SIFA 9.17 Providing basic advice on stakeholder products (basic advice)
Basic advice is intended to be a simpler, quicker and cheaper form of advice to consumers interested in buying a stakeholder product. It covers advice in the form of a recommendation given to a retail customer. The recommendation must relate to a stakeholder product and certain other conditions must be met. These conditions are based on the need for the adviser to make an assessment of the consumer's needs based on the answers that the consumer provides to a series of pre-scripted questions. Firms intending to provide basic advice must ensure that their permission covers the activity.
The stakeholder products on which basic advice may be given are:
- cash deposits;
- medium term investment products i.e. life assurance contracts or collective investments;
- stakeholder pensions; and
- Child Trust Funds
These products are the only products that can be sold with basic advice and they must meet certain criteria to be stakeholder products. For example, the charges are capped. Currently, medium-term investment products cannot include a smoothed fund because our research found a risk that consumers who received basic advice may not understand the concept of smoothing.
A new Chapter 5A has been included in COB that sets out what firms must do when providing basic advice on a stakeholder product. You must provide an IDD on first making contact with the customer. COB 5A.3.1 R includes rules on the scope and range of advice on stakeholder products. The scope of basic advice may be based on a limited number of providers of stakeholder products or a single provider. The range of stakeholder products provided must include no more than one of each type of product (except for cash deposits). A firm may have several different ranges but only one can be disclosed to the customer.
Firms must provide basic advice through a sales process that incorporates pre-scripted questions put to the customer. There is no FSA-mandated script. Instead the firm's sales process must ensure that the firm only recommends that a customer acquire a stakeholder product if it is suitable. The suitability of stakeholder products is covered at COB 5A.4.2 R. COB 5A Annex 1 contains guidance on the steps a firm could take to ensure it complies with the requirements in COB 5A.4.2R (1). A customer must be sent or given a copy of the completed scripted questions and answers.
Where the sales process results in a firm making a recommendation to a customer to acquire a stakeholder product it must meet the requirements of COB 5A.4.6 R to COB 5A.4.9 R. The firm must provide the customer with a summary sheet that sets out for each product recommended the amounts the customer wishes to invest and the reasons for the recommendation. It also explains that in determining any subsequent complaint the Financial Ombudsman Service may take into account that the recommendation was based on limited information only. Where a firm gives basic advice on stakeholder products that offer a choice of funds, it must not give advice on, or recommend, a particular fund for the customer.
The basic advice regime aims to deliver an assessment whether a stakeholder product is suitable without a detailed assessment of the customer's needs. Hence, it differs from full advice on investments. As a result, some other sections of COB do not apply to a firm when providing basic advice on a stakeholder product:
- COB 5.1 Advising on packaged products;
- COB 5.2 Know your customer;
- COB 5.3 Suitability; and
- COB 5.4 Customer's understanding of risk.
Individuals who give basic advice do not need to be approved persons. They must be competent but there is no specified examination requirement.
COB Sch 1 summarises record-keeping requirements concerning the firm's scope and range of stakeholder products. In addition, COB 5A.4.10 R requires a firm to keep a record of each recommendation to acquire a stakeholder product and the customer's summary sheet for at least six years from the date of the recommendation. This is the minimum requirement and you may decide to keep material for longer.