On 20 September 2016, HM Treasury published a consultation paper in which it proposes to amend the scope of the UK regulated activity of "advising on investments" to align with the "investment advice" activity under the Markets in Financial Instruments Directive (MiFID). The key difference between the two activities is that, for the provision of investment advice to be regulated under MiFID, the advice must be a "personal recommendation".
The amendment to the UK regime was suggested by the Financial Advice Market Review (FAMR) final report, which was published in March 2016. The FAMR was carried out with a view to improving consumer access to retail investment advice. It found that many consumers who cannot afford to pay for full advice cannot access suitable guidance to help them with their investment decisions. According to the report, many authorised firms only offer limited guidance, steering well clear of the regulatory perimeter due to a lack of clarity as to the boundary between the provision of guidance and regulated investment advice and a wish to avoid the additional compliance burden associated with the provision of regulated advice.
The proposal to align the UK regime with MiFID in this respect is to be welcomed. Since MiFID was implemented in UK law in 2007, we have had the unsatisfactory position of MiFID investment services and activities being layered on top of the pre-existing UK regulated activities. This means that currently businesses need to understand the definitions and scope of similar, but not identical, activities under the two regimes.
How do the UK and EU activities differ?
The "advising on investments" UK regulated activity is wider than the "investment advice" activity under MiFID. Broadly, the main UK advising activity captures any advice given to an investor or potential investor, directly or indirectly, on the merits of buying or selling certain investments, including shares, other securities, derivatives and insurance contracts (there are also other regulated advising activities in relation to peer-to-peer lending, regulated mortgages and other agreements relating to the acquisition of property or land, and the conversion or transfer of pension benefits, but the scope of these activities is not affected by the consultation).
Although the mere provision of information generally is not caught, the context in which information is communicated can cause it to be classed as advice – i.e. if information contains a steer as to how it should be used by the recipient, it starts to look like advice. This means that there is a risk of anyone providing quite high-level information being caught if that information is not presented in an objective manner, and is one reason why it can be difficult to establish when guidance should or should not fall within the regulatory perimeter.
By contrast, the MiFID activity requires the advice to be in the form of a recommendation that is either: (i) presented as suitable for the person to whom it is made; or (ii) based on a consideration of the circumstances of the person to whom it is made. Consequently, unless it is personalised in some way, investment advice is not regulated under MiFID. The FAMR found that businesses find this MiFID definition much clearer and easier to apply.
Although it is possible implicitly to suggest an investment as being suitable for a particular client, and so the element of personalisation need not be particularly strong, the threshold is notably higher than for the UK regulated activity.
Further, the MiFID definition expressly excludes recommendations issued exclusively through distribution channels or to the public, meaning that even if they are some way personalised, more general recommendations such as investment research and financial analysis usually are not caught due to the manner in which they are issued.
However, under MiFID II (which will come into force on 3 January 2018), only recommendations issued exclusively to the public will be out of scope, in light of the growing use of distribution channels like email to provide personal recommendations. Therefore, personal recommendations issued through distribution channels such as email or websites will be excluded only if they are issued exclusively to the public. This means that where a distribution channel is used to provide a personal recommendation to a specific person or persons, and it is not addressed to the public in general, the recommendation will be caught.
It is not clear from HM Treasury’s consultation whether the intention would be to reflect this change in the UK legislation too, as the proposed drafting aligns with the current MiFID position. However, we would expect the two to be aligned when the change is made under MiFID II.
What might this change mean?
The consultation paper makes clear that the hope is that this change would encourage firms offering regulated investment advice also to offer detailed, high-quality guidance to consumers who may not be in a position to pay for full advice. The FCA plans to produce new guidance, including a collection of case studies, to highlight what firms need to consider when developing and offering guidance services and to address areas of uncertainty around the regulatory perimeter identified by the FAMR.
The proposed change would mean that businesses not otherwise conducting regulated activities may start to offer some forms of guidance, as this may be more clearly outside the scope of regulation. HM Treasury does not seem to think that the change would present much of an opportunity for many unauthorised businesses, although it does analyse briefly the potential risk to consumers of unauthorised businesses offering standalone guidance services.
As the consultation largely is focused on the retail market, it does not discuss the potential impact in the wholesale sector. The proposed change could have some welcome consequences here too. For example, under the MiFID definition of advice, firms providing non-personalised research and analysis to investment managers may be able to conclude that the provision of such services is not regulated and therefore does not attract such a heavy compliance burden.
However, businesses that are otherwise unauthorised will need to take care that their activities do not bring them within scope of other regulated activities. For example, those which not only provide information but also direct persons to providers of regulated investments are likely to be performing at least one of the regulated arranging activities.
Further, even if there is no regulated investment advice, the financial promotions regime must still be considered, potentially restricting whether and how the material can be communicated.
The consultation is open for a period of 8 weeks (until 15 November 2016); it is not yet clear how quickly the proposals will develop after that. HM Treasury has indicated that it intends to hold targeted roundtables as part of the consultation process, giving businesses and trade bodies an opportunity to engage in the consultation directly.