In August 2017, the FCA published consultation paper CP17/28 (the “Consultation Paper”) which sets out several proposals designed to support the retail investment advice sector. These included amendments to the FCA’s Perimeter Guidance Manual (“PERG”) on what amounts to a personal recommendation in order to meet the Financial Advice Market Review (“FAMR”) recommendation to produce new guidance. PERG provides guidance on the circumstances in which firms are likely to be conducting regulated activities.
On 23 February 2018, the FCA published a policy statement (PS18/3) that summarised the feedback they received and indicated where they have made changes alongside Final Handbook Guidance and a consumer guide.
FAMR identified that firms were concerned about providing information and support to help consumers make their own investment decisions in case they inadvertently made a personal recommendation and therefore triggered several regulatory responses and requirements, in particular the suitability rules. Therefore, FAMR recommended that the FCA clarify the position with new guidance to help firms that provide services that do not involve a personal recommendation.
The activity of advising on investments is set out in Article 53(1) of the Regulated Activities (the “RAO”) and includes two types of advice:
- advice which constitutes a personal recommendation; and
- any other regulated activity within Article 53(1) which does not amount to a personal recommendation.
On the 3 January 2018, the RAO was amended so that most authorised firms do not need permission to merely provide guidance.
The main aim of the updated PERG is to help firms understand the personal recommendation boundary. The new rules aim to give firms greater confidence that they can, for example, inform a customer that they have not increased their pension contributions over a long period of time, warn a customer about any adverse consequences of a transaction they propose to make, or offer products designed to meet a particular investment objective without necessarily making a personal recommendation.
WHO IS AFFECTED
- financial advisers;
- consumers and organisations representing consumers;
- providers of retail investment products (“RIPs”), particularly those with direct-to- consumer distribution channels;
- trade and professional bodies that represent financial advisers, product providers, and other firms involved in the distribution of RIPs;
- compliance consultants and other firms that assist stakeholders; and
- discretionary investment managers.
As set out in in the FCA’s guidance paper (FG 15/14) relating to financial promotions in social media, five tests were included to help establish whether a service could be considered as a personal recommendation:
- Does the service being offered constitute a recommendation? For example, firms need to consider the difference between information and recommendation, and whether helping a customer to filter data amounts to a recommendation;
- Is the recommendation in relation to one or more transactions in financial instruments? For example, firms would need to consider how to distinguish generic advice and general recommendations from MiFID investment advice;
- Is the recommendation presented as suitable or based on individual circumstances? For example, firms need to consider the impact of disclaimers and what might appear to be a suitable recommendation.
- Is the recommendation made to a person in their capacity as: a) an investor or potential investor, or b) an agent for an investor or potential investor? For example, firms would need to identify investors and their agents. Firms would also need to consider the distinction between corporate finance advice and investment advice; and
- Is the recommendation given other than through distributions channels or the public? For example, firms need to assess recommendations given online, where recommendations are offered to multiple customers at once, and the effect of sending out investment research.
As a result of the amendment to the RAO and the FAMR recommendations, the FCA has proposed changes to PERG in order to reflect the legislative changes and provide new guidance to support firms offering services to help consumers make their own investment choices without a personal recommendation. Most of the changes are reflected in a newly drafted PERG 8.30B and in a new Annex 1 to PERG 8.37.
As context is imperative to determining whether the tests above are met, the FCA has therefore included examples based on areas of uncertainty highlighted by firms in determining whether the tests are met or not. This saw the FCA propose guidance that fell under the Principles of Business, the clients best interest rule, and the fair, clear and not misleading rule. The guidance in FG 15/14 will now be retired and relocated into PERG.
UPDATES TO PERG
The new definition of personal recommendation is based on the definition of the MiFID investment service or activity of making a personal recommendation and therefore, should be interpreted for the purpose of the regulated activity of advising on investments consistently with MiFID. However, not all the types of investments to which the recommendation relates (as listed in PERG 8.30B.2G(2)) are covered by MiFID.
The FCA confirmed that it will not alter its approach to become less conservative, particularly with regards to implicit recommendations. The regulatory perimeter is set by Parliament in legislation and the FCA cannot change this perimeter. Firms should ensure they present material ‘neutrally’ and take care not to express views on suitability, basing questions on fact not judgement.
Therefore, firms should be wary of potentially unknowingly expressing an implicit personal recommendation. Where the reasonable observer would view the advisor as presenting a recommendation as suitable for the customer, or based on a consideration of their circumstances, then this would be a personal recommendation (this is consistent with the definition of investment advice under MiFID). For example, where advisors comment ‘people like you tend to buy this product’ or ‘this is what I would do if I were you’ is a personal recommendation.
New illustrative examples
As mentioned, Annex 1 has been added to PERG 8, this details examples in table format of what is and is not a personal recommendation and advice. The FCA has set out illustrative and case-specific examples, stating that there is no clear line between what is and is not advice in all circumstances but hopes to help firms make informed judgements about whether they are providing a personal recommendation in a particular circumstance.
Some of the new FCA illustrative examples included show how firms can:
- present product options in a way that links them to general investment objectives and other factors. For example, where a firm wishes to make pension accumulation customers aware of the investment options available to them;
- support execution-only clients who might not have considered all the relevant options. For example, where a customer asks to set a up an annuity which will only provide a very small income;
- make personalised communications to customers regarding product options. For example, where a firm wishes to write to customers to make them aware of product changes;
- help customers determine pension contribution rates. For example, where a firm provides a customer with tools to allow them to calculate the required contribution rates to deliver the desired level of retirement income; and
- communicate with the ‘public’. For example, advice on the internet such as on a generally accessible website, should not amount to a personal recommendation. However, emails sent to a specific addressee list may amount to a personal recommendation.
The FCA confirmed that firms can make communications regarding certain products to relevant segments of a firm’s customer base without making a personal recommendation as PERG 8.30B.18 indicates that sending communications to a segment of customers based on certain characteristics may not amount to a personal recommendation. For example, a sample of customers based on certain factors like age or who hold no similar products, will not automatically mean the firm is providing a personal recommendation. PERG 8.30B.16G to 20 sets out factors that firms may consider when sending out a communication to multiple customers.
In addition, the FCA also confirmed that the same principles apply to all advice, regardless of whether it is presented over the phone, online or in person. They warned that delivering advice on a one-to-one-format could be more likely to lead a customer to believe that they were receiving a personal recommendation because of the personal nature of the interaction as opposed to a more controlled online delivery.
The FCA has also published a consumer guide on understanding the difference between advice and guidance on investments. The guide is designed to help consumers seek support when making decisions about some investment, pension and insurance products. The FCA proposes to conduct a review of the impact of the FAMR recommendations in 2019 and to publish its findings in 2020.
Firms that provide services that support customers without giving a personal recommendation (or firms that might wish to provide such services) should consider the new PERG material. Firms that provide advice and/or guidance services might wish to consider making the consumer guide available to its clients.
For more information on personal recommendations or advice on regulated activity, Cleveland & Co external in-house counsel, your specialist outsourced legal team are here to help.