White Paper: Analysis from the Pinsent Masons Insurance and Wealth Team Retail Investment Advice: Financial Conduct Authority Guidance Consultation and Related Papers September 2014

Foreword In July 2014, the Financial Conduct Authority (FCA) published three papers: 1. Thematic Review report (TR14/10) “Developments in the distribution of retail investments: Purchasing investments without a personal recommendation or with simplified advice”; 2. Guidance consultation paper (GC14/3) “Retail investment advice: Clarifying the boundaries and exploring the barriers to market development”; 3. Consultation Paper (CP14/11) “Retirement reforms and the Guidance Guarantee”. The background to why these papers have been published is the development by a number of product providers, financial advisers and investment firms of new distribution models to sell investment products to consumers and to determine whether there was more that the FCA could do to support the delivery of good consumer outcomes. The paper on the Guidance Guarantee follows the 2014 Budget announcements on pensions reforms. The thematic review findings provided valuable input into the Guidance consultation paper which aims to tackle the uncertainty that the FCA found in the market about the regulatory framework that may have been hindering innovation and the availability of investment products and services to consumers. These findings are also particularly important in the context of the structural changes that were introduced as part of the Retail Distribution Review at the end of 2012 which profoundly affected all participants in the retail investment market. We have published this booklet to address different aspects arising from the FCA’s consultations that are relevant to businesses in the insurance, investment and wealth management industry. In particular, we aim to assist our clients operating in this sector who are considering their reaction in advance of the closing date of 10

Bruno Geiringer Partner T: +44 (0)20 7418 7306 M: +44 (0)7810 752568 E: [email protected]

October 2014 for responses to the Guidance consultation paper, by providing “food for thought” through our analysis and ideas for requesting further clarity. As a fast-growing, international law firm, Pinsent Masons’ approach is to marry our technical and legal expertise with considerable, in-depth, practical knowledge of the sectors in which our clients are involved to help them create and sustain value, resolve issues and fulfil their commercial objectives. With this in mind, we have written a number of articles that we are pleased to present in this booklet looking at the issues raised in the FCA’s papers as well as those published by HM Treasury concerning the new freedoms and choice in pensions and the Department of Health’s consultation on draft regulations and guidance for the implementation of the Care Act 2014. These articles set out analysis and comment of specialists in our insurance and wealth management team at Pinsent Masons who all work with clients in the retail investment sector. Please feel free to contact the specialist lawyers whose details are included in this booklet if you would like to discuss anything in the articles or relating to the fast-changing regulatory environment.

Tobin Ashby Legal Director T: +44 (0)20 7490 6482 M: +44 (0)7766 808680 E: [email protected]

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Contents 1

Guidance Not Advice: What help is there for non-advised propositions?

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Simplified Advice Online: Why not?

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A Regulatory Perspective: Advice and personal recommendations

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FCA Retail Investment Advice: The Guidance Guarantee

10 Financial Advice, Technology, Social Media and Compliance 14 Financial Ombudsman Service: A true barrier? 16

The Care Act 2014: Yet another Government requirement for “information and advice”

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Guidance Not Advice: What help is there for non-advised propositions? Introduction Dealing with customers on a non-advised basis, particularly through online models, has become very important for many firms following the Retail Distribution Review (RDR). For some firms, this activity is about pursuing the commercial opportunity of a direct-to-consumer strategy, in the context of the advice gap left by RDR. However, a non-advised strategy has also become necessary in many cases to deal with existing clients originally brought to the firm by a financial adviser, but who are now ‘orphaned’ as they no longer have an adviser. What does it mean for non-advised propositions? When the FCA introduced its thematic review into the non-advised and simplified advice distribution channels in late 2013, it said that it wanted to “take an early look at whether non-advised and simplified advice models” were “delivering good outcomes for consumers”. As the regulator’s review developed however, its thinking seemed to change and “non-advised” models feature little in the papers issued in July 2014, despite its original statements. The regulator’s attention has become principally focused instead on what is a personal recommendation and what is not. As a result, whilst there are firms who will benefit from clarity on the boundaries surrounding personal recommendations, a provider firm that does not want to provide regulated advice, but does want to provide helpful guidance to direct and orphaned customers will have been left wanting more from the regulator.

Guidance and examples It is undoubtedly useful for the guidance from different sources to be consolidated in the FCA’s papers as it has been and the additional indications provided by way of working examples in the guidance consultation will help firms and their advisers in interpreting how some of the rules and guidance affect them. However, the examples focus almost entirely on whether or not particular approaches constitute personal recommendations. Indeed, almost all of the scenarios suggested conclude that they would be “likely” to involve regulated advice, “depending on the circumstances”, with all that this means for ensuring firms have the right regulatory permission, of which more later in this article. Context and circumstances In its guidance consultation, the FCA uses the term “recommendation” as synonymous with regulated advice and goes on to explain that: “Regulated advice includes any communication with the customer which, in the particular context in which it is given, goes beyond the mere provision of information and is objectively likely to influence the customer’s decision whether or not to buy or sell.” The FCA’s interpretation of the concept of advising on the merits of buying or selling a particular investment has it seems been drawn as widely as possible throughout these papers, with only the nebulous caveats of the interpretation depending on the “context” or “circumstances”. There is unfortunately little indication given on what different contexts or circumstances might be that mean regulated advice is or is not being given, either in the analysis or examples provided. It feels like a missed 7192

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Tobin Ashby Legal Director T: +44 (0)20 7490 6482 M: +44 (0)7766 808680 E: [email protected]

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opportunity to help firms and customers deal with some of the unintended consequences of RDR and it is a pity that the regulator has not taken the opportunity to explore further in these papers what useful activity can still be non-advised. Confusion of concepts and terminology The position for any firm wishing to clarify its proposition is not helped by the range of different terminology that applies to some very similar concepts. A guidance paper that seeks to provide clarity does nothing to demystify the many terms used to describe advice and guidance. There is even some new confusion added to the existing concepts of what constitutes advice. The definition of advising on investments focuses on “a particular investment”, yet the FCA (in relation to decision trees for example) seems keen to extend this to being “one or more particular retail investments”. That kind of distinction can make a significant difference to the way a proposition is targeted. Firms are also asked in the guidance consultation to consider whether their advice process is “likely to be perceived by the customer as assisting them”. The FCA does accept that customers may not always be correct, but for firms to tailor their arrangements to allow for all different individual customers’ perceptions feels like an impossible task. Loose interpretations of the existing legal formulations and vague references to subjective customer perception simply add to the confusion for firms and customers alike and if the objective is to provide more clarity, the guidance currently fails in these areas. Regulated activity The description of generic (non-regulated) advice, for example tools or information that help with budgeting and financial planning, and where it might become regulated, is handled only at a very high level. The view given in the guidance consultation and particularly the examples provided is that anything beyond basic, quantitative, information is “likely” to involve providing regulated advice. For example, sharing any qualitative assessments with customers will be likely to require an advice permission and compliance with the applicable conduct of business rules. Firms will need to consider seriously whether a retail advice permission is needed in relation to any proposition that offers any qualitative judgment or opinion on investments, whether or not aimed at particular individual investors or investors generically. This is where the “context” and “circumstances” become so important. The risks of carrying on activity, without the permission, that is subsequently deemed to have been regulated activity (and so in breach of the prohibition in the Financial Services and Markets Act 2000) are high. The decision on whether or not to apply for a retail advice permission, particularly for firms that do not already have a permission to carry out other regulated activities, may however be a significant one in terms of additional complexity, cost and capital requirements. Liability and disclaimers Firms will also want to weigh up the impact on the liability profile of their business of taking on a role as an ‘adviser’ to its clients. The papers emphasise the fact that the suitability rules in COBS 9 only apply where a personal recommendation is made. This is not the

