Execution only and non-advised business

Do you know the difference between execution-only and non-advised sales?
There are two alternatives to advice: execution-only and non-advised.  If you make a recommendation, you are giving advice and must meet all the relevant regulatory requirements. If you do not make a recommendation and either just provide information or process a request, you have not given advice.  In theory, it’s simple – or is it?

What is execution-only?
An execution-only transaction can be described as ‘a transaction executed by a firm upon the specific instructions of a client where the firm does not give advice on investments relating to the merits of the transaction’. For example, if a client said he wanted to invest a certain amount of money, in a certain fund, with a certain provider and the firm merely transacted the request, this would be an execution-only case.

The FCA definition of execution-only is:

“A transaction executed by a firm upon the specific instructions of a client where the firm does not give advice on investments relating to the merits of the transaction and in relation to which the rules on assessment of appropriateness (COBS 10) do not apply.” 

The appropriateness test in COBS 10 must be applied where the financial instrument in question is other than ‘non-complex’ as defined in COBS 10.4.

A financial instrument is non-complex if it satisfies the following criteria:

  • it is not a derivative or other security giving the right to acquire or sell a transferable security or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures;
  • there are frequent opportunities to dispose of, redeem, or otherwise realise the instrument at prices that are publicly available to the market participants and that are either market prices or prices made available, or validated, by valuation systems independent of the issuer;
  • it does not involve any actual or potential liability for the client that exceeds the cost of acquiring the instrument; and
  • adequately comprehensive information on its characteristics is publicly available and is likely to be readily understood so as to enable the average retail client to make an informed judgment as to whether to enter into a transaction in that instrument.

Accordingly, there are some client instructions that cannot be transacted on an execution-only basis, namely when the instruction relates to a financial instrument that does not satisfy the definition of a non-complex instrument. In this event, the business would be dealt with in accordance with the appropriateness requirements for non-advised business if the firm chooses to transact business on that basis. See below.

Documenting execution-only cases
“Clear and credible” evidence is needed for execution only sales.  This should detail that the client:

  • is aware the transaction is execution only;
  • has not asked for, or received, advice;
  • it is their decision alone to take out the investment; and
  • the firm is taking no responsibility for the product’s suitability.

The client instruction should be in writing and must include ALL aspects relating to the transaction, sufficient for the firm to actually implement the instruction. ‘All aspects’ means exactly that – the client instruction must explicitly state which product type, provider, amount, fund etc. is required.

Any input from the firm would mean that the entire transaction would, in fact, be advised business. There is no hybrid approach in this area.

Existing clients
It is prudent to consider that any transaction for an existing client is unlikely to meet the definition of execution only. Previous discussions with the client could be deemed to have influenced the client, even where those discussions may not have been recent – the FOS has found against firms on this basis.

Whether business is advised or Execution Only is determined by facts rather than by a statement from the client that they want to proceed on an Execution Only basis. A client may state that they do not require advice, but the existence of a prior relationship is likely to mean that advice has already been given that may have a bearing on any execution only request.

 

Non-advised business
In non-advised sales, you do not make any personal recommendation, but merely provide generic information and leave the client to decide how they wish to proceed. For example, providing generic information recommending your client should buy household contents insurance (without mentioning a specific insurer or policy) that is unconnected with the sale of a contract would not be an advised sale.  People making non-advised sales should avoid answering questions in a way that could inadvertently give advice. Answering questions such as ‘what do you think?’, or ‘which one is best?’ could involve making a personal recommendation and therefore become an advised sale. 

 

Complex Financial Instruments
There is no formal definition of complex financial instrument. The implied definition is that it is any instrument that does not meet the criteria for a non-complex instrument.

MiFID II widened the scope of complex products, listed the financial instruments that are covered by the “execution-only” regime and clarified the types of shares, bonds, money market instruments, shares or units in a UCITS that are covered by the regime.  These broadly speaking, exclude any of the types of financial instrument that embed a derivative or else contain a structure that makes it difficult for a client to understand the risk involved.

 

Appropriateness Test
MiFID introduced an “appropriateness” test for non-advised sales, with MiFID II narrowing the scope of investments that can be classified as ‘non-complex’.  This means that the firms must ask clients for information to help it decide whether the client has the “necessary knowledge and experience” to understand the risks involved in the specific type of product or service provided.  This means that in addition to being absolutely clear with the client that they do not need, and are not receiving any advice, firms must also ensure they are confident that the client is sophisticated enough to make their own decisions and have assessed that the service or product is appropriate for the client.

If challenged, a client who is deemed not to have the necessary “knowledge and experience” may render any agreement signed by the client useless in the firm’s defence and they could find themselves liable for having given ‘advice’.

Execution only: A firm is not required to ask its client to provide information or assess appropriateness if the service is “execution only” (e.g. it consists of execution and/or the reception and transmission of client orders), and certain other conditions are satisfied, including that the service relates to particular “non-complex financial instruments”.

Professional Clients: A firm when providing an investment service to a Professional Client is entitled to assume that for the products and services for which it is classified, the client has the necessary level of experience and knowledge.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Both execution only and non-advised, given properly, obviously involve less liability than an advised sale, but are not without some element of risk.

Firms must take care to ensure that business to be transacted under execution-only or on a non-advised basis satisfies the conditions indicated in this article and is processed as required by the rules. Under no circumstances, should business be processed on either basis on order to avoid the obligations of making a personal recommendation.

Simply using a disclaimer to say “this is not advice” is not enough to ensure a firm is not responsible for a client’s actions. This will be down to whether a client thinks they have received advice.  If it looks and feels like advice, it probably is advice.

Action Required By You

  • MiFID II introduced a specific requirement for firms to keep records of appropriateness assessments;
  • These must include where a warning was given, whether the client decided to go ahead despite the warning and whether the firm accepted the client’s request to go ahead with the transaction;
  • Where a bundle of services or products is envisaged, the firm must consider whether the overall package is appropriate;
  • We recommend that our firms ensure they have the appropriate systems and controls in place;
  • Contact your usual ATEB Consultant for more information or contact ATEB directly here.

About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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