When execution-only and non-advised do and don’t apply

23 September 2019

You need to know the difference between execution-only and non-advised sales and what client instructions can be enacted under each of them, says ATEB Consulting’s Steve Bailey.

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 next page.

Professional Paraplanner