same of course as saying that investments on which advice is given, without a personal recommendation, do not have to be ‘suitable’ to investors. Advising on investments still involves advising an investor on the ‘merits’ of buying or selling an investment, even if the specific rules from MiFID do not always apply. It should be noted that a firm might be potentially liable to investors who have placed reliance on the information or guidance provided to them in whatever form. Whilst liability for guidance might be mitigated by the use of appropriate disclaimers that advice is not being provided, liability for providing regulated advice that customers are entitled to rely upon would be much more difficult (and arguably inappropriate) to limit. The FCA warns, as would be expected, that disclaimers that do not reflect the reality of the services provided will be ineffective. With the range of different concepts in this area however (from “execution-only” and “non-regulated guidance” to “regulated advice that is not a personal recommendation” and “personal recommendations” to name a few), disclaimers that the customer will be sure to understand may be difficult to create. Conclusions Why the change in remit? As the FCA says in its guidance consultation, “providing definitive guidance on whether something is regulated advice depends not only the facts of the individual case, but also the context”. This ultimately seems to be the explanation for why the FCA changed the remit of its review and consultation. Further, to focus on the difference between regulated advice and “non-advised” activity would have been to look at what should and should not come within the remit of the FCA. On the evidence of these papers, it seems that the regulator has not been keen to look hard at what it should not be regulating and will need more encouragement if it is to do that. Can any useful guidance be non-advised? The wide interpretation of regulated advice set out in the paper and lack of guidance on what “context” or “circumstances” would make a difference to this interpretation makes it more likely that the additional regulatory burden of the advice permission will be chosen for what previously might have been regarded as ‘nonadvised’ activity. Firms who are simply trying to make the best of the aftermath RDR and the resulting advice gap in providing a sensible service to their customers may see this as an unfair result. What now? The FCA has asked for views on whether a sufficient range of examples has been provided and for input on other areas where greater clarification is needed. Firms could use the consultation as an opportunity to push for greater clarity from the FCA on what assistance can be given without an advice permission being required. Examples of models providing helpful guidance for customers in a non-advised context might be put forward for the regulator to consider and possibly even include in its own guidance. If the FCA can be encouraged to think further about this kind of practical solution to the advice gap, direct customers should end up with better and more useful choices for how to make their investment decisions. 2

Simplified Advice Online: Why not? Introduction Surely it is better to offer people some help with their finances online rather than leave them to seek their own answers and give no advice at all? However, despite some strange findings from recent customer research on behalf of the FCA to the contrary, it is submitted that this does not seem to be the approach being taken by the financial services in the UK, where leaving people to make their own decisions, based on the provision of no advice and giving just (at times, very complex) information, seems to be the industry’s preferred route today. Why is this? And how important is this in the context of customers with more modest amounts to invest and straightforward investment needs who are comfortable transacting online? There are certainly more of these customers than ever before. But, since the Retail Distribution Review (RDR) banned commission and changed the charging model into an explicit charge which customers now have to pay, how important is the provision of some advice rather than none if customers can’t make their own investment decisions and also can’t afford to pay for full advice? Are customer outcomes better with no advice or with some advice? FCA consultation on simplified advice At the start of 2014, the FCA investigated what is inhibiting the development of online, low-cost simplified advice models. It then set out a number of concerns in its thematic review (TR14/10) published in July 2014. A related FCA consultation guidance paper published at the same time has called for responses by 10 October 2014 to a number of general questions about where the boundary line sits between sales models that provide personal

recommendations on retail investments, like simplified advice models, and those that do not because it appears the industry is confused and uncertain about this distinction. It is certainly an important issue as the advice market is shifting rapidly from the “old school” face-to-face advice model to more activity via the internet and mobile technology. The other problem is that this is a complex area of financial services regulation and not easy to see where there might be solutions. Many people will have simple financial needs – a mortgage or a student loan to repay, contributing into an auto-enrolled pension, protecting loved ones and building a nest egg probably, with ISAs and NISAs. And that may be it for many. Some may not want to deal with their finances (because they don’t see the benefit of saving for a future they don’t know or because they have more immediate needs for their money). Some may not feel competent enough if, say, faced with an inheritance or some profit on the sale of a property to feel secure in deciding where to invest and may simply leave the money in a bank. The FCA says in its July consultation paper that “we want firms to understand that there are options for them that sit between execution-only and full advice, that we believe that there are no regulatory barriers to providing these alternatives”. This is encouraging stuff from the new regulator. So why aren’t we seeing more opportunities for people to go somewhere and obtain simplified advice rather than having to pay a sizeable fee for a full financial advice service they may not need or resorting to execution-only platforms (where the combination of platform fees and product fees means this is not always a cheap alternative)? 7192

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Bruno Geiringer Partner T: +44 (0)20 7418 7306 M: +44 (0)7810 752568 E: [email protected]

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Why has it not been possible for more firms to feel confident in designing and launching streamlined and/or automated processes to provide customers with a personal recommendation based around a focused scope of straightforward needs? Firms always have to assess the business risk involved in any venture but, is the risk of potential liability too great for a simplified advice service and does that risk outweigh the advantages? Five barriers stopping simplified advice 1. Uncertainty risk The FCA’s thematic report (TR14/10) identified five barriers to developing simplified advice models. The industry may well have been able to identify more but the barriers cited by the FCA in its report were: firstly, firms are uncertain about the breadth of the suitability standard for providing personal recommendations online, especially when for a focused scope. Where does the fault for this uncertainty lie? Is there a mismatch of interpretation between the industry and regulator? Would more examples and case studies help? The clue to answering this concern in my view is the reference to a “focused scope”. It will always be easy when investigating a complaint to say “So-and-So should have taken this and that into account” but that must be wrong if the limits of focused scope are clear and understood. 2. Systemic misselling risk The second potential barrier in the FCA’s report is that automated advice processes could result in systemic misselling and the potentially highly repeatable liability makes these processes less viable. Presumably, this is a nice problem to have if there is such a volume of users to merit such a concern but surely buying indemnity insurance can lay off some of the risk. Nothing beats having a compliant process to start with and that is the basic requirement. The fear seems to be that the regulator might order a systemic past business review either against one firm or the whole industry. However, the regulator has a role to play here to ensure this risk is mitigated by its own involvement in providing appropriate guidance and supervision. This needs to be recognised. And FOS too, stating that it would “recognise the nature of the service” is a good development as well. This would seem, on reflection, to be a lesser barrier today than before. 3. Causation risk The third barrier is that firms believe they have to price into their models for the risk that they may have some liability for the online simplified advice even if the customer decides later to transact elsewhere. Surely this can be answered by ensuring the user is given a simple and clear statement at the start of the process that if the customer does not buy the product through the adviser, the adviser can limit his liability. And wouldn’t the law help here as well by having a clean break in the chain of causation or establishing the loss as too remote from the advice given? Causation is when there is a direct link between negligence and loss caused by a breach in the duty of care. Although only a court can decide if there has been a break in the chain of causation, it would still be relevant to consider the FCA’s conduct of business rules and guidance. The FCA however will need to move away from

