Basic Advice for Stakeholder products - frequently asked questions

The adviser should factually explain the difference between basic and full advice at the outset of the interview, enabling the customer to decide which level of service they would like. The adviser should explain to the customer that Basic Advice is a short, simple form of financial advice. They should state that they will use pre-scripted questions to identify the customer’s financial priorities and decide whether a product from within their range of low-cost regulated saving and investment stakeholder products is suitable for the customer.

It should be highlighted to the customer that Basic Advice establishes only broad financial priorities and takes limited account of an individual's particular financial circumstances. The adviser should also make it clear that Basic Advice offers suitable recommendations but not 'most suitable' recommendations.

The Basic Advice process was designed to provide a simple form of financial advice for an individual and we did not include joint interviews as part of our research. However, the rules do not prohibit a firm using Basic Advice to serve a financially-linked couple. Clearly, a firm wishing to do this would need to adapt the Basic Advice script to take account of this.

Yes, an adviser can offer Basic Advice in a workplace context. If they wish, they can restrict their product offering to the stakeholder pension available through that employer, and use a suitably adapted Basic Advice script.

Yes, Basic Advice can be given over the telephone or the Internet. We set out in COB 5A.2.5-COB 5A.2.7 rules on what firms need to do if Basic Advice is undertaken by telephone.

These are all covered in the Key Features Documents. Advisers should explain to the customer the 'aims', 'risks' and 'commitment' sections of the appropriate Key Features Documents, along with other product features. This is so the customer is able to make an informed decision about the recommendation.

Yes, but only in relation to non-investment products. Providing they have the correct levels of training and competence, an adviser who is offering Basic Advice on Stakeholder products can exit the Basic Advice service and offer an alternative service should a customer decide that they wish to consider, for example, their protection needs. In these circumstances the adviser needs to ensure that they give consumers clear warnings that they are leaving, and where appropriate re-entering, the Basic Advice process.

It will also be important that the adviser highlights to the consumer the level of service they will offer when buying non-Basic Advice products. It is the Combined Initial Disclosure Document (CIDD)/Initial Disclosure Document (IDD), which states the service that they are offering the customer for that particular transaction.

The advice process should be designed to elicit enough information from the customer – about their financial priorities, circumstances and attitude to risk – to allow the adviser to make a suitable recommendation. The adviser's primary source of information will be the answers provided by the customer in response to the pre-scripted questions. The adviser should make clear that this is the basis on which they will make any recommendation.

There is no requirement on the adviser to access and use information the firm already holds about the customer. And the adviser should not seek to extend the enquiries he or she makes beyond those in the script provided. But our rules recognise that however comprehensive a script might be, it may happen that the customer volunteers information that the adviser could reasonably be expected to recognise as being relevant to the suitability of a product, or that brings into question the accuracy of the customer's answers. In such an event, the adviser should note and take account of the information. For example, if, despite any answer the customer has given to questions about 'affordability', a customer then implies that they may face a change in future income or additional expenditures, then clearly, the adviser should clarify the point and account for this within their recommendation. So a competent Basic Adviser must be able to recognise the sort of information that might have a material impact on the suitability of a Stakeholder product.

However, it is important to note that the basic advice process is not intended to be a detailed assessment of the customer's needs, and this point will have been made clear to the customer.

No. See the answer to 8. Our rules expect firms to design their sales process to be sufficient to ensure that the advisers using it make suitable recommendations. Firms must also ensure that their advisers do not offer advice on issues that they are not authorised to offer advice on, such as fund choice.

A customer should be assessed to ascertain other financial priorities – such as a need to reduce the level of existing debt. And, if appropriate, the adviser should give a customer an unambiguous warning about the desirability of meeting those other priorities before making payments to a Stakeholder product. But our rules recognise that it is for the customer to decide whether or not to address an existing financial priority before taking on a new commitment, provided that the decision is made in an informed way. This is why the guidance suggests that firms give an unambiguous warning about the desirability of meeting an existing financial priority, but allows for the process to go on with the customer's consent. In addition, the guidance also suggests that firms should not sell to a customer who is unlikely to be able to afford a Stakeholder product. This is why the questions about debt may result in a range of outcomes, depending on the scale of the customer's existing commitments.

We have published the scripts we tested and refined during our consumer research to provide direction for firms and help ensure we share the lessons learned.

You can find further information about financial priority and debt warnings in our Consumer Research 32 publication: Consumer testing of a filtered questions approach to selling stakeholder products – stage three.

As most expert financial advisers would agree, there is no single correct answer to this question. Debt levels are relevant to two aspects of the Basic Advice process.

First, from the point of view of sensible financial planning, it is wise to clear debt before saving simply because it is likely to be more cost-effective. So advisers are required to explain this priority to customers and, as the answer to 12 above suggests, give them the opportunity to make informed choices. Second, the Basic Advice process should not be used to sell products to customers for whom the products will clearly be unaffordable.

Firms must establish their own criteria for assessing whether customers will be able to afford a new commitment, and debt levels may well figure in these criteria. But we recognise that a range of criteria are currently used in the industry to determine how financially committed consumers are. We hope that the industry will work together to devise common practice on this issue.

The adviser should explain to the customer that the assessment of whether a Stakeholder product is suitable will be based solely upon the information disclosed during the interview and that a detailed assessment of the customer's needs and circumstances will not be made. The Basic Advice process does not involve a detailed analysis of the customer’s financial position and risk preferences.

