HM Treasury has published a consultation relating to proposed amendments of the definition of financial advice. The consultation, issued on 20 September 2016, follows proposals relating to the Financial Advice Market Review (FAMR), launched in August 2015, and which reported in March 2016.
The FAMR recommendations fell into three broad areas: affordability, accessibility and liability and redress. In the area of affordability, FAMR considered that steps were required to make the provision of advice and guidance to the mass market more cost-effective. A number of recommendations intended to allow firms to develop more streamlined services to engage with customers in a more effective way were made, including a proposal that HM Treasury should consult on amending the definition of regulated advice.
The changing definition of advice
There were 268 responses to the call for input prior to the FAMR report being released. The Treasury indicates there was a strong consensus that having two definitions of financial advice is unhelpful and unclear. The earlier, wider UK definition of advising on investments – as seen in Article 53 of SI 2001/544 (commonly known as the Regulated Activities Order (RAO)) – is not as favoured as that in the MiFID framework, which adopts a more circumspect concept of “investment advice” – the provision of personal recommendations to a client (and the definitions and Article 24 and 25 in MiFID II (Directive 2014/65/EU) track those introduced in 2007).
At the moment, for advice to be regulated under Article 53 of the RAO, in simplified terms, it must:
- relate to a relevant investment;
- be given to a person in their capacity as an investor or potential investor;
- relate to the merits of them buying, selling, subscribing for or underwriting the investment.
A narrower scope
The proposed new definition is closer to the MiFID version, requiring a personal recommendation that is presented as suitable for that person, or based on a consideration of their circumstances. A recommendation will not be a ‘personal recommendation’ if it is issued either exclusively ‘through distribution channels’ or ‘to the public’ (Article 53(1B)).
The FCA already provides guidance on what constitutes ‘through distribution channels’ or ‘to the public’ in Chapter 13.3 of the Perimeter Guidance Manual. While this exclusion has been in the FCA Glossary definition of a ‘personal recommendation’ since the roll out of MiFID I in 2007, these concepts are broad and have the potential to bring certain forms of existing regulated advice outside the scope of the revised Article 53 definition. It will be interesting to see if any further clarity is provided on these concepts.
The benefits of clarifying the regulatory perimeter would also apply to the provision of advice relating to insurance, which also relies on the same definition of advising on investments as set out in the RAO.
A truncated version of the new text of Article 53 of the RAO and the MiFID definition is included for reference at the end of this article. The full text is set out in Annex A of the Treasury’s consultation paper.
Why does this matter?
FAMR perceived a reticence by firms to offer potentially less expensive forms of guidance to consumers, in part at least, driven by a concern that it could constitute regulated advice. There are concerns about the lack of investment support options available to consumers. At what point do general forms of consumer support become regulated advice? Where is the boundary between providing helpful guidance and advice on exercising a right to subscribe for an investment? Could a prompt to act be seen as advice?
As a result of this uncertainty, FAMR concluded that firms limit the amount of guidance they offer customers as they are concerned they may stray into providing regulated advice without meeting necessary regulatory requirements.
Amending the definition is also seen as a positive measure for competition. As well as facilitating new market entrants, HM Treasury anticipates incumbent firms will be more likely to prompt customers to take action e.g. to let them know that they have not used their ISA allowance in a given tax year; provide information on the risk profile of the funds available within their stocks and shares ISA; or highlight that a customer did not increase their pension payments despite receiving a pay increase. Depending on how these are presented, this has potential to allow firms to offer a “factual” or guiding message rather than one that needs to be overlaid with the slant of being suitable for that client or as a considered view based on the client’s circumstances.
To encourage this approach further, we can also expect the FCA to produce new guidance, including a series of illustrative case studies, to support firms offering services that do not amount to advisory services under the revised definition, such as those that help consumers to make their own investment decisions without a personal recommendation. It will also be interesting to see how the FCA brings these to bear on firms that are not authorised.
Firms that presently carry on activities that span both the current Art 53 and the MiFID definition of advice are likely to incur costs from the need to change internal systems and process (for example, training, record keeping, documentation) and external communications strategies. However, the change is likely to be welcome, despite probable immediate costs, as the long term benefit should see less need for time and resource allocation on compliance mechanisms to monitor against guidance services crossing the advice boundary. Some firms may no longer fall within the FCA’s regulatory scope, which also brings costs savings.
There are some risks – firms that currently need to be authorised may be able to provide guidance services without such authorisation. However, the Treasury believes that existing regulatory restrictions offer necessary levels of protection:
- rules limiting the inducements that a regulated firm could make to a stand-alone guidance service;
- restrictions on how far unregulated firms can directly signpost investors on where to purchase a product without being captured by regulation (e.g. requiring authorisation for carrying on the regulated activity of arranging deals in investments (RAO article 25)); and
- restrictions in the financial promotions regime (e.g. an unauthorised firm must not promote engagement in investment activity unless either the content of the communication is approved by an authorised person or it is otherwise exempt under the Financial Promotions Order (SI 2005/1529)).
The change is likely to be welcomed by the industry and should not present many concerns as it is closely aligned to existing definitions set out in the MiFID framework.
Should you wish to make comments, the consultation is open until 15 November 2016. State clearly to HM Treasury if you want the information that you provide to be treated as confidential.
Revised text for article 53 of the Regulated Activities Order – Advising on investments
53 Advising on investments
(1) Advising a person is a specified kind of activity if the advice is a personal recommendation.
(1A) A personal recommendation is —
(a) a recommendation made to a person in that person’s capacity as an investor or potential investor, or in that person’s capacity as agent for an investor or a potential investor;
(b) a recommendation that that person does any of the following (whether as principal or agent) —
(i) buying, selling, subscribing for or underwriting a particular investment which is a security or a relevant investment, or
(ii) exercising any right conferred by such an investment to buy, sell, subscribe for or underwrite such an investment; and
(c) a recommendation that is —
(i) presented as suitable for the person to whom it is made, or
(ii) based on a consideration of the circumstances of that person.
(1B) A recommendation is not a personal recommendation if it is issued exclusively —
(a) through distribution channels; or
(b) to the public.
(4) In this article –
“distribution channels” means channels by which information is, or is likely to become, publicly available;
“information is likely to become publicly available” means information to which a large number of people have access;
(see also full text for paragraphs 2, 3 and 5)
MiFID Directive 2004/39/EC article 4.1(4) defines ‘investment advice’ as meaning the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments. This tracks into the recast MiFID II framework (Directive 2014/65/EU).
Article 52 of the MiFID Implementing Directive (2006/73/EC) clarifies the article 4 definition, so that a ‘personal recommendation’ is defined as a recommendation that is made to a person in his capacity as an investor or potential investor, or in his capacity as an agent for an investor or potential investor. That recommendation must be presented as suitable for that person, or must be based on a consideration of the circumstances of that person, and must constitute a recommendation to take one of the following sets of steps: (a) to buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument; (b) to exercise or not to exercise any right conferred by a particular financial instrument to buy, sell, subscribe for, exchange, or redeem a financial instrument. A recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public.