The government has passed legislation modifying the definition of ‘financial advice’ for (most) authorised firms as part of its ongoing initiative to increase the level of support given to consumers.
In August 2015, the Treasury launched the Financial Advice Market Review (FAMR) to identify barriers to financial advice for consumers. Following industry feedback, the Treasury, in collaboration with the FCA, identified the fact that confusion around the meaning of 'financial advice' was a potential obstacle to consumers receiving support from financial firms.
Many firms were unable to distinguish clearly between regulated 'financial advice' and unregulated 'financial guidance' and consequently were reluctant to offer any guidance to consumers. The result was that many consumers, particularly those of limited means, were making investment decisions without any expert guidance.
The problem was further discussed in a consultation launched by the Treasury and FCA earlier in the year, in which the government proposed changes to the definition of financial advice and sought to assess the merits and weaknesses of doing so. Following the outcome of this consultation, in March, the government has confirmed that the definition of financial advice will be changed and passed legislation to bring this into effect.
What is changing?
Put simply, there are currently two different definitions of what constitutes financial advice under the UK's Regulated Activities Order 2001 (the ‘RAO’) and the European Markets in Financial Instruments Directive (‘MIFID’). The definition of ‘financial advice' under MIFID is widely considered to be clearer because it stipulates that such advice will be personal to the client and their individual needs (and therefore not of a general nature), whereas the definition in the RAO is much wider and more subjective than this. The inconsistency between the two definitions has increased industry confusion in this area.
The government has therefore decided to change the definition under the RAO for authorised firms so that it corresponds with the MIFID definition.
Why is the government doing this?
The government has concluded that creating a clearer boundary between financial advice and financial guidance will help address industry reluctance at providing financial guidance for consumers for fear of straying into advice. In particular, this will create greater consistency and make it easier for authorised firms to provide more advanced guidance services without being subject to the higher regulatory requirements associated with regulated advice.
Who does this apply to?
Under the government’s proposed legislation, the modified definition under the RAO will only apply to authorised firms which means they will be exempt from the need to hold a permission to advise on investments unless they are providing a personal recommendation. The exception to this is authorised firms that only hold permissions for advising on investments or for agreeing to advise on investments (of which there are only a “handful”), for whom the current scope of the RAO definition would continue to apply.
The existing definition will also remain in place for all unauthorised firms. This follows risks raised in the consultation about fraudsters using the relaxed meaning of financial advice to hide from the regulators or unregulated firms attempting to deliver 'advice' which is not a personal recommendation but nevertheless is intended to persuade the consumer to purchase risky investment products.
Regulated firms are perceived by the government to be less of a concern due to their ongoing obligations to act in the client's best interests and to provide information that is clear, fair and not misleading. Consumers will also have access to the Financial Ombudsman Service and the Financial Services Compensation Scheme as well, if need be.
What does this mean for authorised firms?
The government anticipates that there will be some (minimal) cost involved in the short term as some authorised firms, who do not provide personal recommendations, look to change their business models to offer increased financial guidance to their customers. However, it is also hoped that this will result in a reduction in the cost to such firms of ensuring that financial advice is not inadvertently given by them to customers. These firms may also receive benefits from being able to provide improved services to a wider range of clients.
When do these changes take effect?
The government has announced that these changes are intended to take effect on 3rd January 2018, the same day that MIFID II is implemented. This is intended to cause reduced administrative burdens as they align their businesses to meet the requirements of the incoming directive. There is no need for firms to take any action now and the FCA has confirmed they will not need to re-apply for existing permissions for advising on investments. However, the FCA will be making some changes to its Handbook and will consult on these later in 2017.