Following HM Treasury’s consultation on ‘Amending the definition of financial advice’, it has now been confirmed that a statutory instrument will shortly be introduced to make the necessary amendments to the requirements for advising on investments.
The consultation followed the Financial Advice Market Reviews (“FAMR”), which found that there is an increasing number of consumers making and executing their own financial decisions where the requirements are straightforward or relate to small amounts.
HM Treasury felt that individual consumers would benefit from “high quality and more specialised and detailed guidance services”, therefore it felt the need to revisit the definition of “advice” in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the “RAO”). HM Treasury stated that the aim was to clarify which forms of consumer support amount to regulated advice, as firms were limiting advice due to fears that they would overstep their permissions. Firms were therefore providing less support to them and exposing consumers to a greater risk of poor investment decisions.
The FCA has recently published a summary of the new requirements for firms advising on investments under Article 53(1) of the RAO. The changes are intended to give regulated firms far greater scope to provide their customers with advice on financial products and services.
The amendments are intended to come into effect on 3rd January 2018. The primary consequence will be that the majority of regulated firms will not need to hold a permission to advise on investments under Article 53 unless a personal recommendation is being given. HM Treasury have advised that a personal recommendation can be given either explicitly or implicitly. Firms will therefore still need to be careful of providing advice to consumers in such a way that the consumer is influenced to purchase a specific financial product over others, as this may amount to an implicit personal recommendation. The example provided by HM Treasury is a firm making a statement such as “people like you buy this product”.
The Treasury’s aim is to reduce the risk of regulated firms inadvertently carrying out a regulated activity without holding the correct permissions. It is therefore hoped that regulated firms will, going forward, have more confidence in providing their customers with more detailed information, enabling them to make their own financial decisions.
Taking into account the concern that fraudsters could attempt to deliver advice to consumers which stops short of a personal recommendation but which nevertheless persuades individuals to enter into risky investments, HM Treasury has decided to lessen the risk to consumers and only amended the definition of financial advice for regulated firms. Therefore, whilst regulated firms are able to provide more advanced guidance without being subject to higher regulatory requirements, the pre-existing definition in the RAO of “advice” will remain in place for unregulated firms.
It should be remembered that unregulated persons will therefore still be unable to provide regulated advice without the necessary authorisation. This is to ensure consumers remain protected from receiving inappropriate advice and that unregulated firms remain limited to providing factual information only. Further, for a handful of regulated firms, where the only permission they hold is for advising on investments or for agreeing to advise on investments, the current scope of Article 53(1) will also still apply.
The benefit to consumers will hopefully be more tailored and detailed advice being given by regulated firms, who may have previously been concerned that giving such advice would see them carrying out regulated activities which were beyond the scope of their permissions. The upside of this will hopefully be enhanced and more relevant advice being given to consumers, ensuring that they are fully informed when making investment decisions.
The FCA has confirmed that firms do not need to take any action straight away as firms will not need to re-apply for existing permissions for providing investment advice.
The FCA intends to carry out a consultation on the necessary changes which will need to be made to its Handbook and Regulatory Guides but it intends for these changes to come into effect at the same time as the change to Article 53 comes into effect in January 2018. The FCA has also indicated that it will consult on updating its guidance on regulated advice and personal recommendations, further to guidance it previously issued in January 2015 concerning what is not a personal recommendation in relation to retail investments.