Closed consultation

Amending the definition of financial advice: consultation

Published 20 September 2016

1. Introduction

In August 2015, the government launched the Financial Advice Market Review (FAMR) to explore how consumers could access help with their finances more easily. FAMR was a joint review between HM Treasury and the Financial Conduct Authority (FCA). It was co-chaired by Charles Roxburgh, Director General of Financial Services at HM Treasury and Tracey McDermott, Former Acting Chief Executive of the FCA.

FAMR examined the regulatory framework governing the provision of financial advice and guidance and its effectiveness in ensuring that consumers have access to the help they need in order to make effective decisions about their finances. Consumers seek financial advice for a range of different reasons, including for investments and insurance. FAMR sought evidence from consumers about the barriers they face in seeking advice, the value they place on it and how easy it is to find advice and understand it.

FAMR revealed that the advice gap is most acute for consumers who have limited amounts to invest, and those who require specific support at retirement. It concluded that there is a clear need for intervention by the regulator and the government to help consumers and industry benefit from more innovative and cost-effective ways of delivering high quality advice and guidance.

The review recommended a package of reforms to provide consumers with affordable and accessible financial advice, at all stages of their lives. These recommendations focused on three key areas: the supply of advice and the cost to firms; consumers’ demand for advice; and the issue of advisers being liable for bad advice given in the past. FAMR was published on 14 March (2016) and the government committed in Budget 2016 to implement all of the Review’s recommendations for which it is responsible.

One recommendation stated that the government should consult on amending the definition of regulated advice in Article 53 of the existing Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), to bring it in line with the EU definition set out in the Markets in Financial Instruments Directive (MiFID). This would mean that only advice which makes a personal recommendation would be regulated.

This consultation sets out the background on this issue and seeks views on the potential costs and benefits of this change and any potential risks.

2. The case for a change of definition

Consumers face complex financial choices and often seek help. Some consumers need guidance in making their own financial decisions. Others would benefit from limited advice1 on a particular need, such as how to invest their spare income. Others need full advice covering all of their financial needs. For consumers with relatively straightforward financial needs or relatively small amounts to invest the cost of regulated advice may outweigh the benefits. While for some firms, it may not be viewed as 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.

FAMR suggested that in these cases, individuals would benefit from high quality and more specialised and detailed guidance services. However, FAMR found that firms were reluctant to offer this potentially less expensive guidance to consumers.

A key reason for this reluctance was uncertainty about what constitutes regulated advice. Firms, consumer groups and employers all highlighted a lack of clarity about the point at which general forms of consumer support become regulated advice. Stakeholders highlighted two areas of ongoing uncertainty:

  • the boundary between providing helpful guidance and unintentionally straying into an implicit personal recommendation
  • managing the risks of the different regulatory requirements that apply depending on whether a firm is providing factual information on particular investments, or moving beyond that

As a result of this uncertainty, FAMR found that firms are limiting the amount of guidance they are giving consumers for fear of inadvertently straying into the provision of regulated advice without meeting the higher regulatory requirements. By stepping back from the regulated advice boundary, firms are providing less support to consumers and therefore increasing the risk that consumers make unadvised (and potentially poor) investment decisions.

There was a strong consensus during FAMR that a clearer boundary between regulated advice and guidance would allow firms to better help consumers. A range of respondents, including the FAMR Expert Advisory Panel2, suggested that the uncertainty around the boundary stems from an unclear definition of financial advice.

The main reason for this uncertainty is the fact that UK firms face two definitions of financial advice. As set out above, one is defined in MiFID, and another in the RAO. The latter pre-dates the MiFID definition and is wider in scope.

The below table sets out the different definitions of financial advice.

Box 1.A: What is the difference between “advising on investments” under the Regulated Activities Order and “investment advice” under MiFID?

