Advice vs Intermediary Service: The RE5 Distinction That Trips Candidates

Almost everything in the FAIS Act hangs on one question: is this person rendering a financial service? And a financial service is one of two things: advice or an intermediary service. The RE5 tests the difference repeatedly, usually through short scenarios.

What is advice?

Advice is a recommendation, guidance or proposal of a financial nature, given by any means to a client or group of clients, about:

• buying a financial product,
• investing in one,
• converting, varying or replacing one, or
• terminating one.

Notice that advice does not have to be followed. If you propose that a client increase her cover and she says no, you have still given advice. The proposal is the advice.

What is not advice?

The Act carves out several things:

• Factual information about a product: its terms, fees, how it works, how to complete a form.
• An analysis or report on a product without any express or implied recommendation that it suits a particular client.
• Advice given by a pension fund's board to its own members about their benefits, and certain other specified cases.

The word that matters is implied. "This fund returned 12% last year" is a fact. "This fund returned 12% last year, which is what someone in your position needs" is a recommendation.

What is an intermediary service?

An intermediary service is an act, other than advice, performed for a client or a product supplier, that:

• results in the client entering into, or offering to enter into, a transaction in respect of a financial product, or
• is done with a view to buying, selling, managing, administering, keeping in safe custody, maintaining or servicing a product, or
• involves collecting or accounting for premiums or other money payable by the client, or
• involves receiving, submitting or processing a client's claims against a product supplier.

So the person who captures an application, the person who takes the debit order instruction and the person who submits the claim are all rendering intermediary services, even though none of them recommends anything.

Worked examples

A call-centre agent reads out the features of a funeral policy and takes the client's instruction to buy it. Factual information is not advice. Taking the instruction that results in a transaction is an intermediary service.

A consultant tells a client, "Given your two children, I would take the R1 million option." A recommendation tied to the client's circumstances. Advice.

A bank passes a client's premium to an insurer by debit order, as a conduit only. Not an intermediary service. A bank acting merely as a conduit for payment is not rendering one.

A friend passes your name to an adviser and gets a thank-you payment, without discussing any product. Neither advice nor an intermediary service. If the friend adds "you should take their retirement annuity", that changes.

An assistant submits a client's claim form to the insurer. Intermediary service.

Why the distinction matters

1. Licensing. An FSP is licensed for advice, intermediary services or both, for specific product categories. Giving advice on a licence for intermediary services only is acting outside the licence.
2. The advice process. The suitability duties in the General Code (needs analysis, record of advice, replacement disclosures) attach to advice. Disclosure and care duties attach to both.
3. Competence. A representative appointed only to execute sales, under an approved script and direct oversight, faces lighter requirements. If that person drifts into recommending, they are giving advice they are not authorised to give.

How the RE5 tests it

Expect questions that describe what a person did and ask which service it was. The method is always the same:

1. Was there a recommendation, guidance or proposal? If yes, it is advice, even if declined.
2. If not, did the act lead to a transaction, service a product, handle premiums or handle claims? If yes, it is an intermediary service.
3. If neither, it is not a financial service at all.

Watch for the two favourite distractors: treating declined advice as "not advice", and treating plain factual information as advice.

Learn the two definitions closely. A surprising number of RE5 marks depend on them.