Plans by HM Treasury to change the definition of advice following the publication of the Financial Advice Market Review (FAMR) earlier in the year are designed to make things clearer for consumers, but as is so often the case with such government plans, it has the potential to make things more opaque.
The idea is to create a system where regulated advice would simply (perhaps not the right word to use here) be where someone has a personal recommendation made to them on the basis of their individual circumstances, while guidance would not be regulated.
Unless a personal recommendation is made. Yes, you can probably see what I mean now.
The consultation document issued by HM Treasury last month outlined an increasing trend towards consumers making their own financial decisions, even though the review suggested they might benefit from “high quality and more specialised and detailed guidance services”.
However, since guidance is less expensive than advice, the FAMR review found many firms “were reluctant to offer this potentially less expensive guidance to consumers”.Apparently, and perhaps not surprisingly, it was because there was “uncertainty about what constitutes regulated advice”.
Let's be fair here, advice is a business, and businesses need to make money. It is easy to dismiss this fact when it comes to the more emotive issues surrounding advice, but at the end of the day if money is not made there is no business to run, and no advice will be given to anyone if you take this to its extreme.
But for most advisers, the benefit they can offer to their client is the key rather than how much they can feather their own nest at their clients’ expense. So the likelihood is much greater that the confusion around where guidance ends and advice starts is more of an issue to the adviser than whether or not they can charge more or less for it.
The trouble with all of these definitions is that if the people who are operating under them are finding it hard to determine which is which, what hope can a consumer possibly have? Regulated advice in the UK is defined under Article 53 of the current Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) and the suggestion is that this should change following the consultation to bring it in line with the EU definition outlined in the Markets and Financial Instruments Directive (MiFID).
If, as is suggested, there is a clearly defined boundary between advice and guidance – one regulated and the other not – then that would not only help advisers but also help consumers, who potentially could get ‘guidance’ from firms rather than the more expensive advice. In a perfect world, this would be a perfect solution.
However, financial services – and in many ways specifically financial services regulation – is not a perfect world, so if these measures are adopted it is inherently possible that we run the risk of allowing a new breed of unqualified and unregulated ‘advisers’ who are setting up firms to offer ‘guidance’ yet selling products on the basis of personal recommendation as a result.
Is this likely to happen? I would hope not, but there are plenty of people in this world who are far more interested in fleecing customers than helping them, something the last 20 years of financial services changes have gone out of their way to try to prevent.
For genuine advisers who have gone through all of the qualifications and regulatory processes to offer genuine advice, this is a double-edged sword. On the one hand, there would be more clarity about what constitutes guidance and advice which should help to give advisory firms the confidence to deliver both within the one organisation more effectively.
On the other, there is also the possibility that chancers who simply come into the market to exploit the unregulated ‘guidance’ aspect of the rules to sell products end up giving genuine advisers a bad name – because the general public may not understand the difference.
It is little wonder this is hard to pin down, especially when you have the Financial Ombudsman Service finding against advisers in cases such as the Harlequin Property execution-only pension transfer case brought by Mr E, who worked in financial services himself from the late 1980s to 2001, and had also taking Financial Planning papers one and two.
There is an argument that the adviser should have dealt with this case differently, but if as is outlined Mr E was an experienced financial services professional, is it not reasonable to think he would have understood the nuances between execution-only and advice?
One thing is for sure, if HM Treasury does change the definitions of advice and guidance at the end of this consultation, they must be taken up and enforced equitably by all regulatory bodies, including the Financial Ombudsman Service.
Alison Steed is a freelance journalist