UK providers welcome FCA retail investment advice guidance

The UK structured products industry has reacted positively to the Financial Conduct Authority’s (FCA) finalised guidance on retail investment advice which covers the sale of structured products in the UK retail market.

The main focus of the paper, Retail investment advice: Clarifying the boundaries and exploring the barriers to market development, is on clarifying what is and what is not a personal recommendation in relation to retail investments, and what scope there is for firms to provide a range of services in relation to those products.

“With the advent of the RDR (Retail Distribution Review) and the reported creation of a mass affluent 'advice gap' it is hardly surprising that many firms are keen to explore the simplified advice route,” said Zak de Mariveles, chairman of the UK Structured Products Association (UKSPA). “The regulatory/financial risks of providing automated personal recommendations, if they make a mistake or provide them inadvertently, can be high, and with the existing regulations on such matters often thought as challenging to navigate on such matters, help has been needed to allow the market to move forward.”

Distribution models
It is clear that the regulator is “keen to help”, accepting that there needs to be numerous delivery mechanisms for the market to be fully effective for a broad range of potential investors, said de Mariveles.

“This clarification of guidance can only help firms and customer groups to understand what constitutes a personal recommendation and what does not, and guide firms on how to move forward with developing innovative distribution models,” he said.

The paper covers the regulatory landscape on personal recommendations in relation to retail investments and provides detailed examples of whether the FCA thinks the example is regulated advice or not.

The new guidelines also comprises existing guidance that is available to firms from the FCA (particularly on simplified advice) and from the Committee of European Securities Regulators (CESR) and the European Securities and Markets Authority (Esma).

“The overriding message is that all clients need to understand what service they are being provided with and what the limitations are,” said Ian Lowes, managing director at Lowes Financial Management, a specialist structured products independent financial adviser (IFA). “While firms always need to pay due regard to the regulatory requirements, they equally need to act appropriately to avoid potential litigation. As such, the firms need to be sure that the client is sure what is and what is not advice and leave no grey area that a litigious client could exploit if, for example, investments don’t mature with the best outcome.”

Esma rules
According to the FCA paper, although Mifid II does not fundamentally change the requirements on firms in regard to the suitability of personal recommendations, or the appropriateness test that they are required to perform for transactions of complex products not involving personal recommendations, the changes to the rules in this area include making clear that when a firm recommends a bundle of products the overall bundled package must be suitable, and that the list of products that would be considered complex is also being widened to automatically include shares and bonds that embed derivatives so firms will have to conduct appropriateness tests when selling a wider range of investments without advice.

“We are pleased to see this new guidance covers complex and non-complex products, demonstrating that structured products, defined as retail investment products, can and undoubtedly will play a role in the future of any such developments,” said de Mariveles.

Given the nature of the changes that Mifid II is set to bring in regarding suitability and appropriateness, the FCA said that the new directive will not create any significant uncertainty that might prevent firms from designing and operating new business models to distribute retail investments at this stage.

“As Mifid does not apply to insurance-based investments, we will need to consider whether or not there is a case for applying some or all of the revised Mifid standards to such products in the UK,” said the FCA in its report. “In March we will be publishing a discussion paper on investor protection aspects of Mifid II.”

Click here to read the FCA report.