considering that the duty of care in the case of focused or simplified advice in relation to retail investment products includes having to deal with wider considerations, such as the absence or insufficiency of protection insurance. This is important if the concept of simplified advice is going to be developed by some of the bigger and more conservative players, such as banks and life insurance companies, who need to spend millions to develop systems to cater for potentially very high volumes of customers. 4. FOS risk The fourth barrier to developing a commercially viable online simplified advice system (and an old chestnut for many) is cited as the way FOS would handle complaints and the growth of complaint management companies. However, as we have seen recently, the number of claims management companies operating in the UK has fallen by nearly 600 since stricter rules came into force in April 2013 (http://www.out-law.com/en/articles/2014/ august/hundreds-of-claims-management-firms-have-leftindustry-since-introduction-of-tough-new-rules-governmentsays/) so, maybe, this is also becoming less of a concern. 5. Compliance risk The last and fifth perceived barrier was that simplified advice systems need increased levels of compliance oversight which defeat the objective of a streamlined process. Compliance is always going to be required whatever distribution model is used and an online automated system should have an inherent advantage that, once designed and built properly, it should comply with the regulations, otherwise it should not be launched. The problem is more around keeping it up to date with regulatory changes and more importantly, regulator’s and customers’ expectations. But that is mainly an IT concern in my view, not a compliance concern, to start with. The FCA also mentioned that they had concerns with the inability of firms to be able to filter out customers for whom the simplified advice process was inappropriate. This seems to be an odd finding set against the fact that the FCA found that most firms had identified the types of customer that a non-advised service was appropriate for, including the range of investments to make available, the type of and content of information non-advised customers needed and the systems necessary to ensure good outcomes. So, why can’t the same be said about simplified advice models? The answer for firms looking at this part of the distribution market might therefore lie in developing more robustness on the design and ongoing governance of the simplified advice model and focusing on the needs of customers more to deliver good outcomes. The FCA’s thematic report (TR14/10) devoted nearly 9 pages to describing the key elements of a non-advised service delivering good customer outcomes but said nothing about what would be the key characteristics of a simplified advice model (presumably because this has been covered by the existing guidance, for which see later for our comments). The challenge is there: can a simplified advice model operate viably and result in good outcomes for customers, taking into account the need for a certain volume, keen pricing and, presumably, a trusted brand? 4

Current regulatory guidance The FCA (and its predecessor the FSA) says it encourages the development of well-designed, low-cost methods of meeting customers’ straightforward needs. But is that right? The current regulatory guidance on simplified advice was published by the FSA in March 2010. The guidance set out the requirements for firms developing a simplified, automated, advice model for customers with straightforward investment advice needs. Yes, suitability standards are required to be met; yes, training and competency requirements are needed for a “simple needs adviser” or the designer of the automated system; yes, the post-RDR charging rules should apply to the simplified advice service; and yes, it is restricted advice. These are the same elements required for giving full advice. Why would someone launch a simplified advice model rather than a full advice one after complying with all that? Within these elements, there needs to be a degree of tolerance that distinguishes the simplified advice service from the full advice service, otherwise, what is the point? The FCA unfortunately seems to disagree. It says in its consultation paper “We do not believe that the relaxation of the requirements for individuals who give simplified advice is in the best interests of the customer”. It seems we therefore have an impasse – the regulator does not want to compromise its objective of customer protection (which is understandable, but only up to a degree that ensures the protection is both proportionate to the risk and the circumstances), yet it also wants at the same time to have a regulatory regime that encourages the development of welldesigned, low-cost methods of meeting customers’ straightforward needs such as simplified advice. Something has to give if the two objectives are to be met. The existing 2010 guidance on simplified advice must surely now be discredited. In it, the FSA said it was “not convinced, as some commentators appear to be, that the RDR will mean many customers who want and need advice will not be able to access it”. If that seems to be very wrong then, so too, is the FSA’s reliance placed on the Money Advice Service. The long-awaited RDR post-implementation review is expected at year end and is awaited with interest. What we say So what do we say should be submitted to the FCA in response to the guidance consultation on simplified advice? Firstly, we believe the FCA has already demonstrated a significant shift from the previous, somewhat rigid, thinking of the FSA and has demonstrated an enlightened mind and is open to consider a different approach to simplified advice. Recently reported quotes from the FCA give some hope: “the suitability requirement is flexible”; “the information a firm must obtain will vary from case to case”; and “the firm would need to explain to the customer their other financial needs will not be addressed”. This approach however needs to be developed into action, every day, supervisory practice and of course, incorporated into the FCA rule book. So, when the FCA says in its consultation paper that collecting information to meet the needs of suitability must be what is necessary to achieve the outcome, this must translate into a different standard of fact-finding for a simplified advice service.

Secondly, the thematic review and consultation paper “talk” about “simplified advice” and so it is time for this term to be defined and included in the glossary of the FCA handbook to be clear what exactly it means. Indeed, we would welcome the inclusion in the FCA rulebook of a great deal of the existing guidance on simplified advice, but as amended of course after the consultation exercise to enable it to become a more viable service. Thirdly, it should also be clear that the service provided under a simplified advice model does not include advice on existing products held by the customer. The customer has to know the limit of the simplified advice service and that this is not included, else it’s full advice for them or they make their own minds up with no liability on the simplified advice service provider. Fourthly, the current guidance on a simplified advice process says it is not suitable for people who do not have their priority needs met or who have need to reduce existing debt. If this service can ignore existing products, it should also not be concerned with whether a priority need has been met or whether the customer is in debt. People are commonly both investors and savers today and to exclude people with debts from using a simplified advice model would reduce the size of potential customers likely to be in this segment of the market and potentially increase the inaccessibility of people with simple needs and means to advice (known as the “advice gap”). And besides, what is meant by “priority needs” anyway? This is likely to mean different things to different people. If it is an important boundary line for when simplified advice can be accessed, then the term “priority needs” should be made clear in the rules. If someone has a specific investment need despite having a debt or existing products, some help of some sort, hence advice, should still be available to them and it is submitted that it would be much more beneficial than no advice at all and would still achieve good outcomes in most cases. But of course, this is always to be judged only within the scope of that advice parameter. Conclusions In short, we think the FCA should be much clearer about simplified advice and marry its guidance on the subject with the handbook. It should distinguish it as part of its handbook much more clearly than exists today from both full advice and execution-only (particularly against those execution-only businesses that confusingly state they are not giving advice (in an effort to avoid liability) but are in reality as close to doing so as they can be (if not actually over the mark in some cases in reality)). Finally: a word on disclaimers. We agree with the FCA (see paragraph 3.53 of the consultation guidance paper) and accept that a disclaimer attempting to say a service is something (e.g. non-advised) that it is not (when in fact a recommendation is being presented) will be ineffective in negating liability for that recommendation. However, we do believe that a well drafted, bold disclaimer describing clearly the limited extent of the (simplified advice) service will be effective to ensure customers understand their rights and remedies if they use that service. 7192

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This line of thought would seem to be backed up by MiFID (see paragraph 3.26 of the consultation paper). It’s time for the FCA to be straight about this and say so.

