‘Advice’ is a loaded word. Different interpretations have very significant and distinct regulatory implications: is it the provision of ‘information’ or ‘guidance’ (such as in an ‘execution only’ service) or a ‘personal recommendation’ (i.e. regulated advice)?

I note with interest a couple of recent contributions to the perennial debate about where the boundary lies. The chief executive of Money Advice Service, Toby Hobman, was reported yesterday defending the use of the words ‘independent’, ‘free’ and ‘unbiased’ in MAS’ recent TV advert. In an interview with Money Marketing, Hobman said the use of the wording was not intended to undermine the role of the IFA – although, I suppose, ”IFU” would have been too close to the bone!

He reportedly said: “We used ‘independent’ in the sense we are independent from Government and from the industry, that we are a standalone organisation. We understand there are these technical definitions and they are important but in a post-RDR world we expect we will help customers understand what those labels mean and, in a sense, engaging more people with their finances creates a bigger market for independent advice.” He said he understood the concerns from parts of the industry but added: “We are using the term ‘advice’ in the way average people in the street use it….”

The ‘man in the street’ test has also been put to use in the recent case of Rubenstein v HSBC [2011] EWHC 2304 (QB). The judge was deciding whether an HSBC private client adviser had given the claimant advice to invest in the AIG Premier Access Bond Enhance Fund or merely carried out an ‘execution only’ instruction after providing relevant information. The judge reviewed (old) COB and PERG (including PERG 8.28 and 8.29) and provided the following useful guidance on the Court’s approach to the issue:

“…most private clients, if they understood the significance of the distinction at all, would say that they expected their relationship with a financial adviser to be an advisory one. In the circumstances, there can be no default presumption that the contract is “execution only”, if the distinction between the giving of advice and the provision of information is not expressly addressed. I accept [the expert's] view that the onus was on [the adviser] to clarify the position if it was at all unclear.

The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of that information to the client’s investment decision, or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient. In both these scenarios the information acquires the character of a recommendation.

To attempt any greater definition of the giving of advice in an investment context would be unwise and is probably impossible. I suggest, however, that the starting point of any inquiry as to whether what was said by an IFA in a particular situation did or did not amount to advice is to look at the inquiry to which he was responding. If a client asks for a recommendation, any response is likely to be regarded as advice unless there is an express disclaimer to the effect that advice is not being given. On the other hand, if a client makes a purely factual inquiry such as “What corporate bonds are currently yielding X%?” or “How does this structured product work?”, it is not difficult to conclude that a reply which simply provides the relevant information is no more than that. …The test is an objective one.”

This is only the decision of a High Court judge and would not (as we know all too well) bind the FOS but, although by no means conclusive, it is a very useful judicial interpretation of a fundamental regulatory issue.