RegulationMar 14 2016

FCA to overhaul advice definition

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FCA to overhaul advice definition

The Financial Advice Market Review has recommended the government amend the definition of regulated advice so it is based upon a personal recommendation.

The FAMR paper stated this would make the UK definition of regulated advice in line with the definition set out in the second Markets in Financial instruments Directive (Mifid II).

In addition to the consultation to be carried out by HM Treasury on advice definitions, another consultation is to be carried out by the Financial Conduct Authority on new guidance to support firms offering services that help consumers to make their own investment decisions without a personal recommendation.

This guidance should include illustrative case studies highlighting the main considerations firms need to take into account when developing such guidance services and dealing with areas of uncertainty identified during the review, read the final FAMR report, published this morning (14 March).

The review recommended a clear framework to give firms the confidence to deliver advice on simple consumer needs in a proportionate way.

The FCA’s framework for delivering advice should include:
New guidance to support firms who wish to offer ‘streamlined advice’ on a limited range of consumer needs.
Modifying the time limits for employees to attain an appropriate qualification in the FCA’s existing Training and Competence sourcebook, giving firms more flexibility to develop a new generation of advisers by allowing employees to work for up to four years under supervision while obtaining appropriate qualifications and experience.
Guidance on the cross-subsidisation rules in relation to the interpretation of ‘long term’ and the flexibility allowed, supporting firms providing advice to consumers with lower levels of wealth.

A major theme highlighted by stakeholders in the call for input was reluctance on the part of firms to offer other, potentially less expensive, support to consumers in the form of guidance, for fear of straying into the provision of advice.

Firms, consumer groups and employers raised concerns about a lack of clarity regarding the point at which more general forms of consumer support become regulated advice, suggesting that this limits their ability to help consumers.

In particular, stakeholders highlighted the following two areas of ongoing uncertainty:

• Navigating the boundary between providing helpful guidance based on a customer’s circumstance (such as a financial ‘health check’ prompting customers to think about their financial needs and priorities) and straying into an implicit personal recommendation.

• Navigating and 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 into advice on the merits and risks associated with buying or selling particular investments (i.e. non-personalised regulated advice).

As a result of these concerns, a number of stakeholders have said that they have designed their current guidance services to stop a ‘safe distance’ short of where they perceive the regulated advice boundary to be, according to the report.

Amending the definition of regulated advice in the existing Regulated Activities Order (RAO) so that regulated advice is based upon a personal recommendation should allow firms to provide more useful information to support customer decision-making, such as the merits of, and the risks associated in general with, buying and selling particular investments, according to the FCA and HM Treasury.

Stakeholders also stated this change will also provide 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; and

• bringing the UK’s definition of advice into line with that of other countries covered by Mifid.

Under this proposal, regulated firms providing certain services such as generic advice, investment research and general recommendations (currently captured by the definition of advice under the RAO) would continue to need to act in the client’s best interests and provide information that is clear, fair and not misleading.

However, they would no longer need to have the ‘advising on investments’ permission from the FCA, unless they also provide personal recommendations.

Firms providing guidance services which support customers making their own investment decisions are not responsible for complying with the suitability rules (unless they also provide a personal recommendation).

However, firms must meet their other regulatory obligations, which will depend on the service offered.

peter.walker@ft.com