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A Regulatory Perspective: Advice and personal recommendations Background The aim of the FCA guidance consultation paper on retail investment advice is to provide clarity on different kinds of advice. There is a wide spectrum of advice that firms provide to customers: • generic advice (setting out in a neutral manner the facts relating to investments and services with no spin) • product related advice referred to in the consultation paper as “regulated advice” (setting out in a selective and judgemental manner the advantages and disadvantages of a particular investment or service) • personal recommendation (based on the particular needs and circumstances of the investor) • The FCA guidance consultation paper brings together in one place existing guidance from the FCA, CESR and ESMA on these different kinds of advice. However, it does not particularly add anything new to the existing guidance. Advice Advising a person is a regulated activity under the Financial Services and Markets Act 2000 (FSMA) if the advice: • is given to a person in his capacity as an investor or as agent for an investor • is on the merits of his buying, selling subscribing for or underwriting a particular investment (Article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 as amended (RAO))

Michael Lewis Partner T: +44 (0)20 7490 6549 M: +44 (0)7585 996254 E: [email protected]

Generic advice does not constitute investment advice as defined in article 53 of the RAO but product related advice and personal recommendations do. The difference is between generic statements (e.g. buy technology shares) which are not a regulated activity and advice on a particular investment (e.g. buy ABC PLC shares) which is a regulated activity. This is the case whether the advice is express or in writing or through a software programme into which an investor has input data where the system generates advice. For the advice to be regulated it must involve an element of opinion or judgement on the part of the adviser. Regulated advice involves recommending a course of action or making a judgement on the merits of exercising a right (e.g. to buy or sell). Generally speaking, giving someone information and nothing more is not a regulated activity. Giving facts about the performance of investments or the price of investments does not constitute regulated advice if the investor is left to exercise his own opinion on the action to take. The circumstances in which the advice is provided can make it a regulated activity. Presenting advice in a selective manner so that it influences or persuades an investor may amount to a regulated activity. So a decision tree will not generally be regarded as providing regulated advice but may do so if it has been designed to lead an investor to a particular investment or service. Any information which seeks to influence or persuade an investor to buy or sell an investment may also amount to a financial promotion.

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The advice must also be given to an investor or the agent of an investor, so advice given to an IFA or tax adviser would not be a regulated activity on the basis that the IFA or tax adviser would not be an investor. But advice given to (say) an asset manager would constitute advice to the extent that the asset manager is an agent of the investor. Personal recommendation The MiFID activity of investment advice is defined as “the provision of a personal recommendation to a client either upon request or at the initiative of the firm in respect of one or more transactions in financial instruments” (Annex 1, section A5 and Article 4.1(4) of MiFID). A personal recommendation comprises three main elements: • the recommendation is made to a person in his capacity as an investor or agent for an investor • the recommendation is presented as suitable for the person to whom it is made based on the investor’s circumstances • the recommendation relates to taking certain steps in respect of a particular investment. The MiFID definition is narrower than the definition of advice in article 53 of the RAO as it requires the definition to be of a personal nature. So making a recommendation in the form of an investment bulletin that is not targeted at individual customers is unlikely to constitute a personal recommendation but would be a regulated activity under article 53 of the RAO. HM Treasury has not amended the definition of advice in article 53 of the RAO on the basis that a personal recommendation is subsumed within article 53 of the RAO.

Suitability Where a person provides a personal recommendation, the person making the recommendation must ensure that the personal recommendation is suitable for the customer taking account of the customer’s personal and financial circumstances. The firm must obtain from the customer information necessary to understand the essential facts about the customer and have a reasonable basis for believing that the recommendation: • meets their investment objectives • is such that the customer can financially bear any related investment risk consistent with their investment objectives • is such that they have the necessary experience and knowledge to understand the risks involved. The suitability requirement relates to all personal recommendations, no matter how they are delivered. However, the suitability requirement is flexible and allows firms to develop a different process depending on the product and type of customer for which it is intended. The suitability test is qualified by reference to the nature and extent of the service provided. So the information that is necessary for a firm to obtain varies from case to case: the more complex and high risk the product, the higher the threshold of required information. Under MiFID II there will be more onerous requirements on firms providing personal recommendations to determine suitability. Firms giving personal recommendations will be required to disclose whether they will provide the client with an ongoing suitability of the portfolio. Periodic reports will need to be provided to clients including an assessment of the suitability of the portfolio (unless the firm is not carrying out a periodic assessment of suitability). Firms providing personal recommendations will also need to provide customers with a statement specifying the basis on which the personal recommendation is suitable for the client. Conclusion The boundary of regulation is the same regardless of the medium through which personal recommendations are made. However, there are additional risks where personal recommendations are given to customers electronically. In particular, there is a systemic risk for the firm if part of the process produces unintended or unsuitable recommendations for customers. Firms need to ensure, therefore, that when designing processes for giving personal recommendations they receive regulatory input to ensure that they hold the necessary FCA permissions and that they have adequate processes in place to comply with the applicable FCA rules. The examples provided by the FCA in its guidance consultation will be helpful to many firms, although may not cover all scenarios that firms may have concerns about. Firms may want to consider what input they might have to the process now to make the guidance for future as clear as possible.

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FCA Retail Investment Advice: The Guidance Guarantee

Tom Barton Partner T: +44 (0)113 225 5451 M: +44 (0)7826 859747 E: [email protected]

“Everyone who retires with a defined contribution pension will be offered free and impartial face-to face guidance on their choices at the point of retirement” The Budget 2014 The purpose of the guidance guarantee As with so many issues of significance in pensions, it all starts with auto-enrolment. In 2012 the non-pensioned masses began to be enrolled into workplace schemes for their own good, whether they liked it or not. As it happens, the majority seem to have found their schemes satisfactory enough to stay put and continue saving. In 2014 HM Treasury decided to let everyone withdraw from pensions altogether (after age 55) and use whatever retirement savings they have stored away however they like. As everyone knows, freedom like this is a good thing – except when it is not. Auto-enrolment was put in place because in 2002 the Pensions Commission concluded that the UK workforce needed to start saving for retirement, to avert an unsustainable drain on the public purse. Such well intentioned saving is all well and good, but it would certainly be rather a bad thing if the UK workforce suddenly started using its savings unwisely. Perhaps only luxury car salesmen would disagree. Recognising the importance of equipping people to make good decisions, the Government announced the introduction of a guidance guarantee alongside the new freedoms.

