FCA helps firms navigate advice guidance boundary

The FCA has urged firms to provide greater levels of support for consumers making investment decisions. 

“We, therefore, remind firms of how the advice boundary currently operates,” the regulator said.

“By building greater confidence among firms to operate closer to the relevant boundary, we hope to improve access to investment guidance and advice for consumers.”

The FCA highlighted different ways authorised firms can support consumers under the existing regulatory framework.

The regulator said it wants to see more consumers invest with confidence, understanding the risks they are taking and what regulatory protections apply.

“We want consumers to be able to get advice or support when making their investment decisions,” it said. 

This comes as earlier today the FCA announced it was pausing plans to create a simplified advice regime after limited support from the industry and instead rolled it into a wider review of the boundary between advice and guidance.

The FCA said it will not go ahead with the core investment advice regime, which aimed to allow firms to provide consumers with straightforward financial needs access to simplified advice.

The regulator said it will now instead incorporate its work into its review of the advice/guidance boundary. 

Meanwhile, in its Financial Lives Survey 2022, the FCA estimated 4.2mnn UK adults with at least £10,000 held mostly or entirely in cash, have some appetite for investment risk. 

These people might benefit from support to do more with their money than leave it in cash.

Additionally, 2015 pension freedoms give consumers more potentially complicated decisions to make about their pension savings.

The City watchdog said accessing the right support is crucial to enable consumers to make informed investment decisions; and consumers who receive this support are more likely to invest.

“We believe some FCA-authorised firms may be hesitant to provide help to consumers due to an overly cautious interpretation of the current regulatory framework, and because they are concerned about the regulatory requirements that apply if they provide a personal recommendation,” it said.

“As a result, firms may be providing less help than they could. This could lead to consumers suffering harm that might have been avoided if they had received more support or information from their firm.” 

Understanding the advice boundary 

The FCA said whether or not any support given to a customer amounts to advice is generally only relevant to persons who are not appropriately authorised by the FCA. 

If a person who is not FCA-authorised gives investment advice, they are acting in breach of the general prohibition in section 19 of the Financial Services and Markets Act, which is an offence. 

For FCA-authorised persons, the relevant boundary is not the giving of advice, but the giving of a personal recommendation. 

This is because, broadly speaking, as a result of the reforms introduced following the Financial Advice Markets Review, an FCA-authorised firm only gives investment advice if the advice amounts to a personal recommendation.  

The FCA sets out that a personal recommendation is: "a recommendation made to an investor or potential investor in relation to a security, structured deposit, or a relevant investment that is presented as suitable for the person to whom the recommendation is made, or is based on a consideration of that person’s circumstances". 

Investment advice that falls short of a personal recommendation is governed by the same standards as apply to investment guidance and other more general communications between a firm and its customer.

For example, a communication will not be advice if it is purely factual information without expressing any opinion or value judgement on the relevance of that information to the customer’s investment decision, and without suggesting any course of action. 

The provision of purely factual information does not become a personal recommendation merely because it feeds into the customer’s own decision-making process and is considered by them.

Additionally, generic or general advice, for example on the merits of investing in investment trusts as opposed to unit trusts or unit-linked insurance, or in Japanese rather than European equities, does not amount to the regulated activity of advising on investments.

This means authorised firms would not be giving advice (and therefore not be giving a personal recommendation) where they offer the following kinds of support, for example:

• Where a customer asks a firm about the difference between an Isa and a pension, a firm can explain their different features e.g, access restrictions and tax treatments
• Where a customer asks a firm how much they can withdraw from their pension each year to maintain a desired standard of living throughout retirement. The firm can explain that this is uncertain and the reasons why and direct the client to tools which may help them, such as an online calculator, where personal information or parameters for a query are input and controlled by the customer
• Where a customer indicates they would like to take a withdrawal rate that may be too high. The firm may remind the customer that pensions are designed to fund expenses in the future and taking funds from a pension now may mean there will not be enough left for later life
• Where a firm is aware that a customer who is asking to take out an annuity has a partner. The firm can explain that the customer has an option to take out either a single life or joint life annuity and explain the consequences and risks of each option
• Explain factually any potential tax implications of any transaction request.

Consumer duty

The FCA also outlined examples to help firms understand where it expects them to comply with the consumer duty and where they can do so in a way that doesn’t amount to providing a personal recommendation.

For example, where a customer has significant cash funds on a platform. 

In this instance, the firm signals to the customer the drawbacks of holding significant levels of uninvested funds in cash and the possibility for greater returns from appropriate investments over the longer term. 

Another example is where a customer would like to transfer their pension to a different provider and the firm is aware that the customer may lose a valuable benefit as a result.

In this scenario, the firm helps the customer by outlining the risks of losing such benefits and the implications if they are to transfer. 

“For example, if they would lose a protected retirement age, protected tax-free cash or a guaranteed investment return,” the FCA said. 

“Where a customer would need to obtain financial advice due to a safeguarded benefit, the firm explains the nature of the benefit that gives rise to the requirement.”

sonia.rach@ft.com

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