UK consults on adopting MiFID 'personal recommendation' in definition of financial advice

Out-Law News | 22 Sep 2016 | 4:58 pm | 2 min. read

Bringing the UK's definition of advice on investments into line with that set out in the Markets in Financial Instruments Directive (MiFID) will "open the door" to firms seeking to develop automated advice models, an expert has said.

The UK Treasury is consulting until 15 November on a new definition based on a firm giving a customer a personal recommendation, as set out in the EU's MiFID and as recommended by the recent Financial Advice Market Review (FAMR). Financial services expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said that the proposal would go some way towards "bringing the legislation into line with the reality created by developments in technology in recent years".

"If the MiFID definition is adopted, it could provide a genuine distinction between more traditional advice and full automated advice models on the one hand, and the higher level objective guidance that online providers have increasingly been developing on the other," he said. "This would open the door to the follow-up FAMR proposals on streamlined advice, rules of thumb and nudges being much more effective."

"The additional clarity could be to the benefit of both advisers and providers and could lead to an increase in the help made available to retail customers, whatever amounts they might have to save," he said.

The Financial Services and Markets Act 2000 Regulated Activities Order (RAO), which sets out activities that are regulated, includes the regulated activity of "advising on investments". The consultation proposes amending the wording used in the relevant part of the RAO to reflect the MiFID definition, to the effect that consumers would only be receiving regulated advice on investments if they are getting a personal recommendation. 

FAMR was a joint review by the UK Treasury and the Financial Conduct Authority (FCA). It identified the 'advice gap' for consumers with lower budgets and less complex financial needs who may be put off from seeking financial advice. Published in March 2016, the review made 28 recommendations designed to improve the accessibility and affordability of financial advice and guidance.

The review heard that some firms were reluctant to offer guidance services to consumers for fear that they would stray into providing regulated advice and could then be potentially liable for doing so without having met all the regulatory requirements.  . Firms could support consumers better in making their own investment decisions if there was a clearer boundary between actions comprising regulated advice and those constituting guidance, which could be achieved by changing the definition of "advising on investments". 

"For example, under the new definition firms are likely to have confidence to contact customers to let them know that they have not used their ISA allowance in a given tax year; provide information on the risk profile of the funds available within their stocks and shares ISA; or highlight that a customer had never increased their pension payments, despite receiving a pay increase," the Treasury said in its consultation. "All of which firms are currently reluctant to do."

The FCA will produce new guidance for firms setting out the regulatory responsibilities that apply to the design and delivery of new guidance services, according to the consultation. This guidance will "set out the FCA's view on what providers of guidance services need to do in order to treat customers fairly", and include illustrative case studies, according to the consultation.

The Treasury is seeking views from consultation respondents about the potential risks to consumers from changing the definition of advising on investments in the RAO, as well as how these risks should be mitigated. However, its position is that it is unlikely that the proposed changes will heighten the risk that consumers already face  of fraudsters providing "unregulated general recommendations encouraging consumers to invest in risky unregulated products", according to the consultation.