What is the guidance guarantee? From April 2015, every individual with defined contribution (DC) savings will have a new right to free and impartial guidance at retirement to help them make “confident and informed decisions”. The face-to-face aspect of the guidance has become optional, for anyone who wants to take advantage of it. Otherwise, guidance will be provided over the telephone or online as the member prefers. Guidance will be tailored and personalised, but will not recommend specific steps, products or providers. To this extent we really are talking about “guidance” being provided, rather than “advice” in the regulated sense. The guidance will be provided by The Pensions Advisory Service and the Money Advice Service, both independent of pension providers and therefore impartial. The guidance is free to members, but not for the regulated financial services industry which will fund the guidance service by way of a levy. As an aside, this means that the financial services industry will foot the cost of occupational DC scheme members who take the money as cash, and therefore never enter the industry as such.

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What will guidance look like? Those who take up the offer of guidance will be taken on a journey. That journey will begin with a note of caution; confirmation that the guidance is designed to equip good decision making but without any particular recommendation. A “fact find” will follow, whereby members will be required to talk about their financial and personal circumstances, possibly in a more searching (and even daunting) way than they have ever experienced. The guidance provider will then be able to talk through the options in broad terms, which are likely to include (i) retirement income products; (ii) cash; or (iii) a combination of the two. A formal record of the guidance session will follow, as a practical reference source in future (and, of course, for audit trail purposes if the FCA ever comes looking). Limitations of the guidance guarantee The FCA expects the outcome of these guidance sessions to be (i) no immediate action; (ii) take specialist advice; or (iii) buy a product or products directly. This is, in reality, precisely the same set of options faced by members at the moment (and by those who choose not to take up the offer of a guidance session after April 2015). The limitation of the guidance guarantee (or at least one of them) is therefore that, from the member’s perspective, it doesn’t actually deliver a solution. There is still a decision to make. What is it that gets members to the next level? What is it that helps to define which of the three options is the one for them and, more particularly, which product (or package of products) best suits their financial and personal circumstances? The answer is, of course, advice. Role of advice in relation to retirement choice (eg above and beyond guidance) The 2014 Budget reforms heralded a new dawn in innovative retirement products, breathing new life into the retirement market. DC savers will be able to use new products to plot a route through retirement, in a way which provides a best fit for their financial circumstances until the end. Some of these products and packages may well be pretty complicated.

High earners and those on medium incomes may already be accustomed (or at least amenable) to the idea of paying for advice in relation to financial matters. For this population, the best thing about the guidance guarantee might be that it helps to educate members just why it is worth paying for advice at retirement. We are, after all, talking about one of life’s biggest financial decisions. Lower paid earners are in a different position altogether. Autoenrolment and default investment strategies have dispensed with (and arguably discourage) member decision making in relation to retirement saving. Come retirement the tables are turned back onto the members. Having spent the duration of the accumulation phase being told what to do, they enter the decumulation phase with a big decision to make all on their own. Guidance might very well enlighten this population of the merits of advice (if they don’t already know it), but of what practical use is this if there is no money to pay for the advice? Being realistic, is the guidance guarantee all this population is ever going to get? Role of providers Understandably, the policy makers (and the providers) have shied away from the idea of providers delivering the guidance guarantee. With the inherent conflict of interests there comes a level of risk and discomfort. However, this does not mean that providers have no role to play. In the current regulatory environment, the more helpful a well-intentioned provider attempts to be, the greater the (significant) risk of straying into the advisory space. This is not an illogical position in a world of mass annuitisation but the game has now changed. Should we question whether this is the right approach in light of new mass market freedoms underpinned with a guidance guarantee? If the policy makers are confident that the guidance guarantee will work, then they need to allow people to go out and identify suitable retirement products for themselves. We have already decided to treat people as grown-ups by offering freedom at retirement. Surely the logical extension of this is to trust them to be responsible shoppers when hunting for a retirement product. If this means permitting on-line modelling to point to a particular outcome then so be it; the user can take the experience with a healthy pinch of salt. Without this extra bit of help we are in danger of leaving a large population of the UK workforce faced with a bewildering array of products which dare not declare their suitability for purpose. If the policy makers really want to equip good decision making, they need to clarify the distinction between advice and guidance in law and let providers steer people towards an answer that might be “for them”.

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Financial Advice, Technology, Social Media and Compliance

John Salmon Partner T: +44 (0)20 7490 6318 M: +44 (0)7901 715904 E: [email protected]

Luke Scanlon Out-Law Lawyer (Solicitor Qualified in Australia) T: +44 (0)20 7490 6597 M: +44 (0)7887 815950 E: [email protected] Digital technology is transforming almost every industry leaving business models, products, and services obsolete as more customercentric, cost efficient online alternatives take their place. While retail investment businesses may have moved on from the very early stages of digital transformation, many of them still seem to be some way off achieving a full sense of digital maturity. Online financial advice and adviser–client interactions are aspects of digital transformation that are accelerating, helping some businesses achieve their customer convenience objectives. But a lack of clarity in understanding how financial regulation applies in a digital context remains an obstacle impeding further innovation. The FCA is concerned to deliver good outcomes for consumers and it has acknowledged that achieving this is a balancing act. On the one hand, it sees value in formulating rules and guidance that facilitate innovation. On the other, it is eager to maintain a focus on protecting consumers against unfair market practices. In its “Retail investment advice: Clarifying the boundaries and exploring the barriers to market development” guidance consultation the FCA has addressed some of these issues. It

specifically identifies examples of innovation in providing financial advice that for many, may seem to be in a regulatory ‘grey-zone’. Examples of sales processes the FCA has assessed include: • Pure information portals without any interactivity or classification of products • Information portals without interactivity that classify products, include industry ‘star ratings’ or tailor-made ratings • Pop-up boxes that remind customers to consider certain needs such as health, retirement dates or other circumstances when assessing a particular product • Interactive pages that filter information and products displayed in response to information input by the customer about ‘what they want’ from investment products • Interactive pages that filter information and display products in response to information input by the customer about ‘what is good for them’ • Combinations of the above.

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As expected, the FCA did not formulate blanket rules outlawing decision trees, filtering questionnaires, best buy lists, star ratings or other forms of classifying products. It did however, draw a distinction between functionality that falls on the side of providing ‘financial advice and personal recommendations and functionality that does not. As a key guiding principle the FCA has drawn a distinction between presenting information as ‘what customers want’ in terms of investment products and ‘what is good for them’. In making this distinction the FCA focused attention on three factors: (1) the extent to which information sought about customers relates specifically to their lives and not only their views on effective investment strategies; (2) the extensiveness of information sought; and (3) the complexity of the interactive processes customers are being asked to complete. Information presented as ‘what is good for a particular customer’ falls on the side of providing regulated advice and potentially a personal recommendation. The FCA’s approach may frustrate some, as it does not set out prescriptive rules against which firms can test innovative propositions. Firms therefore need to continue to make value judgments in assessing compliance risks in presenting information digitally or otherwise engaging with customers digitally. Assessments of this nature are best made at the design and development stage before costs might be wasted on processes that may fall short of the regulator’s expectations. Take away When planning for digital innovation in the context of providing financial information or advice to customers, firms will need to measure their innovative proposals against the FCA’s expectations as set out in its current advice guidance consultation. They should also consider more generally whether to engage with the FCA to identify any other expectations that it may hold in relation to the use of technology and digital channels which could have adverse impacts on their customers or the overall market, whether as part of the consultation on advice or beyond that. Other digital innovation developments In addition to its focus on advice, the FCA is also considering more broadly the impact of digital innovation on financial services. As firms consider the retail investment advice guidance consultation, they may also need to: • Consider whether they would benefit from engaging with the FCA in relation to Project Innovate (see below) • Review and understand the FCA’s expectations as to meeting the requirements for financial promotions made through social media • Review their overall approach to compliance with ‘digital’ and data laws in general.

