The power to settle financial complaints.
The power to settle financial complaints.
This note applies mainly in relation to "packaged" investment products.
"Execution only" is a term introduced by the financial services regulator to describe sales where a consumer has requested a specific investment – and has chosen not to receive advice at that time.
"Execution only" has a place in the regulatory framework. There are many people who know enough about investments to make their own decisions – and/or who do not want to explain their circumstances to investment companies.
"Execution only" is described by the Financial Services Authority (FSA) 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 and in relation to which the rules on assessment of appropriateness ("COBS 10") do not apply.
In the complaints that consumers refer to us, the problem that commonly arises is the misuse of "execution only". We see cases where it has been used as a “way round” regulation – for the inappropriate sale of investment products.
A business needs to provide "clear and credible" evidence that an investment transaction is "execution only" – to avoid the regulatory obligations that apply when providing investment advice.
This requirement was clarified by PIA Regulatory Update 33 in the context of pensions – and we usually decide that the required standard of evidence is the same for other investments. When we decide whether the required standards were satisfied, we will look at the rules that were in place at the time of the transaction.
The "clear and credible" evidence that a business usually provides is in the form of an “execution only” notice. This is a statement signed by the consumer, agreeing that:
If a statement like this is clearly worded and signed, it cannot be dismissed easily. A notice does not have to be signed. But unsigned notices can lead to questions as to whether the consumer saw them.
An "execution only" notice can be a stand-alone document – or it can be included as part of another document.
As part of complaints about "execution-only" sales, consumers frequently say:
and then the product sold turned out to be unsuitable.
When we consider complaints involving "execution only" sales, we begin by taking into account the consumer's background.
If they appear to be an experienced investor – or worked at the time of the sale in the investment industry – then it is likely that we can take the "execution only" notice at face value.
But if they appear not to have an investment history and no apparent connection to the investment industry, then the case will usually require further investigation.
Where we investigate a case further, we will need to obtain statements from both the consumer and the salesperson involved (if possible), explaining why the "execution only" notice was signed.
If the salesperson can no longer be found – or their statement does not clarify why "execution only" was appropriate for the consumer concerned – then we will ask the business to explain why the consumer would have taken this route.
If the case seems evenly balanced, we are likely to allow our decision to turn on the clarity (or otherwise) of the "execution only" notice itself.
If we decide that the "execution only" notice cannot be relied on, we will consider whether the investment that the consumer bought (or was sold) was appropriate. We will do this by looking at their circumstances at the time of sale.
If we take the view that the investment product was appropriate for them, it usually follows that the consumer should not receive any compensation for this aspect of their complaint. But we may still tell the business to pay a small amount of compensation for distress and inconvenience – to compensate the consumer for the fact that the business relied on an inappropriate "execution only" notice.
If we decide that the investment product was not appropriate for them, our usual approach to compensation for mis-selling an investment is likely to apply. There is more information about this in the section on our website on compensation for being "deprived" of money and for investment loss.
The Markets in Financial Instruments Directive (MiFID) took effect from November 2007 and introduced changes in this area.
MiFID created an "appropriateness" test for “non-advised sales”. This means that in some cases, the business will have to obtain information from the consumer – to enable it to decide whether that particular consumer has the necessary knowledge and experience to understand the risks involved in the transaction.
This applies in the case of "complex" products (for example, some structured products or spread-betting contracts) and where the financial business, rather than the consumer, has initiated the sale in the case of some "non-complex" products.The "appropriateness" test is not triggered by general communications (like newspapers or billboards). But where relevant, we will look carefully at other communications – to see if they are "personalised". This is because personalised communications trigger the "appropriateness" test, as the financial business has initiated the contact with the consumer.
contact our technical advice desk on 020 7964 1400
This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.