Execution-only platforms and the advice issue revisited

Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.      

Financial Conduct Authority (FCA) chief executive Martin Wheatley echoed the thoughts of many in the industry recently when he expressed concern that people with “portfolios of less than £100,000 are not getting the same service” that they were getting before the first round of retail distribution review (RDR) rules came into effect earlier this year.

Both the FCA’s own research findings and those conducted by industry support the view that access to advice has become more difficult for some in the post-RDR world.

The FCA's findings indicate that the number of advisers has dropped from more than 38,000 to 32,000 since the beginning of the year leaving a shortfall for many who remain in need of assistance when taking investment decisions. This includes the reported 3.8 million people over 55 years of age with a financial worth of £100,000, who may be at risk of not receiving the help they need with retirement planning.

People in that sub-£100,000 bracket still want to invest but probably are not in a position to pay for advice. They are likely to turn, then, to execution-only platforms.

It is no wonder then that last week the FCA clarified that it will be looking more closely at execution-only platforms in an upcoming review to make sure that they are not giving what it deems to be advice.

But as we have discussed previously on this blog, what is an advised service and what is a non-advised service is difficult to define. As it stands, regulation calls for a distinction to be made between giving a personal recommendation and supplying information and tools that assist clients in taking investment decisions. But it remains unclear which types of activities sit on which side of the fence.

There are all sorts of portfolio management and risk assessment tools that are useful to potential investors who will not be speaking to advisers directly. Investors also benefit from gaining easy access to the latest views on specific fund performances, local and world market developments and asset allocation trends.

Many investors also seem to be benefitting from comparison sites and services and 'best buy lists' which inherently make a distinction between products that are worth buying and those that are not. There is a lot of discussion about the benefits of decision trees and other guided architecture processes.

The rules provide that personal recommendations can come in two forms: information based on a consideration of a person's personal circumstances; and information that is "presented as suitable for the person to whom it is made".

The FCA's views on defining what counts as advice may be influenced by how regulators in other jurisdictions have discussed the concept of financial advice.

The US Security and Exchange Commission, for example, has recently taken on the issue of what is advice in the context of services provided to municipal governments. It has said that it "does not believe that the term 'advice' is susceptible to a bright-line definition." It has also been willing to provide some more constructive guidance pointing out that where the recipient of information "would reasonably expect that it could rely and take action, without further input, based upon such communication", the communication will likely be deemed to be advice.

The Australian Securities and Investment Commission, consistent with Australian law, takes the view that financial advice can be equated to statements "intended to influence a person or persons in making a decision on a particular financial product or class of financial products". The key differentiating point here seems to be the emphasis on the intention of the person giving the statement.

In Canada one provincial regulator, the Ontario Securities Commission, has highlighted that it is important to remember that advice does not guarantee a successful outcome for consumers. It has said, quoting Canadian case law, that "advisors are under no duty to offer only successful financial advice [and that] they will inevitably make wrong predictions and it is difficult, in hindsight, to question honest investment advice".

A difficult task faces the FCA but it should not focus on one kind of consumer detriment to the exclusion of all others. It is rightly keen to protect investors from receiving advice that is the result of commercial bias and not the result of a careful consideration of that person's circumstances.

But it must also consider what happens if its regulations make platforms fearful of giving any assistance at all. An investor operating without any information, guidance, recommendations or tools is more likely to make poor investment decisions, which should be seen by the FCA as an equally damaging outcome.

People will always look for information on which to base their investment decisions. If the FCA rules that tools and information must not form part of execution-only platforms, users will look to websites, social media, investment forums or other unregulated sources of information. This risks either putting them off investment altogether or making them vulnerable to unscrupulous manipulation in unregulated environments.

Some time ago now the Financial Services Authority's technical specialist said that "A lot of the execution-only mechanisms we see today are not as simple as 'here is a list of products and funds, take your pick'". There is a risk that the FCA's review could mean that this is exactly what execution-only platforms become, and that would not serve the interests of the investors who want or need to make use of them.