FSA says 'simplified' advice will be subject to same FOS complaints rules

The FSA today issued proposed guidance for firms seeking to develop a 'simplified advice' process for retail investment products.

Among the key points is confirmation that complaints against simplified advice will likely be treated the same way as client complaints for independent and restricted advice, as set out in the regulator's Dispute Resolution Sourcebook.

Additionally, it said that, given the target markets that had been described to it by some stakeholders, it would expect products recommended through simplified advice to be easy-to-understand, low cost, low risk and with simple charging structures.

In today's paper, the FSA said 'simplified' advice represents a "limited form" of advice, in that it is focused on one or more specific needs and does not involve analysis of the consumer's circumstances that are not directly relevant to those needs.

However, simplified advice would result in a specific product recommendation, it said.

Advisers have been reluctant to develop a full simplified advice process due to a lack of guidance from the FSA, although some have revealed their desire to develop a proposition.

The FSA said the models which have been shared with it have typically been  automated, process-driven advice services, which could be delivered over the internet, face-to-face or over the telephone.

The regulator invites comments from stakeholders by 15 November.

Nine guidelines outlined in today's paper

This list is not exhaustive

1 A client agreeing to go through a simplified advice service does not absolve a firm from its obligation to make sure that personal recommendations on designated investments are suitable. However, certain circumstances may reduce the degree of detail that a firm needs to obtain in relation to a client's existing investments in order to be able to recommend they purchase a new investment product.

2 It is unlikely that a firm is able to ensure that a recommendation to sell or transfer an investment product is suitable through a simplified advice process.

3 An automated advice process may ask a client whether they want their existing investments (if they have any) to be considered in terms of (i) whether they are still suitable, or (ii) whether they would influence the suitability of a recommendation to purchase a new product. If the client indicates that they do not want either (i), or (ii), and the firm has reason for believing that the client understands the implications of this decision, the extent of information required on a client's existing investments may be reduced. If the client indicates that they would like (i) or (ii), or they are unclear on what they want or the implications of this decision, they should exit from the simplified advice process and be referred on as appropriate.

4 The extent of information required on a client's existing investments may be reduced, in that the firm may not need to know certain details about these investments, such as the broad asset allocation, product types or country/sector exposure. This is because this specific information may not be relevant for the limited advice service being provided. To understand a client's regular financial commitments, firms should understand the level of any regular contribution products owned by a client. In order to recommend a tax-efficient investment solution, firms should understand whether clients (who are eligible) have used up their annual ISA allowance.

5 The implications of a client's existing investments not being considered in detail could include that the process:

• does not consider whether their existing investment products match their stated risk appetite;
• only considers the objectives of investing the particular sum identified, and does not consider whether these objectives align with the client's broader financial objectives; and
• will not take into consideration any implications the recommendation has for the diversification or balance of the client's broader portfolio.

6 Client understanding of the limitations of the service could be achieved through mechanisms such as timely alerts, by playing back answers to the client for confirmation (both during the process, and at the point that the recommendation is given), and filters throughout the process. For automated advice services, confirmation processes will need to be designed in a way that reflects how individuals typically interact with such screen-based systems, and should not allow, for example, clients to simply ‘click through' important information.

7 In assessing the suitability of a personal recommendation being given to a client, firms should take into account any retail investment products that they have previously sold to that client.

8 To comply with the suitability rules (and Principle 6 and the client's best interests rule) firms should understand the type and level of clients' debt, and not recommend a retail investment product if a client would be better advised to repay debt rather than investing money. Similarly, firms should not recommend a retail investment product unless they have reason for believing that the client has adequate savings to access in an emergency. Firms should not rely solely on a client's judgement as to whether they are able to cope with their existing level of debt or the adequacy of their savings. If a client has debt that they should repay or insufficient emergency savings, they should exit from the process and be referred on as appropriate.

9 In assessing a client's investment objectives, it should be made clear that saving for retirement is an option. If a client indicates that they want to save for retirement, or the information given by the client suggests that they should be saving for retirement, and the product suite does not include an appropriate product, the client should exit from the process. Clients should be advised to seek advice if they are uncertain of their retirement needs or would like to discuss their retirement plans.