On 20 September 2016, HM Treasury released their consultation to amend the definition of financial advice (the “Consultation”). This Consultation is the product of the Financial Advice Market Review (the “Review”) which was launched by HM Treasury and the FCA in March 2016. As a brief reminder, the purpose of the Review is to improve the accessibility of financial advice and guidance to consumers in order for them to be able to make effective decisions about their finances. Clearly, the stepping stone for this begins with understanding how financial advice is defined in the first place, therefore, in their 2016 Budget, the government announced they were committed to implementing the recommendations provided for by the Review. This Consultation sets out the importance of such an amendment, how it can be achieved and the impact it will have on consumers and firms.
Why?
The definition
Currently, the term “regulated advice” is generally defined in Article 53 of the Financial Services and Markets Act (Regulated Activities) Order 2001 (the “RAO”) as ‘advising on investments’. However, more recently through MiFID, a much broader EU definition was introduced that is based upon a firm providing the consumer with a personal recommendation.
Upon comparing the two, the Review stated that the definition found in MiFID is clearer for firms and consumers and subsequently, it would be much easier for firms to reflect this definition in their compliance procedures. As a result, the Review advised that the UK definition provided for in the RAO should be amended to illustrate that advice provided to consumers will only be considered regulated advice, if a personal recommendation, for a specific product, is offered.
The firm
For many firms, it could be viewed as less profitable to provide consumers with regulated advice if they only initially have small amounts to invest. As an alternative, firms could provide more general forms of consumer support, but the Review highlighted that the industry is unclear at what point such support becomes regulated advice. An unfortunate result of this is that firms limit the amount of guidance they provide consumers to avoid falling into the realms of regulated advice, especially where they are not in the position to meet the higher regulatory requirements.
The consumer
Consumers have varying needs; some require help with complex financial choices whilst others may have more straightforward financial needs and only small amounts to invest, and therefore the cost of regulated advice could outweigh the benefits. However, if a consumer is provided with limited guidance because the firm is wary of what may constitute regulated advice, this could increase the risk of the consumer making ill advised and possibly poor investment decisions.
Intended result
The intention is to provide certainty to firms and consumers by bringing the definition of advice, as set out in the RAO, in line with MiFID and create a single definition for regulated advice and also remove some of the regulatory barriers restricting the content of current guidance services. The benefit to consumers, is an improvement in access to financial advice and for firms, this would lead to savings from less rigorous compliance monitoring as the distinction between the two activities is clearer, so less time and resources will need to be allocated to constantly ensuring compliance.
Furthermore, in response to some of the suggestions made since the Review was published, the FCA agreed that they will provide new guidance to support firms who would like to offer services to consumers to make their own investment decisions without the personal recommendation element.
The government is welcoming any responses to the questions raised up until the Consultation closes on 15 November 2016. The full Consultation is available here: https://www.gov.uk/government/consultations/amending-the-definition-of-financial-advice-consultation/amending-the-definition-of-financial-advice-consultation.
If you need any guidance or advice on whether your firm is carrying out regulated advice, Cleveland & Co, your external in-house counsel, are here to help.