See the answer to Q13. Our rules and guidance are there to ensure that a firm only recommends a product if they deem it to be suitable, taking account of what the process has uncovered about a consumer's financial circumstances, objectives and attitude to risk. Firms should make their own decisions about whether a client can afford to purchase a product, bearing in mind the client's level of debt. We have provided guidance in COB 5A Annex 1G saying that a stronger priority should be given to the customer's levels of debt if it appears that the customer is significantly indebted. For this purpose, firms should consider creating their own means of reckoning to decide whether the customer's debt to income ratio exceeds a given threshold. We have not created any prescribed measures and it is for firms to review their chosen thresholds.

As we have explained in our answer to Q13, it often makes more economic sense to pay off debt before trying to save. But interest rates for credit and savings can vary widely, and we acknowledge that sustaining some debt isn't necessarily always incompatible with saving. Such behaviour is ultimately a matter for informed consumer choice. So we haven't prohibited selling products to consumers who are carrying debt. What is important is that the customer understands the implications of their actions, and makes an informed choice about whether to make the purchase. This does not mean that we expect firms to make a detailed assessment of the various types of credit held by a customer and compare these with the expected returns from Stakeholder products. The firm should simply explain in general terms that in most cases, paying off debt is likely to represent better value for money.

Of course, a firm may decide that levels of indebtedness are such that they could impact on the affordability of a new commitment. In such a case, the firm must have regard to our standards that dictate that the process should not be used to sell to a consumer for whom a new product is likely to be unaffordable.

A Basic Advice process should assess a customer's attitude to risk to the extent necessary to make a suitable recommendation. Clearly, though, Basic Advice is not the same as 'full' advice – the latter requires a full assessment of the customer's 'attitude to risk'.

Our guidance indicates that any Stakeholder product which has any exposure to equities or property should not be sold to an individual who is unwilling to accept any risk to capital in any circumstances. But at the same time we recognise that customers may have differing risk appetites according to the purpose of the investment and the anticipated time-horizon. So the adviser should ascertain whether the customer is willing to accept any risk of loss of capital, and the extent to which that is an absolute position or varies according to product and time-horizon.

The adviser needs to ensure that the customer understands the risk they are undertaking when agreeing to an adviser's recommendation. Consequently, the adviser should ensure that they have explained, and the customer understands, the aims, risks and commitment requirements of a particular product. It is reasonable to expect that where the adviser recommends a Stakeholder investment product, they have grounds for believing that the customer understands and accepts that it carries some risk to capital.

The adviser should explain that Stakeholder products, although designed, are not backed by the Government. Government regulations apply some ‘risk controls’ to Stakeholder investment products, but advisers must explain, in a balanced way, the risks associated with a specific product. The adviser can explain that if the customer is willing to invest for a longer period, the risk of loss is generally reduced compared with shorter periods. The adviser may also explain the risks of inflation to customers seeking to save for the longer term.

No. A Stakeholder pension should not be recommended in either of these cases and the customer should be advised to seek full advice. In paragraph 16 of COB 5A Annex 1G we say that a stakeholder pension should not be recommended if the customer 'has or will have access to an occupational pension scheme.' By 'will have' we mean – for example – an individual who may be required to undertake an initial 'waiting period' before they are entitled to join the occupational pension scheme, or who for some other reason has indicated that they will in the future be eligible for entry. If an adviser doubts whether a consumer is sure of their position, they may decide to terminate or suspend the interview until the consumer can clarify their situation.

No. The Basic Advice process only covers advice on products within the Stakeholder suite. A customer seeking advice relating to other products would have to do so outside the Basic Advice process.

Yes. The rules do not preclude selling a stakeholder pension through Basic Advice if a customer has access to an employer designated Stakeholder pension scheme. However, our rules and guidance are there to ensure that a firm must only recommend a product if it deems it to be suitable, having regard to a consumer's financial circumstances, objectives and attitude to risk.

Firms need to ensure that they do not sell a Stakeholder pension to customers through Basic Advice if the customer has, or will have, access to an employer-based pension that may give them additional benefits such as employer-based contributions, death in service benefit etc. We would expect firms to create Basic Advice scripts which ensured that the adviser obtained the necessary information to make a suitable recommendation, and where appropriate suspend the interview if the consumer needs time to clarify their circumstances.

The adviser cannot offer advice on – or make a specific recommendation about – fund choice. However, if the provider offers more than one fund option within a particular Stakeholder product, the adviser can offer the customer information about the different fund options. For example, the adviser may want to provide a list of all the funds that they offer – this should be clear, fair, not misleading and balanced .

The adviser may also answer factually any questions the customer asks about a specific fund or funds, and give factual information about specific points of comparison. If the adviser does offer the customer information on fund choice, the adviser should make absolutely clear that this information does not constitute advice. A useful example would be in the case of relative risk. If the customer is seeking information about the relative risk of two funds, the adviser may point to where, in the Key Features Document or fund guide, such information is provided. However, the adviser should avoid advising the customer about which of the two is 'the more risky'.

The adviser should make clear to the customer that matters concerning pension transfers are too complex to be dealt with through Basic Advice. A Basic Adviser should not comment on the suitability of a transfer and should direct the customer to seek full advice.