Bovill is a specialist financial services regulatory consultancy. We run briefings each month to help firms understand compliance with FCA regulation in a practical way. Novembers briefings were on Advice Models - details of what we cover are below: When is advice not advice? It’s a simple question, but hard to answer. The FCA thinks this confusion is bad for customers. Clients are not getting the help they need when making investment decisions. RDR has put retail investors off paying for traditional advice. This has created an appetite for new ways to invest. The regulator wants to support innovative ways for providing advice and execution-only services. Although many feel the recent guidance consultation on advice still raises questions, it shows the FCA embraces new ideas. Our briefing helps you understand and capitalise on new advice models. We answer questions such as: • What do terms like ‘simplified advice’, ‘non advised guided sales’ and ‘execution only’ actually mean? • What service models should you be considering for your business? • How can this help provide a quicker, slicker and less costly client experience? We walk through the different elements of the FCA’s consultation, and help give you the confidence to design new service models that can meet the FCA’s expectations for suitability and appropriateness.

1. Simplifying advice (and non-advice)
Bovill Briefing
November 2014
Neil Walkling

2. The Grey Area
2
?
Full
Advice
Execution
Only

3. 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
3

4. 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

5. What is investment advice?

6. What is advice?
6
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

7. 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’)

8. Advice: Personal? Regulated? Generic?
8
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

9. Distribution models: what do the
labels mean?

10. 10
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 recommendationRAO advice?No advice

11. 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

12. Non-advised investment
propositions

13. 13

14. 14

15. 15

16. 16

17. 17

18. 18

19. 19

20. Considering a non-advised investment platform?
20
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

21. Simplified advice propositions

22. 22

23. 23

24. 24

25. 25

26. 26

27. 27

28. 28

29. 29

30. What could a ‘simplified’ advice model look like?
30
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

31. Regulatory developments

32. 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

33. • 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
33

34. Questions
34