Written by Jon Dean on Thursday 26 March 2015
Amazon buyer reviews – as illustrated above for the film ‘Final Destination’
Anyone who uses the internet these days can hardly have failed to notice the rise of ‘social advice’. Want somewhere to eat in an unfamiliar town? TripAdvisor has reviews of pretty much any restaurant in the world. Books, films and music? How about Amazon’s system of recommendations (based on your previous purchases) and buyer reviews – as illustrated above for the film ‘Final Destination’?
My execution-only investment platform has been paying attention. They’ve designed a feature to show me information about typical investment activity of people like me, based on its large database of customers in the same age range with broadly similar portfolio sizes. Simply by keying in my age and level of savings, I received some interesting information about the average portfolio sizes, product wrappers, asset class preferences and five favourite funds of this group of customers.
Only it turns out, on closer examination against the FCA’s recent guidance paper FG15/1, that what I actually received constitutes regulated financial advice. This paper uses around 18,000 words, slightly fewer than Shakespeare’s tragedy ‘Timon of Athens’, to define advice. With such difficulty defining the boundaries, opening up the door for potentially unlimited future litigation, is it any wonder that so few investment firms are prepared to provide any useful information for their customers without some kind of fee?
While FG15/1 attempts to collate all the relevant regulations into one document, there are still some grey areas and in order to be completely sure my platform was giving me more than information, I needed to cross-reference a number of other documents such as FG12-15 (definition of a retail investment product), CESR10-293 & 294 (MiFID definition of advice), COBS, PERG, the Regulated Activities Order (RAO) and the judgement of the Supreme Court in Plevin v Paragon Personal Finance Limited. Having taken all this in, I found that I had received an ‘implicit personal recommendation’, which was also ‘regulated advice’.
This has profound consequences to my investment provider. Under MiFID rules they are now obliged to assess the suitability (to me) of the funds which people like me typically buy. By asking me only my age and size of investment, they are unlikely to have enough information to make this assessment, and would be liable to redress should I buy one of these funds and suffer detriment. Perhaps they already know this and have factored the risk into their capital reserves, or maybe in the next weeks and months, this useful feature will be quietly dropped.
I asked my wife, who does not work in financial circles, to ‘user-test’ the so-called advice. To her mind she was reading a sales message, with obvious disclaimers that she was not receiving advice. Interestingly however, the language describing the platform’s top-rated funds suggested to her that these were ‘better funds’, something which the FCA paper has confirmed is not necessarily a personal recommendation but is likely to be regulated advice. What will this mean for the many D2C platforms that currently display such lists?
Coming back to that Amazon review, well it looks like advice to me, but sadly I won’t have redress if I buy the film and it gives me nightmares. Mind you, that death clock might just come in handy for my retirement planning…