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New advice definition could be ‘silver bullet’

This article is part of
Guide to the Financial Advice Market Review

New advice definition could be ‘silver bullet’

Post Retail Distribution Review the definition of regulated financial advice and the requirements to deliver it saw a reduction in the number of advisers operating in the UK.

In the Financial Advice Market Review input paper, published in October 2015, the Financial Conduct Authority and HM Treasury reported in 2007 that two-thirds of retail investment products were sold with professional advice.

However, in recent years the FCA reported it had seen a decline in the number of financial advisers offering professional advice - from around 26,000 in 2011 to 24,000 in 2014.

A number of major providers have cut back their professional advisory businesses, or left the market, the regulator stated, while the remaining advisers have increasingly focussed on high net worth individuals.

The Financial Advice Market Review final report published in March acknowledges this shift in the make-up of the financial advice industry and how it has hit consumers.

The report states: “There are some consumers whose straightforward needs or lower amounts to invest mean the cost of regulated advice outweigh the benefits.

“Some firms may find it uneconomic to provide these customers with this type of advice.”

However, even with low-cost guidance, FAMR found advisers and providers were reluctant to offer this “for fear of straying into the provision of advice”.

It has been difficult, FAMR recognised, to navigate between guidance and advice, and the risks involved with regulatory requirements applying to factual information or advising on the merits of certain investments.

Therefore, it proposed amending the definition of ‘advising on investments’ in the existing Regulated Activities Order, article 53, in line with the European Union’s Markets in Financial Instruments Directive’s (Mifid’s) ‘investment advice’ definition.

Difference between ‘advising on investments’ under the RAO and ‘investment advice’ under Mifid
Article 53 of the RAO says regulated advice must:

1) Relate to a particular investment

2) Be given to a person on their capacity as an investor or potential investor, or in their capacity as agent for an investor or personal investor

3) Relate to the merits of them buying, selling, subscribing to or underwriting the investment, or exercising rights to buy, sell, subscribe to or underwrite such an investment.

Mifid’s investment advice involves the provision of personal recommendation:

1) There must be a recommendation 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

2) The recommendation must be presented as suitable for the person to whom it is made or based on the investor’s circumstances

3) 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 to, exchange, redeem, hold or underwrite a particular financial instrument, or to exercise a right to buy, sell, subscribe to, exchange or redeem a financial instrument.

Source: FAMR March 2016

Because the RAO definition is wider than Mifid, it could be open to interpretation, according to the FAMR report.