The Treasury's consultation on amending the definition of financial advice is an important opportunity for advisers to make their voice heard, says Mark Greenwood
As outlined in the Financial Advice Market Review (FAMR) earlier this year, the Treasury is now consulting on revising the definition of regulated financial advice, with a view to bringing it into line with the EU definition set out in the Markets in Financial Instruments Directive (MiFID).
As you may remember, the driver for this change was the Treasury's belief that consumers face many complex financial decisions throughout their lives and that they would often want to seek, and would benefit from seeking, advice.
The Treasury recognised that many consumers need guidance in making financial decisions - whether that meant limited advice on a particular need, such as how to invest their spare income, or holistic advice on an ongoing basis.
For consumers with relatively straightforward financial needs or small amounts to invest, the cost of regulated advice may outweigh the benefits. Similarly, for some advice firms, it may not be profitable to provide those consumers with regulated advice. FAMR also found there was a growing trend towards consumers making and executing their own financial decisions - particularly online.
So what difference will this make? The main part of the MiFID definition concerns the giving of a personal recommendation, whereas the current definition, as contained in the Regulated Activities Order (RAO), is broader and less specific.
The reason for adopting the MiFID definition is to ensure it is "clearer for firms and customers and also much easier for firms to build into their compliance processes". Consumers would only receive ‘regulated advice' when they are offered a personal recommendation for a specific product. A full definition of each can be found below.
The Treasury does not believe this amendment to the definition of regulated advice will pose a significant increase in risk to consumers, from either regulated or unregulated firms promoting regulated products. Nor does it believe this change will significantly increase the risk of fraud, as there will be a corresponding increase in access to guidance from regulated firms, thereby reducing consumers' susceptibility to scams by unregulated entities.
As is always the case however, it is not always that straightforward and there are both pros and cons for keeping the status quo, or bringing the definition in line with MiFID.
Definitions of advice
The regulated activity of ‘advising on investments' under Article 53 of the RAO is wider in scope than ‘investment advice' under MiFID. This is because MiFID requires advice to be of a personal nature, whereas the RAO does not.
For advice to be regulated under Article 53 of the RAO, it must:
* relate to a relevant investment, which includes contracts of insurance;
* 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);
For its part, MiFID investment advice involves the provision of personal recommendations to a customer, either upon the customer's request or on the firm's initiative. It comprises 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 personal investor);
* the recommendation must be presented as suitable for the person to whom it is made or based on the investor's circumstances; and
* the recommendation must relate to taking certain steps in respect of a particular investment which is a MiFID financial instrument, namely to buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument (or exercise a right to buy, sell, subscribe for, exchange, or redeem a financial instrument).
The important point is this consultation is your chance to make your voice heard. Responses must be submitted before the week beginning 21 November to: Assets, Savings and Consumers, HM Treasury, 1 Horse Guards Road, London SW1A 2HQ. Or email: [email protected]
Mark Greenwood is group regulatory policy manager at SimplyBiz Group
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