The regulated activity of ‘advising on investments’ under Article 53 of the Regulated Activities Order (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)
  • 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)

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
  • 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 main part of the MiFID definition concerns the giving of a personal recommendation, whereas the definition in Article 53 of the RAO is broader and less specific. FAMR found that the MiFID definition is clearer for firms and customers and is also much easier for firms to build into their compliance processes.

FAMR recommended amending the definition of advice in the Regulated Activities Order (RAO) to bring it in line with MiFID to help remove uncertainty. Stakeholders suggested this change would provide firms with greater certainty by:

  • creating a single definition for regulated advice based upon the MiFID definition of a personal recommendation
  • removing some of the regulatory barriers constraining the content of current guidance services

By providing certainty, firms will be better able to understand the regulatory requirements. FAMR consultation responses from firms stated that they would be more confident in providing information to support customer decision-making, such as the merits and risks associated with particular 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. All of which firms are currently reluctant to do.

On the whole, FAMR found that these issues were more acute for investment advice. In particular, affordability issues are less pronounced for advice relating to general insurance and protection, where advisers are generally remunerated via commissions. However, the government considers the benefits of clarifying the regulatory perimeter would also apply to the provision of advice relating to insurance, which also relies on the same definition of advice under the RAO.

In response to the FAMR consultation a number of stakeholders suggested that new FCA guidance would be needed to set out the regulatory responsibilities governing how firms design and deliver guidance services. The FCA and HM Treasury agreed that firms needed clarity on the regulatory responsibilities underpinning the development and delivery of guidance services.

As a result, the FCA will produce new guidance to support firms offering services that help consumers to make their own investment decisions without a personal recommendation. This will include a series of illustrative case studies highlighting the main considerations firms need to take into account when developing such services and dealing with specific areas of uncertainty identified during the Review.

This guidance will set out the FCA’s view on what providers of guidance services need to do in order to treat customers fairly. This will complement the change to the definition of advice.

2.1 Policy objective

The objective of this regulatory change is to provide firms with clarity so they can be confident in developing guidance services which can be applicable to a range of consumer needs.

The government wants to ensure that people have access to financial advice and guidance at all stages of their lives in order to help them make informed financial decisions. The regulatory framework should not inhibit firms from delivering guidance services that can support consumers in this.

FAMR found that there are a variety of reasons why some consumers do not want financial advice. The main ones concerned cost, unwillingness to pay or customers preferring to make their own investment decisions. FAMR found that these consumers could benefit from good, potentially cheaper, financial guidance to help them make informed decisions. FAMR also found that the unclear regulatory parameters meant firms were only providing simple financial guidance to these individuals to remove the risk of straying into the regulated sphere.

3. Proposed approach

The government proposes to amend the wording in article 53 of the Regulated Activities Order to reflect the text set out in MiFID. A revised text of article 53 as it would be if the amendments, shown in bold, were made can be found in Annex A. This approach would amend the definition of advice for securities and relevant investments as defined by the RAO, including contracts of insurance.

The change will be made by way of an order made under the Financial Services and Markets Act 2000 (FSMA). It will require secondary legislation that is subject to negative resolution procedure in Parliament.

Question 1

Is the proposed wording a suitable and effective way to achieve the stated policy objective? Is there anything else needed in drafting terms in order to achieve the policy objective set out above?

4. Costs and benefits

FAMR was not tasked with analysing the potential costs and benefits of implementing the recommendations it put forward. The government will publish an impact assessment prior to laying the order to bring about the policy change. This assessment will be based on input from the regulators and market participants, alongside responses to this consultation.

Based on the FAMR consultation responses, the costs and benefits associated with the change are likely to fall onto two types of firm:

a) Firms who currently carry out activities covered by both definitions of financial advice

For these firms, the main costs are likely to arise from the need to change internal systems and process (for example, training, record keeping, documentation), as well as external communications. Initial discussions have indicated that this will be a small one-off cost to a firm.

