Under MiFID, "investment advice" is the provision by an investment firm of a "personal recommendation" to a client, either at the client's request or at the firm's initiative, in respect of one or more transactions relating to financial instruments.
Under MiFID II, the definition of "investment advice" itself is not changing. However, the concept of "personal recommendations" is being widened.
MiFID II also draws a new, crucial distinction between the provision of investment advice on an independent basis, and the provision of investment advice on a non-independent basis. Additional client-facing and internal obligations will be imposed on firms who provide investment advice on an independent basis from 3 January 2018, and those firms should be putting processes in place now to ensure that they are well-prepared for the new rules.
Under MiFID II, firms will be required to tell clients if investment advice is being provided on an independent or non-independent basis.
Firms that provide investment advice on an independent basis will be required to assess a sufficient range of financial instruments available on the market, and will generally not be allowed to accept inducements from third parties in relation to the provision of the service. Those firms will also be required to put specific internal processes in place.
Extra requirements are also being imposed on firms that provide investment advice on both an independent and non-independent basis.
PERSONAL RECOMMENDATIONS: WHAT'S CHANGING?
Position under MiFID
Under MiFID, a recommendation made to a person in his capacity as an investor or potential investor (or to his agent), is not treated as a personal recommendation if it is issued to the public, or exclusively through distribution channels (i.e. channels through which information is, or is likely to become, publicly available).
Reasons for change
Concerns arose that recommendations using distribution channels (such as social media platforms, and email distribution lists used for the dissemination of newsletters/brochures) that reached a large number of investors/ potential investors were not deemed to be "personal recommendations" (and were therefore not subject to MiFID rules on investment advice). This was viewed as less than ideal from an investor protection perspective.
Position under MiFID II
In light of the above, the exemption for recommendations via distribution channels is being removed, meaning that a recommendation will only be treated as outside the scope of MiFID II's rules on investment advice if it is made exclusively to the public at large.
Unless it is made exclusively to the public at large, a recommendation by a firm will be in-scope for the MiFID II rules on investment advice if it is either presented as suitable for the client, or based on a consideration of the client's circumstances, and recommends that one of the following steps be taken:
the purchase, sale, subscription, exchange, redemption, holding or underwriting of a particular financial instrument; or
the exercise or non-exercise of any right conferred by a particular financial instrument to purchase, sell, subscribe for, exchange, or redeem a financial instrument.
ESMA has published, and is maintaining, Questions and Answers on MiFID II and investor protection topics - it is possible that further guidance on personal recommendations and investment advice will be included in that document from time to time and that the practical impact of the change will become clearer.
WHAT IS "INDEPENDENT" INVESTMENT ADVICE?
To provide investment advice on an "independent" basis:
- Range: the firm must consider:
- a sufficiently wide range of financial instruments available on the market; and
- a sufficiently diverse range of financial instruments (i.e. diverse types, diverse issuers/product providers),
- to ensure that the client's investment objectives can be met in a suitable way;
- Providers: the financial instruments considered by the firm should not be limited to those provided by:
- the firm itself; or
- other entities that have close links with the firm, or other entities with close legal or economic relationships with the firm, in a way that could impair the independent nature of the advice;
- No inducements: the firm cannot receive and keep benefits from third parties in relation to the provision of the service to the client (save where the benefits are minor non-monetary benefits, and where the receipt of those benefits will not impair the firm's ability to act in the best interests of the client).
GIVING INFORMATION TO CLIENTS ABOUT ADVICE
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WHAT INTERNAL PROCESSES MUST FIRMS PUT IN PLACE WHEN PROVIDING INVESTMENT ADVICE ON AN INDEPENDENT BASIS?
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The new investment advice rules in MiFID II will force firms to consider whether they wish to provide advice on an independent basis, a nonindependent basis, or both. Firms that choose to provide advice on an independent basis will need to ensure that they can meet the conduct of business rules and, in particular, that their business models allow them to comply with the new inducements restriction.