Financial advice definitions for advisers redefined by FCA
The UK regulator is to change its advice relating to what constitutes advice and therefore brings a firm within its ambit for regulation, it announced today as part of changes following the Financial Advice Market Review.
It has updated its handbook and now says that “financial advice” will only apply to advice that makes a personal recommendation to a client, and will therefore be subject to FCA regulation.
Services offered by a regulated firm that do not come with a personal recommendation will be considered only guidance, and not advice.
Those clients that receive guidance instead of advice would be covered by the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) instead of the FCA, it said.
Some firms that had red responded to the review had expressed fears that any compensation offered to complainants via theFSCS would be disproportionately punitive to the industry.
The FCA dismissed these fears, however, saying: “We believe that any costs falling on the FSCS as a result of firm failures relating to guidance are likely to be minimal.
“The FSCS may pay compensation to an eligible claimant if it is satisfied that, amongst other things, the claim relates to activity conducted in connection with protected investment business or protected non-investment insurance business.
Minimal expansion in FSCS protection under the new definitions
“Under our proposal, where a consumer makes a claim relating to guidance given by a firm that was conducting such business, we would require that the FSCS must treat the guidance as in connection with that business.
“We believe that the circumstances under which a firm would offer guidance that was not ‘in connection with’ designated investment business or protected non-investment insurance business would be very rare. Consequently, we believe that this is unlikely to represent a significant expansion in the scope of FSCS protection as compared to the status quo.”
The FCA also added: “We do not agree that the insistent client guidance imposes new requirements or liabilities on firms. The guidance is designed to set out how firms may comply with certain existing obligations in the FCA Handbook when dealing with insistent clients.
“Guidance is not binding and need not be followed to achieve compliance with a particular rule or requirement but it indicates a possible means of compliance. It is open to firms to deal with clients in other ways that are consistent with our rules and principles.”
The FCA gave more detail on execution-only transactions and its relation to insistent clients.
It said: “If a firm offers a client a personal recommendation and then the client makes an execution-only transaction against the recommendation through the firm, then it is up to the firm to determine whether this guidance is relevant.
“If there is a clear separation between the advice and execution-only channels then the guidance may be less relevant although a firm always needs to consider the client’s best interests rule.”