Overview and summary
The UK’s current definition of the regulated activity of advising (in Article 53 (1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”)) is broader than that in the Markets in Financial Instruments Directive (“MiFID”). Similarly it is broader than the definitions of the regulated activity of advising in the recast Markets in Financial Instruments Directive ("MiFID II”) and the Insurance Distribution Directive (“IDD") (which are to be implemented next year). The directive definitions are based on there being a ‘personal recommendation’ which is not a pre-requisite under Article 53(1).
The FCA’s Financial Advice Market Review (“FAMR”) concluded that the MiFID definition was clearer for firms and consumers and easier for firms to incorporate in compliance processes. In September 2016, HM Treasury (“HMT”) launched a consultation on the merits of amending the UK definition of “advising on investments” to bring it in line with the narrower MiFID definition of investment advice. On 27 February 2017, HMT published its response. Due to concerns about unregulated firms escaping regulation by providing “guidance” on risky products, the Government decided to change the definition of financial advice for regulated firms only.
The changes were introduced by statutory instrument - SI 2017 No. 500. These will take effect from 3 January 2018. Further guidance and amendments to aspects of the Handbook by the Financial Conduct Authority (FCA) is expected between now and the changes entering into effect. The effect of the SI amendments is that Article 53(1) advice (which applies to insurance products as well as MiFID financial instruments) as it applies to
- Regulated firms with permission to conduct activities other than Article 53(1) advice (or agreeing to do so) - will only fall within Article 53(1) advice if they provide a personal recommendation; but
- Other firms and individuals will continue to be subject to the current broader definition of advice in Article 53(1) and will not be able to provide investment advice even where this does not involve a personal recommendation.
The new definition of financial advice
The current definition of “advising on investments” under Article 53 (1) of the RAO is that the advice must
- be given to a person in their capacity as an investor or potential investor (or in their capacity as agent for an investor or potential investor); and
- relate to the merits of them buying, selling, subscribing for or underwriting the investment (or exercising rights to buy, sell, subscribe for or underwrite such an investment).
There is no requirement for there to be a personal recommendation involved.
SI 2017 No 500 uses the MiFID investment advice definition which involves the provision of a personal recommendation[3] and includes three main elements:
- there must be a recommendation that is made to a person in their capacity as an investor or potential investor (or in their capacity as an agent for an investor or potential investor);
- the recommendation must be presented[4] as suitable for the person to whom it is made or based on a consideration of that person’s circumstances; and
- which constitutes a recommendation to them to do any of the following (whether as principal or agent) - to buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular investment (or exercise or not exercise any right conferred by such an investment to buy, sell, subscribe for, exchange or redeem such an investment)[5].
The definition of advice under IDD is more straightforward but has the same requirement for a personal recommendation to be involved. The UK consultation and response made no mention of IDD but the changes under SI 2017 No. 500 do apply to advice in relation to insurance and are presumably regarded as being compliant with IDD (as well as MiFID II).
Impact on firms
The effect of SI 2017 No. 500 is that the new narrow definition of advice will only impact certain authorised firms (category A) who will cease to be regarded as giving regulated financial advice where no personal recommendation (as above) is involved. Category A are authorised firms or individuals with permission to conduct a regulated activity other than Art 53 (1) advice (or Article 64 permission for agreeing to give such advice).
For Category A firms, the changes “will remove the regulatory barriers currently constraining the content of firms’ guidance services, by ensuring regulated firms do not need to concern themselves with the grey area between providing factual information on particular investments and giving more tailored guidance on the risks associated with that particular investment[6]”. Unless guidance contains a personal recommendation it will not be regulated financial advice. This means that Category A regulated firms will be able to provide unregulated guidance that would previously have been within the regulatory perimeter, without being subject to the stricter regulatory requirements associated with regulated advice. This change will reduce the risks of regulated firms carrying on a regulated activity without the proper authorisation and enable them to provide customers with more accurate information in their financial decision making.
There will be no change, however, for other firms and individuals which do not fall in Category A (Category B). The current broader definition of advice will continue to apply to Category B firms and these firms may be regarded as giving regulated advice even though no personal recommendation is involved. The UK will therefore be super-equivalent under both MiFID II and IDD.
The FCA summarised HMT's new investment advice requirements and the impact on firms regarding the changes to the regulatory perimeter -
Regulated firms:
- with ‘advising on investments’ and/or ‘agreeing to advise on investments[7]’ permission(s) and another permission (in Category A above). These firms can provide advice without the advising permission(s); however, they will need to keep the advising permissions if they provide personal recommendations.
- without the ‘advising on investments’ or ‘agreeing to advise on investments’ permission(s) but with another permission (also in Category A above). These firms can provide advice without the advising permission(s); however, they will need to obtain the advising permission if they intend to provide personal recommendations.
- with ‘advising on investments’ and/or ‘agreeing to advise on investments’ permission but without another permission (in Category B above). There is no change for these firms – the scope of regulated advice for which permission is required remains the same.
Unregulated firms and individuals:
- There is no change; these firms and individuals (in category B above) will not be able to provide any form of regulated advice.
Next steps
The changes under SI 2017 No 500 will come into effect on 3rd January 2018. The FCA states that firms do not need to take any action now and they will not have to re-apply for existing permissions for advising on investments. The FCA is to consult later this year on the related changes to the Handbook and Regulatory Guides including on guidance on regulated advice and personal recommendations (see current guidance in FG15.1: Retail Investment Advice: Clarifying the boundaries and exploring the barriers to market development).
The FCA changes are also expected to come into force on 3rd January 2018.
[1] The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2017
[2] EIOPA published the final version of its technical advice (EIOPA-17/048) to the Commission on possible delegated acts under IDD on 1 February 2017 along with a final report (regarding its July 2016 consultation). EIOPA published final draft ITS (EIOPA-17/056) regarding the standardised presentation format for the IPID, and an IPID template, along with its final report (EIOPA-BoS-17/055) (regarding its August 2016 consultation), on 7 February 2017. EIOPA’s 2017 work programme, it stated “EIOPA stands ready to develop Level 3 guidance as a follow-up to ensure a Union-wide consistent approach to the detailed implementation and application of such POG arrangements.”
[3] SI 2017 No. 500 states that a recommendation that issued exclusively to the public is not a personal recommendation.
[4] HMT’s consultation response document states that under MiFID a product can be recommended to a customer either explicitly or implicitly. In both cases the firm will be providing MiFID investment advice (where the other tests for MiFID investment advice are met).
[5] HMT’s consultation response document states that “MiFID is clear that recommendations to hold a product (to do nothing) will count as investment advice. Additionally, whether a recommendation to purchase a specific product is advice does not depend on the purchase actually being made.”
[6] HMT consultation response document, page 6.
[7] The FCA states that ‘agreeing to advise on investments’ means “the regulated activity of agreeing to carry on specified kinds of activity (in Article 64 of the Regulated Activities Order) where that specified activity is advising on investments.”
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