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HM Treasury plans to redefine financial advice

HM Treasury plans to redefine financial advice

HM Treasury has revealed plans to amend the definition of advice to bring it in line with European regulation and “make it clearer.”

HM Treasury has published a consultation on a new definition of advice following the publication of the Financial Advice Market Review earlier this year.

The new definition would effectively mean that only advice which makes a personal recommendation that is tailored to the individual would be regulated.

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Guidance would therefore not stray into advice unless a personal recommendation is made.

In its consultation HM Treasury stated: “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.”

Under the current rules, set out in article 53 of the Regulated Activities Order, for advice to be regulated it must relate to a relevant investment, be given to a person in their capacity as an investor or potential investor and must relate to the merits of them buying, selling subscribing for or underwriting the investment.

But the Mifid definition is newer and narrower in scope.

Under this definition advice must be a recommendation made to a person in their capacity as an investor or potential investor, the recommendation must be presented as suitable for the person to whom it is made and it must relate to taking certain steps in respect of a particular investment.

According to HM Treasury’s consultation, two types of firm would be affected by this change in the definition of what constitutes advice the most: those currently carrying out activities covered by both definitions and firms looking to enter the market to provide guidance services.

But HM Treasury stated it is aware the new definition of advice could lead to “unscrupulous” firms using guidance services to distribute products without being subject to regulation.

This is because under the new regime firms offering only guidance on a stand-alone basis would not require authorisation.

The consultation said: “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.

“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.