The main benefits are likely to arise in two key areas. The first relates to savings from less rigorous compliance monitoring to avoid crossing the boundary from guidance to advice when offering help to consumers. The current uncertainty around the advice boundary means firms need to implement processes to ensure their guidance services do not cross the boundary into advice, often including a ‘second line of defence team’ to prevent a breach of current regulation. With a clearer distinction between the two activities, firms will be able to allocate less time and resource to their compliance mechanisms. The majority of savings are likely to come from staff time and external costs such as legal opinions.

The second benefit relates to opportunity cost. Due to the current uncertainty, firms are deliberately limiting their guidance services to remain well short of the regulated advice boundary. This creates an opportunity cost in terms of customers not served and revenue forgone. After the change, firms will be able to give more tailored information and guidance to better serve customers without incurring additional regulatory costs.

b) Firms looking to enter the market to provide guidance services

Smaller firms looking to enter the market will also benefit from reduced costs in setting up compliance systems and obtaining authorisations. Currently these firms need to apply for an ‘advising on investments permission’ but this may not be necessary when the definition of advice is clarified. The key savings for such firms would include:

  • non-payment of an authorisation application fee
  • time saved in preparing an application
  • compliance costs; annual regulatory fees
  • lower private indemnity insurance

We expect the majority of firms that will be affected by the change will fall within the first group described above. The change will enable firms to increase the supply of financial guidance and provide more support to customers at a relatively small cost. The main costs are likely to be adjusting systems and processes. Combined with the savings made by the second group discussed above, we believe that the change presents a net benefit to firms in general.

There will also be a positive impact on consumers. FAMR found that a significant number of consumers were not getting the help they wanted or needed to make financial decisions. As this proposal will allow firms to better support consumers in their financial decision-making, the government believes that the change will have a significant benefit to consumers. Currently, very few firms charge consumers to use their guidance services. With the ability to provide more advanced guidance, some firms may begin to charge for the use of such services.

Question 2

Do you agree that these are the main costs and benefits that firms and consumers will face?

Question 3

Can you provide further detail of the costs and benefits associated with the change, including quantifying them where possible?

5. Potential risks

FAMR highlighted that amending the definition of financial advice is not without risk. Moving the regulatory boundary will enable some firms to provide guidance services, for which they currently require authorisation, without being authorised. FAMR recommended that the government should consider the potential risks and mitigation strategies as part of this consultation.

Regulated firms

Under this proposal, regulated firms providing guidance services alongside a regulated advice service, or other MIFID activity, will continue to need to act in the client’s best interests and provide information that is clear, fair and not misleading. Their customers may also have access to the Financial Ombudsman Service and the Financial Services Compensation Scheme. This includes large regulated banks and insurance companies as well as Independent Financial Advisers. The risk of such firms misleading customers through their guidance services is therefore significantly limited.

Risks posed by unauthorised firms

FAMR did find some anecdotal evidence of risks to consumers related to firms that offer guidance services on a stand-alone basis. Under the new regime, such businesses would not require authorisation, and would therefore not be subject to the regulatory obligations referred to above. There is a small risk that unscrupulous firms may attempt to use guidance services to distribute products, without being subject to regulation.

Where a guidance activity is related to a regulated product, there are already regulatory restrictions in place to prevent consumer detriment in certain circumstances these will continue to apply and they include:

  • rules limiting the inducements (such as fees and other benefits) that a regulated firm (for example, a product provider) could make to a third party, including to an unregulated firm (such as a stand-alone guidance service)
  • restrictions on how far unregulated firms can directly signpost investors on where to purchase a product without being captured by regulation as they would be arranging deals in investments 3
  • requirements in the financial promotions regime that an unauthorised firm must not promote engagement in investment activity unless either the content of the communication is approved by an authorised person or it is otherwise exempt under the Financial Promotions Order

Together the government thinks that these restrictions limit the potential commercial benefit to unregulated firms providing guidance on regulated products. The restrictions also give the FCA powers to take action against unscrupulous firms attempting to use guidance services to distribute products. Given this, the government expects that this proposal will have a low impact on the risk of firms operating in this way and does not believe that further safeguards are required.

