards, chief executive of the Personal Finance Society (PFS), says: “The advice sector continues to evolve and while the rules around a regulated activity should be set and monitored by the FCA, we need to now see a corresponding evolution of regulation to catch up with the reform of an advice industry which has become a profession.”