An area of continuing difficulty for firms is the question of the point at which providing “guidance”, which bears no regulatory connotations, becomes the provision of “advice”, in the sense of being advice regulated under the Regulated Activities Order (as opposed to the Markets in Financial Instruments Directive (MiFID) definition of advice as a personal recommendation). This distinction has real practical implications, as there are specific requirements which information must meet if provided as part of an advice service. HM Treasury has decided to take steps to help remedy this problem, by taking steps to amend the definition of regulated advice from 3 January 2018, to coincide with the coming into force of MiFID II.
Eversheds Sutherlands regularly advises clients on the scope of regulated advice and the consequences of performing such advice, and has contributed to HM Treasury’s consultation process on the new rules, available here. We set out below an overview of the proposed new regime as well as our thoughts on its operation.
As pointed out in HM Treasury’s “Amending the definition of financial advice: Consultation Response”, the unintended consequences of this have been:
- firms spending resources to avoid crossing the boundary from guidance to advice when offering help to consumers;
- firms deliberately limiting their guidance services to remain well short of the regulated advice boundary; and
- a significant number of consumers not getting the help they wanted or needed to make financial decisions.
To alleviate these issues, HM Treasury is proposing to narrow the scope of the application of regulated advice, as a result of feedback that this would make it easier to build appropriate compliance processes for regulated advice, and also make firms more confident in providing information to support customer decision making, such as the merits and risks associated with particular investments.
However, concerns were raised regarding narrowing the scope of regulated advice, in particular the potential risk that fraudsters might deliver ‘advice’, stopping short of a personal recommendation, intended to persuade individuals to purchase risky investment products. To enable the Financial Conduct Authority (FCA) to take action in these circumstances, HM Treasury has proposed that the scope of regulated advice for unregulated entities.
The new rules
To implement the policy decisions outlined above, HM Treasury is proposing to alter the definition of regulated advice only for regulated firms (with or without permission for advising and/or agreeing to advise on investments) and another permission. These forms can provide advice on financial products and services without the advising permission(s), as long as they are not providing personal recommendations. The aim is for these firms to be able to provide more advanced guidance services, that would previously have been regulated advice, without being subject to the higher regulatory requirements associated with regulated advice.
The position for unregulated entities, as well as other regulated firms (i.e. those with permission for advising and/or agreeing to advise on investments but without another permission) remains unchanged, and so the existing rules will still apply.
There is a clear logic to the HM Treasury’s position, and many regulated firms will benefit from the reduced scope of this regulated activity, particularly in terms of being able to provide more guidance for their products without having to worry about straying into a regulated activity. The greatest uncertainty for these firms is determining the point at which their activities constitute a “personal recommendation”.
The definition of personal recommendation is to be based on the text of MiFID, which defines a personal recommendation as one that is made to a person in his capacity as (potential) investor, agent thereof, which is:
- presented as suitable for that person, or based on a consideration of the circumstances of that person;
- constitutes a recommendation to: (a) buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument; (b) exercise or not to exercise any right conferred by a particular financial instrument to buy, sell, subscribe for, exchange, or redeem a financial instrument; and
- is not issued exclusively through distribution channels or to the public.
This definition is still slightly grey (consider, for example, whether a personal recommendation includes a flowchart on a webpage which suggests certain investments depending on the customer’s answers to questions). However it is clearer than the current definition, for example in terms of clarifying that a simple list of the merits of an investment is no longer treated as regulated advice. In addition, the FCA has proposed further guidance to clarify how the new definition will work in practice.
On the other hand, the new position introduces further complexity for many in terms of the remit of regulated advice. In particular, unregulated firms are, in some ways, the most vulnerable to accidentally providing regulated advice, as they are unlikely to be familiar with the regulatory regime. Firms which have permission solely for advising and/or agreeing to advise on investments may also feel disadvantaged, in that they have an additional compliance cost when providing their services compared to other authorised firms.