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Securities Commission tries to clear up definition of advice

The Securities Commission has issued guidance on the boundaries between financial advice and provision of a financial planning service in an attempt to clear up industry confusion on the issue.

Monday, March 29th 2010, 9:58PM 3 Comments

by Sonia Speedy

Under the incoming Financial Advisers Act, only Authorised Financial Advisers (AFAs) will be able to provide financial planning services.

Unauthorised advisers can provide financial advice on a narrow range of financial product such as bank term deposits, credit cards and most insurance products - known as category two products.

However, advisers have been concerned that the definition of a financial planning service under the Act has been too broad.

The guidance note issued yesterday puts the emphasis on the significance of the advice to a client's current financial situation and goals in determining whether a financial planning service has, or should have, been provided.

It gives the example of a home equity release product, advised on a way of structuring a client's post-retirement finances. It says this would require analysis of the client's financial situation and goals to advise them properly and therefore would generally constitute a financial planning service.

However, advising a client on a standard car insurance product is unlikely to require analysis of this sort and therefore would typically fall under financial advice rather than a financial planning service.

The guidance note also sets out that a suitability analysis would not be expected when:

  • It is made clear to clients that they are providing non-personalised advice only
  • A client declines to provide the information necessary for one. However, the adviser must make the risks clear to the client and keep a record of their instructions

The Commissioner for Financial Advisers David Mayhew says: "It would be unacceptable for unauthorised advisers to deliberately restrict their inquiries and the standard of care, diligence and skill the giving of advice demands, just to avoid being seen to provide a financial planning service."

Mayhew adds that if advisers think their business model might involve stepping over the category two boundary, they should seek authorisation.

Society of Independent Financial Advisers chairman Murray Weatherston says he is personally disappointed by the guidance, which he believes does not clarify the industry's concerns.

Read full guidance note here

Tags: regulation

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Comments from our readers

On 29 March 2010 at 11:33 pm Doug said:
As clear as mud!
On 30 March 2010 at 6:59 am Bazza said:
What did you expect, they weren't changing the rules, they were just clarifying their position. The category one and two products were all ways the red herrings, all professional advisers can now get on and get Authorised, no matter what the product.
On 30 March 2010 at 6:59 pm phil said:
I'm glad the SC used the car insurance analogy. Heres why the car salesman and the F&G broker must be AFA's. Young guy under 25 finances buying Jap import. After 2-3 years the premiums on his comprehensive car insurance cover will have enabled him to buy another car. With the usual excess on his policy he should pray that he never has a claim. What with running the car he will have no money left after allowing for booze and cigs. Between the car salesman and the F&G insurance you can guarantee the car owner has no money left for anything else. Under this scenario if anyone needs to be an AFA its the car salesman who has put his interests first and the clients interests a distant second. I wonder what the SC will do about that?
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