What is a Non-advisory Service?


As we have described, when a firm is giving you investment advice or is managing your investments, it must ensure that the product is suitable for you.

When you are not receiving investment advice from a firm, or not relying on a firm to manage your investments, you will generally be expected to take a greater degree of responsibility for your decisions. When you want a firm simply to buy or sell an investment without providing you with investment advice or portfolio management services, different requirements apply. In such case, the licensed entity must assess whether the client has the knowledge and experience to invest in such product and the test to be carried out is known as the Appropriateness test.

The test aims to protect those who may not understand or be aware of the implications and level of risk involved in a transaction, particularly where the products are ‘complex’ or where you have not taken the initiative to carry out the transaction.

Examples of ‘complex’ financial products include:

  • Options, futures, swaps, and other derivatives

  • Financial contracts for differences

  • Convertible bonds

  • Warrants

  • Binary options.

These products are categorised as being complex given that the characteristics of such product would not be understood by the average investor and therefore one needs to have a certain degree of knowledge and experience in the investments field in order to understand the risks of such products.

Examples of ‘non-complex’ financial products include:

  • Shares, bonds or other forms of securitised debt admitted to trading on a regulated market

  • Money market instruments

  • Units in certain investment funds

The above are the ‘traditional’ financial instruments the average investor would typically invest in.

These examples are by no means exhaustive and merely indicative.

As part of the Appropriateness test, you are likely to be asked questions about your investment knowledge and experience.

If the firm concludes that you have the necessary knowledge and experience to understand the risks involved, then the firm may simply go ahead with the transaction.

If the firm concludes that you do not have the necessary knowledge and experience, or you have not supplied enough information to enable it to reach a conclusion, then you will receive a warning from the firm saying that either the firm does not regard the proposed transaction as appropriate or that the information is not enough to enable it to determine whether the financial instrument is appropriate or not.  If you insist on going ahead with the transaction, you must accept the risk and be provided with a risk warning.