Simplifying advice (and non-advice)

Bovill Briefing

November 2014

Neil Walkling

The Grey Area

2

? Full

Advice

Execution

Only

Information/advice boundary – all clear?

“Providing definitive guidance on whether something is

regulated advice depends not only on the facts of the

individual case, but also the context.”

FCA Guidance Consultation: Clarifying the boundaries

and exploring the barriers to market development

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4

Agenda

1. Definition of investment advice

2. Distribution models: what do the labels mean?

3. Non-advised investment propositions

4. Simplified advice models

5. Recent regulatory developments and next steps

6. Summary of key messages

What is investment advice?

What is advice?

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You drink

too much

Shares will outperform

bonds next year

Fund A outperformed

Fund B last year, but not

by enough to offset its

more expensive charges

We’ve noticed that you’ve

previously bought albums by

Cradle of Filth and Napalm

Death, so we thought you

might like this new album

from Skeletonwitch

Dear Mr Smith, we are sending the

enclosed details about our new North

Korean wine fund to a carefully

selected sample of our existing clients

who we feel would be likely to benefit

from this unique investment opportunity

Online platform: Client chooses

‘adventurous’ risk profile

description; then can select

funds by risk rating, star rating

and other factors

You’d probably be better

off going into buy-to-let

than relying on a pension

scheme

Which ‘advice boundary’ concerns your firm?

7

Generic advice - unregulated

Regulated advice (RAO)

Personal

recommendation

(MiFID)

About a specific investment

To potential investor(s)

Personalised to

individual

Advising permission

required but can be

‘non-advised’ sale

Suitability

(‘advised

sale’)

Advice: Personal? Regulated? Generic?

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Filtering tools that allow

investors to select

funds by a) sector, b)

charges, c) star ratings

You should

pay off your

credit cards

before you

invest Attitude to risk

category

descriptions and

funds grouped into

risk categories

Comprehensive risk

profile tool (attitude and

capacity for loss) and

funds grouped into risk

categories

Sell all

your

shares and

buy bonds

You should

invest in a

cautious

income fund

Investment research

bulletins paid for by

subscribers to a

sharedealing

platform

Distribution models: what do the

labels mean?

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Distribution models for retail investments

‘Non-

advised’

with

guidance

tools

Simplified

advice

Limited or

focused

advice

Full

advice

Likely to be

regulated advice

under RAO

But if no

personal

information used

to aid selection,

not a

personal

recommendation

Investment

proposition

designed to meet

relatively simple

client needs

Limitations pre-

defined by firm

offering the

service

Full advice is

available but

client wishes

adviser to

address only one

or more need

areas on this

occasion (e.g.

Investment of a

lump sum)

Advice will

consider full

range of client’s

needs

Traditional

execution-

only

Order taking –

traditional E.O.

stockbroker

model

Personal recommendation RAO advice? No advice

Regulatory implications of distribution models

11

Traditional

execution

only

Non-advised

(guidance tools)

Simplified

advice

Limited or

focused

advice

Full advice

Suitability

assessment No No

Yes –

recognising

nature of

service

Yes –

recognising

nature of

service

Yes

Adviser

Qualifications No No

QCF4 for any

advisers or

auto system

designer

QCF4 QCF4

Adviser

Charging No No Yes Yes Yes

Independent

or restricted N/A N/A Restricted Either Either

Complex

products

No

Appropriateness

test – K&E

NMPI promotion

No

Yes - K&E

and NMPI

promotion

Yes – K&E

and NMPI

promotion

Non-advised investment

propositions

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14

15

16

17

18

19

Considering a non-advised investment platform?

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Target market for

proposition

Guidance for

purchasers

Transactions and

reporting

Who is your proposition (not)

suitable for?

Product range and channels

Complex products?

Targeting of marketing to

attract traffic

Fit with existing client

proposition

Define fair customer outcomes

Generic educational material

Risk profiling

Filtering functionality

Presentation and positioning –

clear, fair and not misleading?

Helpline for users who get

stuck?

Product disclosure

Timely and accurate

processing of orders

Best execution?

Portfolio monitoring tools and

post-sale reporting

MI required for outcomes

testing

PRE-LAUNCH: CUSTOMER RESEARCH/TESTING/PILOTING

No significant mis-

buying

Informed purchase

decision

Delivery of promised

service

POST-LAUNCH: OUTCOMES TESTING USING MI FROM PLATFORM AND CUSTOMER FEEDBACK

Simplified advice propositions

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What could a ‘simplified’ advice model look like?

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Simple client needs

Lump sum or regular savings (ISA?)

Suitability of existing holdings, or how they impact suitability of new investment

not considered

Exclude other financial planning needs

Tailored factfind

Assets/liabilities – broad headings only (e.g. existing investments, unsecured debt)

Omit protection, pensions etc – except as regular expenditure commitments

K&E less significant for simple products (unless high risk)

Limit risks to firm/client

Fully automated or screen-based process with no scope for adviser to deviate?

Screen out clients not suited – please don’t use this service if any of the

following apply…..

Recommendation is not to invest in certain situations (e.g. large debts)

Outcome testing

Rigorous pre-launch testing/piloting

MI to test outcomes built into design

Automated post-sale customer surveys?

Simplified advice process

Regulatory developments

Regulatory ‘mood music’ changing

32

Post-RDR landscape: ‘advice gap’ criticisms

Support innovation that benefits consumers

Work with industry to overcome barriers – perceived or real

Next steps: Finalised guidance expected Q1 2015

FCA open door: offers advice on new

models at early stage of development

Non-advised From: you’d be wise to accept that

any guidance likely to be viewed as

advice

To: firms over-cautious about use of

tools Helpful scenarios to

illustrate non-advised route

Simplified advice From: Advice gap is myth, market small,

few benefits for many, high potential for

detriment, screen out most people, onus

on industry to overcome hurdles

To: Encourage development of well

designed, low cost methods of

meeting simple needs

• Non-advised sales and simplified advice models could help

you meet (some) clients’ needs more effectively and at a

lower cost

• Now is a good time to seriously consider whether or not you

should be joining the party

• A well-designed model with outcome testing built in is key

to minimising the risk of potential future liabilities

• Don’t assume firm X has got it right…

• Take advantage of the FCA’s offer of support at an early

stage of development

• Simplified advice considerations are also relevant to

developing new discretionary investment management

models

Summary of key messages

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Questions

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