Navigating the Advice/ Guidance Boundary

Whilst the FCA consults on the boundary between advice and guidance (DP23/5 was issued on 8th December 2023), they are encouraging firms to provide greater levels of support for consumers making investment decisions. They hope to improve access to investment guidance and advice for consumers, and to close what is termed the ‘advice gap’.

Data from the FCA’s Financial Lives Survey in 2022 found that only 8% of adults (4.4 million) reported taking financial advice over the previous year. Adults with over £250,000 in investible assets were the most likely to have received advice in the previous 12 months (37%, compared to 17% of those with at least £10,000).

Common reasons for not accessing advice are the perception that the consumer would not benefit from it (60%), the consumer had not thought about it or got around to it (23%), or the consumer had an issue with fees (12%). Access to advice is, in practice, also limited for consumers with smaller sums, but they perhaps don’t seek it, hence the apparent advice gap.

Some firms may be hesitant to provide help to consumers due to a cautious interpretation of the current regulatory framework, so they may be providing less help than they perhaps could. The FCA wants to change this mindset, particularly under the auspices of Consumer Duty, in encouraging clients to pursue their financial objectives and achieving good outcomes.

In the client’s best interests?

Lack of appropriate support may lead consumers to make decisions that are not in their best interests. For example, they become disengaged with their pensions making them unprepared for retirement, or they turn to high-risk investments, such as cryptoassets, without adequately understanding the risks.

When clients seek advice firms must act in their best interests and are reminded about the client’s best interest rule (COBS 2.1.1): A firm must act honestly, fairly, and professionally in accordance with the best interests of its client.

It is important to note that the rule not only applies when providing financial advice, but it also applies when a firm is providing guidance. So by providing clients with greater degrees of understanding, support, and guidance, firms will also be demonstrating compliance with the client’s best interest rule.

Personal recommendations

Let’s have a look at how firms can improve the level of support they provide to clients making investment decisions. For FCA-authorised persons, the relevant boundary (between financial advice and guidance) is the giving of a personal recommendation. So what is a personal recommendation?

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. The definition excludes a recommendation issued exclusively to the public (PERG 8.30B.2G).

So what isn’t a personal recommendation?

The FCA has provided some examples of what is not a personal recommendation:

• Purely factual information without expressing any opinion or value judgment on the relevance of that information to the customer’s investment decision, and without suggesting any course of action.

Where it does not relate to a particular investment:

• 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 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 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 that may help them, such as an online calculator, where personal information or parameters for a query are input and controlled by the customer; and
• Explain factually any potential tax implications of any transaction request.

Consumer Duty

The FCA has provided examples of where firms can provide more help to consumers, but also it expects them to comply with Consumer Duty in helping clients to pursue their financial objectives and avoid causing them foreseeable harm. They can do so in a way that doesn’t amount to providing a personal recommendation:

• 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;
• Where a customer would like to make a withdrawal from an investment or pension and the firm suspects that the customer may possibly be the victim of a scam or fraud. The firm helps the customer avoid harm by providing appropriate warnings about the risks and implications of their chosen option and encourages the customer to seek financial advice before proceeding;
• Where a customer is seeking to reduce or stop their pension contributions due to cost-of-living pressures. The firm makes the customer aware of their options and the short- and long-term potential risks of stopping or reducing their pension contributions, such as losing out on employer contributions and the increased risks of insufficient funds at retirement;
• Similarly, when a customer is accessing their pension for the first time or increasing their pension withdrawals due to cost-of-living pressures, the firm makes the customer aware of the related potential consequences, including the risk of sustainability throughout retirement and tax/means-tested benefit consequences; and
• Where a customer’s portfolio has not been re-balanced for some time and the firm is concerned that the portfolio’s current holdings may no longer align with the customer’s needs. The firm contacts the customer to invite them to contact an adviser to review their holdings. So long as the firm does not identify what specific assets the customer should buy or sell, the firm will not be giving a personal recommendation in that initial communication.

Additional examples of what is and is not a personal recommendation and advice can be found in the Perimeter Guidance Manual PERG 8 Annex 1.

Firms are also reminded that for non-advised sales, the fair, clear, and not misleading rule in COBS 4.2 still applies to all communications, letters, etc.

Record keeping

It is important that firms keep an accurate record of any guidance they provide to consumers, for example, by writing up some notes that detail the conversation held and the client’s circumstances, as well as the outcome, so that the firm can go back to the conversation if needed. The firm then has documentary evidence, but crucially is not stepping over the advice guidance boundary into regulated financial advice.

Good record keeping will also help to build up a defense should the firm ever receive a complaint about the guidance or advice. KYC as always is paramount!

So, what’s in the Discussion Paper DP23/5?

The FCA has set out a number of proposals for closing the advice guidance boundary. These are:

• Further clarifying when firms can give consumers support without giving regulated financial advice;
• A new approach allowing firms to provide support tailored to groups of people in similar circumstances; and
• A new form of simplified advice that makes it easier for firms to provide affordable personal recommendations to clients with more straightforward needs and smaller sums to invest.

The regulator hopes that the proposals put forward will go some way to closing the UK’s support gap – ensuring that more people are able to access targeted financial advice that is relevant to their needs at an affordable cost. New and emerging technologies can further enhance consumer experiences and outcomes.

The proposals could help consumers in a number of different scenarios. For example, firms could also highlight to a customer holding excess cash in their bank account that inflation could erode the value of their savings, describe the value of investing, and suggest products based on an understanding of the customer’s target market. This is probably stating the obvious to firms, but it may not be so transparent to a client who has never previously sought help.

The simplified advice proposal could enable advisers to help consumers who want the assurance of advice to make first steps and invest a one-off lump sum into an ISA for example, but without taking into account their wider financial situation. This form of support would be presented as being suitable for the specific consumer and result in a personal recommendation.

The proposals are at an early stage and it will be interesting to see how things develop.

Our view

Firms can often be nervous about providing guidance, as this may be construed as a personal recommendation by the client, and even by the firm. Firms may therefore be providing less help than they could and Consumer Duty places an emphasis on firms enabling and supporting consumers in pursuing their financial objectives whilst avoiding (by act or omission) foreseeable harm. This can be achieved by firms providing not only suitable financial advice but also appropriate guidance to their client base where appropriate.

Where firms do provide guidance they must maintain adequate records and ensure that all communications are fair, clear, and not misleading.

Action required by you

Be prepared to help your clients not only in the provision of financial advice but also, the provision of guidance. If you are still unsure where the boundaries between guidance and advice lie, speak to your Thistle Consultant.

Author - Gary Aspin – Senior Compliance Consultant