Project Innovate The purpose of Project Innovate, the subject of a separate FCA consultation, is to encourage firms to communicate formally with the regulator about future plans to innovate, and to assist non-authorised firms (particularly innovative start-ups) in understanding the authorisation process. Martin Wheatley, the FCA’s chief executive, has described Project Innovate as “... one of the most important pieces of work currently emerging at the FCA” and said that “it’s an imperative for regulators to be standing on the right side of progress.” A key component of Project Innovate will be an ‘Innovation Hub’ within the FCA’s policy team, which the FCA has said will provide firms with expertise to assist in advising on compliance issues as and when innovative product ideas are forming and new business models are being proposed. It will also collaborate with relevant stakeholders to identify areas of financial regulation that need to adapt to new technology or broader change. In its Call for Input on Project Innovate the FCA has said that the project could result in “... changing requirements where needed to foster innovation in the interests of consumers” and that “[r]ule changes, guidance and waivers can all (within the constraints of EU law) play a part in meeting this challenge.” Project Innovate therefore gives businesses operating in the financial services sector an opportunity to advocate regulatory change supportive of innovation. If it proves effective, the regulator’s expectations as to how firms can adequately address digital compliance risks may become more readily apparent. As it is currently at an initial stage, firms may want to raise any concerns they may have about the effectiveness of the approach the FCA is taking towards fostering innovation. Financial business may want to ask: • Is it helpful for the FCA to establish a unit encouraging businesses to discuss innovative, but highly likely commercial sensitive ideas and trade secrets as and when they arise? • What assurances will businesses be given that they will not be put at a disadvantage in terms of delays in bringing innovative products to market by engaging in this process? • While mandatory involvement is not being proposed, will firms that do not engage with the process come under greater regulatory scrutiny? Like all consultation processes, investing time and resources into engaging at the policy formation stage may help mitigate the risk of guidance and regulation developing in a way that is unfavourable to specific business or market needs.

Below we look in more detail some of these related developments and considerations.

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Beyond advice – communicating through social media Concurrently with its retail investment advice consultation, the FCA is seeking views until 6 November 2014 on the regulatory implications of financial promotions made in a social media context. In a separate (third) consultation, “Social media and customer communications: The FCA’s supervisory approach to financial promotions in social media”, the FCA has sought to provide practical guidance in helping firms draw the line between financial promotions – invitations to engage in financial activities, and other forms of online communication. The existence of this consultation may explain why so little attention was given to social media in the retail investment advice guidance consultation. The FCA’s social media consultation is not only relevant to financial promotions, but also may have relevance to the discussion of what constitutes financial advice. Its views on what amounts to influence and persuasion in the context of financial promotions are worth considering when assessing whether or not digital information presented has the potential to influence a customer’s decision to enter into an online transaction. Therefore even firms that do not intend to actively engage with social media should be aware of the content and outcomes of this consultation. In respect of this consultation the regulator has already been criticised for not providing more clarity as to the circumstances in which a communication in a social media context may be considered a financial promotion. In our view however, this criticism may be overstated. Erring on the side of taking a principled-based approach, in the consultation the FCA avoids the danger of setting out prescriptive rules that may too quickly become outdated or unsuitable as innovative technologies progress.

5. Links to more information: the effectiveness of linking to more comprehensive information and the FCA’s preference that firms use ‘image advertising’ where a link would be inadequate as a risk warning need to be assessed. 6. Benefits and past performance: there is a need to avoid over-emphasis of benefits and past performance particularly where character limitations apply. 7. Prominence rules: the importance of the FCA’s existing prominence rules should be taken into account. Firms should be able to demonstrate that they have thought about factors such as target audience, nature of the product being advertised and “likely information needs of the average recipient”. 8. Dynamic banners: standalone compliance in the context of dynamic banner advertisements that flicker between promotions and risk warnings need to be met. 9. Infographics: using infographics as images in communications to address character limitation concerns may be a way to address compliance concerns. 10. Re-tweeting: the consequences of sharing communications of others must be considered. The FCA highlighted that firms will bear responsibility if they re-tweet a customer’s tweets. The FCA has identified social media compliance as one aspect of its overall approach to advancing its regulatory objectives, which in some circumstances it intends to address through the use of enforcement powers. Therefore in addition to its close relation to the advice guidance consultation, firms have good reason to revisit their approach towards social media compliance.

In terms of practical assistance, the FCA has highlighted at least ten matters for firms to consider when communicating through social media: 1. Character limitations: the impact of limiting characters per communication, such as the 140 character limitation imposed by Twitter, on compliance with both the high level ‘fair, clear and not misleading’ rules and other sub-sector specific rules need to be addressed. The FCA has said that the use of the hashtag #ad to help consumers identify that “a promotion is a promotion” may in some circumstances be an appropriate response to addressing the risk of non-compliance. 2. ‘Advergames’: financial businesses need to assess whether any entertainment applications also contain promotional messages. 3. Personal communications: communications made by senior persons in the business and whether their personal views are clearly sign-posted as ‘not made in the course of business’, should be monitored, even when made from personal accounts. 4. Non-intended recipients: the impression a social media communication could have on a non-intended recipient (for example, after re-tweeting or re-posting of a Facebook page, blog or other social media communication) must be considered.