Question 4

Do you agree that the regulatory requirements set out above are enough to limit the commercial benefit of unregulated firms providing guidance on regulated products?

Risks posed by fraud

Where a guidance activity is related to an unregulated product there are currently no regulatory restrictions in place, and that will remain the case under this proposal. This includes the risk of fraudsters providing unregulated general recommendations encouraging consumers to invest in risky unregulated products.Fraudsters can be prosecuted through the courts for running an illegal investment scheme, or for conspiracy to defraud.

The government considers it unlikely that the proposed change in definition will heighten this risk which is already posed by such activity. Businesses that have dishonest intentions and operate fraudulently are already knowingly in contravention of the law (for example the law regarding misrepresentation, negligence and breach of contract), and a change to the regulatory boundary is unlikely to influence their behaviour. Furthermore, the government believes that increasing consumers’ access to guidance from regulated firms will reduce consumers’ susceptibility to unregulated firms. This is because consumers will be able to access guidance from a recognisable brand easily.

Question 5

Do you agree with the government’s view on the risk of unregulated firms offering guidance on unregulated products?

Question 6

Are there additional risks that are not covered above?

Question 7

Should the government take further steps to mitigate potential risks?

People with protected characteristics

This consultation will consider whether the proposed policy would have any negative impacts in relation to advice for consumers in vulnerable circumstances.

We will consider if there are any groups of people with protected characteristics under the Equality Act 2010 that might be impacted as a result of the proposed policy. The protected characteristics relate to age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex, and sexual orientation.

Question 8

Are people with protected characteristics under the Equalities Act 2010, or any consumers in vulnerable circumstances, impacted by the policy proposed?

Additional Information

Question 9

Is there anything else that we should consider in the context of this change to deliver affordable and accessible advice to consumers?

6. How to respond and next steps

How to respond

The government welcomes responses to the questions raised in this consultation. Respondents are encouraged in their responses to add any additional information they feel is relevant to this consultation.

The consultation begins with the publication of this document and will last for a period of 8 weeks. This will inform the government’s decision on how to proceed with amending the definition of financial advice before making the necessary legislative changes. The government cannot guarantee that responses received after this closing date will be considered.

Responses should be made to the following address:

Assets, Savings and Consumers
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

Or email: dfa@hmtreasury.gsi.gov.uk

This document can be found on HM Treasury’s website. When responding please state whether you are responding as an individual or as part of an organisation. If responding on behalf of a larger organisation, please make it clear whom the organisation represents and, where applicable, how the members’ views were assembled.

Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, among other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.

Freedom of Information

Any Freedom of Information Act queries should be directed to:

Correspondence and Enquiry Unit
Freedom of Information Section
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

Tel: 020 7270 4558

Email: public.enquiries@hmtreasury.gsi.gov.uk

Next steps

As part of the consultation process, the government intends to hold targeted roundtables for representatives of affected parties. Following the consultation period, the government will provide a summary of responses along with a government response. This will then be followed by publication of an impact assessment and the laying of the necessary legislation.

7. List of questions

Question 1

Is the proposed wording a suitable and effective way to achieve the stated policy objective? Is there anything else needed in drafting terms in order to achieve the policy objective set out above?

Question 2

Do you agree that these are the main costs and benefits that firms and consumers will face?

Question 3

Can you provide further detail of the costs and benefits associated with the change, including quantifying them where possible?

Question 4

Do you agree that the regulatory requirements set out above are enough to limit the commercial benefit of unregulated firms providing guidance on regulated products?

Question 5

Do you agree with the government’s view on the risk of unregulated firms offering guidance on unregulated products?

Question 6

Are there additional risks that are not covered above?

Question 7

Should the government take further steps to mitigate potential risks?

Question 8

Are people with protected characteristics under the Equalities Act 2010, or any consumers in vulnerable circumstances, impacted by the policy proposed?