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Further rules for both advice and other digital services and communications Whether providing financial advice or communicating via social media, businesses operating in the financial services sector need to ensure that they comply with all applicable online, data and communications laws. Any business engaging with a customer online for financial products or services must comply with EU laws that set out common standards for information to be given to consumers before any contract for a financial product or service is entered into. This information should include details about the firm itself, the service provided, the online contract formed and means of dispute resolution. These laws also provide consumers with withdrawal rights in some circumstances. Data protection laws must be met. Risks arise particularly where information has been gained in one context and the firm intends to use it for another. Dealing with these risks is best achieved by being transparent as to the current and future intended uses of data. The current data protection regime does not however, require that businesses obtain consent from each customer to use their personal data in all instances. If a financial business can identify a legitimate business interest that does not ‘override’ their customers’ ‘fundamental rights and freedoms’, including data privacy, they may be able to use that person’s data without their consent. Where data is to be used in a context that could lead to an adverse inference being drawn about a customer however, in general, the expectation of most regulators is that consent must first be obtained. The Article 29 Working Party, a representative body of data protection regulators across Europe has provided recent guidance on the issue of the circumstances in which data can be used for purposes to which the persons to whom they relate have not consented. Unfortunately, the opinion gave little in the way of practical steps that businesses can take to determine when a business interest will override a person’s right to privacy. It does however state that where there is “a risk of damaging the reputation, negotiating power, or autonomy of the data subject” it would be difficult to demonstrate that a business’ legitimate interests overrode those of a customer. Businesses looking to use

Businesses operating in the financial services sector must also consider the impact of the Privacy and Electronic Communications Regulations (PECR) when engaging with existing and potential customers online. Among other things, PECR permits unsolicited email and online communications to be sent only in limited circumstances, the broadest of which is where a prior relationship between the sender and the recipient of a communication can be established. PECR provides that for a prior relationship to be established the recipient’s contact details must have been obtained “in the course of the sale or negotiations for the sale of a product or service” and that the communication must relate to “similar products and services only”. While the Information Commissioner’s Office’s guidance indicates that “[i]t is enough if ‘negotiations for a sale’ took place” and that “[t]he customer does not have to have bought anything to trigger [a] soft opt-in”, a recent lower court decision has cast doubt on the reliability of this guidance in the context of web communications. In a decision against John Lewis one lower court recently found that browsing a website, registering an email address and not un-ticking a pre-ticked box (a soft opt-in) were not sufficient circumstances to establish that negotiations for the sale of a product or service were taking place. John Lewis has confirmed that it will not appeal the decision as the damages awarded were trivial. But the decision highlights that uncertainty remains as to the effectiveness of common website practices such as prepopulating product forms and soft opt-in mechanisms when communicating with clients online. What is clear though is that marketing on the basis of an opt-in mechanism that attempts to cross-sell products or services that are not similar to those that a client has already purchased or is considering will almost always be ineffective in meeting the PECR requirements. These are of course, only a few examples of a vast array of laws that businesses must take into account when engaging with a customer online.

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data about customers generated in the contexts of either providing online advice or social media need to be aware that their ability to do so is limited if specific consent has not been obtained for the purpose for which the data are intended to be used.

Pinsent Masons | White Paper

The Financial Ombudsman Service: A true barrier?

Colin Read Partner T: +44 (0)20 7418 7305 M: +44 (0)7824 865913 E: [email protected]

The “expectations gap” what next? In turning to businesses and consumers for responses to its consultation, the FCA identified what it called “the expectations gap”. A space, then, between regulatory expectations and what firms are prepared to provide in response to the selling of investment products.

among those firms which are at the sharp end of ombudsman decisions. However, the strength of feeling is such that it cannot entirely be blamed on the odd decision where the firm “came second”. The FCA made plain in the consultation paper that roundtable discussions and responses to its thematic review had demonstrated a clear level of industry concern.

For some businesses, the FOS is the “elephant in the room” whose history prevents effective decision-making and product development by firms in retail investment. The consultation acknowledged that the FOS could prove a “barrier”, setting aside a specific section in the consultation for the FCA to give its view – and the FOS’s view – on the place of the FOS in handling complaints, especially around so called “simplified advice”.

Fighting the last war Generals – armchair or real – like to say that there is a tendency for those tackling problems (even the more prosaic such as confidence by consumers in financial products) to fight “the last war” when it comes to current thinking. That may be happening here. Senior claims personnel and litigators at leading assurance businesses have made plain to those prepared to listen that consistency and “politics” make it difficult for firms to plan and fundamentally change thinking in a way which regulators and customers might expect. PPI tends to be the most cited example but is by no means the only product. Anecdotes are shared of businesses seeking to rely on the “rules” of what should be addressed and compensated and why, only to feel they are put under undue pressure to accept the “politics” of the situation and compensate another set of consumers and the claims management companies (CMCs) promoting their claims. A diligent insurance business finds itself tarred with the latest media concern about a bank’s handling of PPI. Suddenly, it is argued, politics is all and rules and market practice take second place; in face to face meetings with ombudsmen, some firms have argued that shoulders are shrugged, this is just how it is.

Previous criticism of the FOS The wording of the consultation paper suggests little or no movement on whether the FOS could do more to address firms’ concerns. Nonetheless, the FCA has identified outputs from the FOS as a relevant consideration for firms in deciding whether to embrace many of the changes being looked for from regulators. And why should that be? Get-togethers of industry players provide a fertile ground for sharing experiences of the FOS. In our experience, such occasions often lead to negative comment about aspects of dealing with the FOS and its output – particularly consistency, the impact of various specific ombudsman decisions and industry-wide statements. Perhaps it is difficult to imagine any form of ombudsman generating entirely positive feedback

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Response from the FOS The FOS does not accept these criticisms. The consultation paper is robust. It sets out the FOS’s view that its assessments “take the regulator’s rules and guidance into account” alongside “good industry practice”. The FOS does not appear keen on limitations on how it treats complaints beyond the current system, confirming that “in any complaints we might receive, we would judge the advice in the specific context in which it was given”. For some firms, such statements make automated practices more susceptible to review. To date the FOS has been emphatic in resisting this criticism. In July 2014, its then chief ombudsman declared himself “mystified” by suggestions from industry that concerns about the FOS had inhibited clear thinking by firms about “simplified advice”. Some industry players have demanded from the FOS a real acceptance and application of different approaches to the provision of advice, especially “simplified advice”. This is understandable. Any business in this sector is likely to want to develop straightforward processes around the simplest forms of advice: otherwise, the economics of such policies can prove challenging. However, if at some future point, criticisms can be made of the outcome of simplified advice – with the resulting business review, costs and more damage to the industry’s name, this would be disastrous. Surely, it is argued, the regulatory system presided over by the FCA can set out a series of rules, case studies and strong guidance to mitigate these risks for firms. Change of leadership but not tone at the FOS It is unlikely that the FCA and the FOS would be prepared to give those assurances to firms. Mindful of any gaming of rules by firms, it is likely that the regulator would point firms in the direction of the principles for business. For some firms, regardless of debate about which rules apply, it has been clear that those firms have adopted a cavalier approach to advice and are yet to incorporate customer centric practices within their sales approach. Regular readers of Ombudsman News in 2014 are more likely to find examples of firms demonstrating a real failure to embrace what are now clearly laid out principles, rather than fine legal distinctions. Regulators must be concerned that a focus on rules designed to make forms of advice unchallengeable in terms of recourse to the FOS could lead to outcomes outside the current approach and undermine public confidence. In August 2014, the FOS promoted an internal candidate, Caroline Wayman, to become its new chief ombudsman and is not expected to alter its position on these key questions ahead of any change in the political climate or media critique of the practices of financial institutions.