Question 9

Is there anything else that we should consider in the context of this change to deliver affordable and accessible advice to consumers?

8. Annex A: Revised text for article 53 of the Regulated Activities Order

53 Advising on investments

(1) Advising a person is a specified kind of activity if the advice is a personal recommendation.

  • (1A) A personal recommendation is —

(a) a recommendation made to a person in that person’s capacity as an investor or potential investor, or in that person’s capacity as agent for an investor or a potential investor;

(b) a recommendation that that person does any of the following (whether as principal or agent) —

  • (i) buying, selling, subscribing for or underwriting a particular investment which is a security or a relevant investment, or
  • (ii) exercising any right conferred by such an investment to buy, sell, subscribe for or underwrite such an investment; and

(c) a recommendation that is —

  • (i) presented as suitable for the person to whom it is made, or
  • (ii) based on a consideration of the circumstances of that person.

(1B) A recommendation is not a personal recommendation if it is issued exclusively —

  • (a) through distribution channels; or
  • (b) to the public.

(2) Advising a person is a specified kind of activity if the advice is —

(a) given to the person in that person’s capacity as a lender or potential lender under a relevant article 36H agreement, or in that person’s capacity as an agent for a lender or potential lender under such an agreement; and

(b) advice on the merits of that person doing any of the following (whether as principal or agent) —

  • (i) entering into a relevant article 36H agreement as a lender or assuming the rights of a lender under such an agreement by assignment or operation of law,
  • (ii) providing instructions to an operator with a view to entering into a relevant article 36H agreement as a lender or assuming the rights of a lender under such an agreement by assignment or operation of law, where the instructions involve —

*(aa) accepting particular parameters for the terms of the agreement presented by an operator, *(bb) choosing between options governing the parameters of the terms of the agreement presented by an operator, or *(cc) specifying the parameters of the terms of the agreement by other means, *(iii) enforcing or exercising the lender’s rights under a relevant article 36H agreement, or *(iv) assigning rights under a relevant article 36H agreement.

(3) Paragraph (2) does not apply in so far as —

(a) the advice is given in relation to a relevant article 36H agreement which has been facilitated by the person giving the advice, in the course of carrying on an activity of a kind specified by article 36H and is given by —

*(i) an authorised person with permission to carry on a regulated activity of the kind specified by article 36H(1) (operating an electronic system in relation to lending), *(ii) an appointed representative in relation to that activity, *(iii) an exempt person in relation to that activity, or *(iv) a person to whom, as a result of Part 20 of the Act, the general prohibition does not apply in relation to that activity;

(b) the advice is given in the course of carrying on an activity of a kind specified by article 39F (debt-collecting) by a person carrying on that activity not in contravention of the general prohibition; or

(c) the advice is given in the course of carrying on an activity of a kind specified by article 39G (debt administration) by a person carrying on that activity not in contravention of the general prohibition.

(4) In this article—

“distribution channels” means channels by which information is, or is likely to become, publicly available;

“information is likely to become publicly available” means information to which a large number of people have access;

“operator” means a person carrying on an activity of the kind specified by article 36H(1) or (2D), and “relevant article 36H agreement” means an article 36H agreement (within the meaning of article 36H (operating an electronic system in relation to lending)) which has been, or may be, entered into with the facilitation of a person carrying on an activity of the kind specified by article 36H(1) or (2D).

(5) For the purposes of the application of section 22(1) of the Act (regulated activities) to an activity of a kind specified by paragraph (2) of this article, article 88D (credit agreement), and article 73 (investments: general) in so far as it relates to that article, have effect as if the reference to a credit agreement in article 88D includes a reference to a relevant article 36H agreement.

  1. This report uses ‘advice’ as a shorthand for regulated financial advice. Other forms of help provided to consumers, which do not meet this definition, are referred to in this report as ‘guidance’.

  2. This consisted of experts from consumer groups, financial advisors, and financial service providers.

  3. Regulated Activities Order, Article 25, Arranging deals in investments.