The FCA would argue that the July consultation paper limits “CMC-risk” by setting out a range of distribution models designed to give greater clarity to firms looking for steers on structure, pricing and extent of advice giving to consumers. Unsurprisingly, in all options a “yes” answer is given to the question whether access to the FOS should be available to customers. Together with the robust statements made on these issues by the FOS itself, it is difficult to see any consultation leading to an alternative answer for the investment product models currently in play. It is clear that firms, in their discussions with the FCA and their public pronouncements, have elevated the question of how the approach of the FOS can drive the behaviours of firms in product design and innovation. For unhappy firms, the FCA’s acknowledgment that the FOS can be a “barrier” is progress. But, this side of the consultation, it is difficult to see the regulator agreeing to take away from any customer – however simplified the advice – recourse to the FOS. To help bridge the resulting “expectation gap”, it is likely that firms will keep pressing for ever sharper guidance. Whether the FCA and the FOS are prepared to inch forward across this bridge is likely to become clearer in the next round of regulatory reports in October 2014.

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Claims management experiences Back to our “fighting the last war” problem. It may be that firms’ negative perceptions of some decisions by the FOS have been exacerbated by the resulting behaviours on the part of CMCs. There are the practical issues such as grumbles about the effectiveness of the body to which the Ministry of Justice (MoJ) has delegated the management of problems about CMCs. However, the MoJ can point to numerous examples of its interventions and the simple decline of the numbers of CMCs in recent times and a more “grown up” approach to systemic problems. The Courts are increasingly asked to sanction schemes to ensure payouts to an aggrieved class of claimant where endlessly recycled but legally moot claims generate fees for lawyers but provide a cumbersome process for claimant, defendant and court. If the heyday of CMCs is behind us – especially their more questionable practices, with lessons learnt by regulators and firms alike – then regulators might argue this is a red herring in terms of devising the products of the future.

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The Care Act 2014: Yet another Government requirement for “information and advice” Introduction At the same time as HM Treasury is progressing plans to establish the guidance guarantee about the new retirement options starting in April 2015, the Department of Health (DoH) has also recently consulted with the care industry and local authorities on the regulations and guidance which are being developed to deliver the new system for adult social care in the UK. There is a remarkably complementary objective between the establishment of the guidance guarantee about retirement options initiated by George Osborne, the Chancellor of the Exchequer in the Budget 2014 on the one hand and the access to financial information and advice under the Care Act on the other hand to help a person’s planning and consideration for future care and support needs. However, both policies are being developed by different Government departments and propose to use different delivery organisations and mechanisms. Care Act: providing information and advice The new regulations and guidance relating to the care and support reforms contained in the Care Act will also start to come into effect in April 2015, like the guidance guarantee for retirement options. The Care Act requires local authorities to establish and maintain an information and advice service in their area. This service is considered fundamental to enable people to take control of and make well-informed choices about their care and support needs.

Bruno Geiringer Partner T: +44 (0)20 7418 7306 M: +44 (0)7810 752568 E: [email protected]

Views have been invited by the DoH in their consultation exercise about how local authorities should identify and support people who would benefit from financial information and advice as part of a person’s consideration of the care, health and support options. The consultation also asked whether the draft guidance provided sufficient clarity about the active role that local authorities should play to support access to financial information and advice that is independent of the local authority, including access to regulated financial advisers. Respondents have also been invited to give examples of best practice or tools that they think would be helpful to local authorities to deliver the duties and powers in the Care Act. The exact wording of the current draft guidance is that local authorities must: “establish and maintain a service for providing people in its area with information and advice relating to care and support for adults and support for carers”. The local authority must ensure that the information and advice services they establish cover more than just basic information about care and support. The service should also address prevention of care and support needs, finances, health, housing, employment, what to do in cases of abuse or neglect of an adult and other areas where required. Local authorities must also have regard to identifying people that contact them who may benefit from financial information and advice independent of the local authority and actively facilitate those people to have access to it.

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Guidance on financial information advice The guidance also talks about ‘financial information and advice’ which includes a broad spectrum of services whose purpose is to help people plan, prepare and pay for their care costs. There does not seem to be the same emphasis on the difference between information and advice as has characterised the debate about the retirement guidance guarantee. In places it talks of ‘independent’ financial information or advice which means services independent of the local authority, not independent financial advisers. The guidance also refers to ‘regulated’ financial advice which means advice from an organisation regulated by the FCA which can extend to “individual recommendations” about specific financial products. There is a slight mismatch between the terminology used in the guidance and how the financial advice market is regulated by the FCA. It would seem to be quite easy to mirror each other’s terminology and it is hoped that the two Government departments will work towards this aim to avoid any unnecessary confusion in the future. The local authorities will have an important role in facilitating access to independent financial information and advice, where it would not be appropriate for a local authority to provide it directly. It is submitted that many local authorities are very unlikely to take on board the full training and competency requirements to enable their staff to provide regulated advice. So the hand-offs to independent financial information and advice are going to be really important to get right. As the guidance recognises, care decisions are often made quickly and at a time of crisis, and they can often involve family and friends in the process. The local authority must have regard to the importance of identifying those who may benefit from independent financial advice or information as early as possible. As identified earlier, the “hand-off” process is therefore crucial and must be made to work as quickly, efficiently and effectively as possible to avoid people falling through the cracks in the system and not being advised.

How it will work? So, how is it currently envisaged that this process will happen? The facilitation of access to financial advice and information is to be complemented by a broader awareness-raising about how care and support is funded. An important aspect of this will be for local authorities to include how care and support costs interact with retirement decisions. Actions taken by a local authority to do this will have to include: • Working with partners to get the right message to people in the authority’s area: those who develop care and support needs, their carers, families and friends • Working with partners to communicate messages about the benefits of financial information and advice for example with the voluntary sector, through hospitals, GPs, or even solicitors who may be advising on wills or power of attorney • Considering a person’s need for financial information and advice when they make first contact with the authority and throughout the assessment, care and support planning and review processes. As part of when local authorities facilitate access to financial information and advice, they are required to include free and fee-based advice as well as covering regulated forms of financial advice. However, there has been no mention in the consultation of using the Money Advice Service or the Pensions Advisory Service as is the case with the retirement guidance guarantee. “Access” may include making people aware of specific sources of information and advice that are available and giving directions about how to use them. Local authorities have to make people aware that some independent services may charge for the information and advice they provide. Local authorities should be able to actively describe the general benefits of independent information and advice and be able to explain the benefits to an individual. The guidance says local authorities may not wish to make a direct referral to an individual independent financial adviser, but they should actively help and direct a person to a choice of adviser. It is difficult to see how this process is going to work without referrals to independent financial advisers who are trained in advising on the needs in later life and certainly some of the options currently being considered by the advice market such as simplified advice and execution-only platforms would seem to be non-starters for local authorities to refer people to use. Next steps There are many questions still to be answered by the DoH consultation into the area of facilitating access to financial information and advice. The Care Act consultation closed on 15 August 2014 and the next step is expected to be in October 2014 when the DoH intends to publish final documents to allow local authorities six months to prepare before the Care Act comes into force. It remains to be seen if the Government will be able to meet very similar timetables for both the Care Act and Budget 2014 initiatives and how the proposals in relation to both of them complement each other or differ and why. Both the adviser and financial product provider community interested in this part of the market is likely to want to watch the next developments very closely. 7192

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