Posted: 10th May 2018
First published by TISA in May 2018
On the 3rd January 2018, the definition of advice under the Regulated Activities Order (RAO) was amended after an HM Treasury consultation. Most regulated firms will now be exempt from the regulated activity of ‘advising on investments’ under Article 53(1), unless the firm is providing a ‘personal recommendation’.
One driver for this change is the increasing ambiguity around the information firms are permitted to provide customers without being seen to be giving advice. The regulator has attempted to remedy this issue with this new definition and, given the added clarity, firms are arguably less likely to inadvertently give information which could be construed as advice.
The narrowing of the advice definition
Prior to the change, the FCA would use the term ‘regulated advice’ in considering whether advice had been given by a firm. This was a much wider definition of advice than that of a ‘personal recommendation’, and firms could easily stray into giving advice by implying or suggesting a course of action, or giving an opinion, without it necessarily being specific to the client. This wider definition remains in place for unregulated firms.
For advice to amount to a personal recommendation for a regulated firm, a certain amount of tailoring to the client is needed. For example, it would need:
- To be personalised to a customer in their capacity as a potential investor
- For that person to buy, sell, subscribe to, exchange, redeem, hold or underwrite a particular investment (or exercise or not exercise a right relating to an investment)
- To be presented as suitable to the potential investor
- To be based on a consideration of the circumstances of the potential investor
- Not to be issued exclusively to the public
Broadly, if the actions of the firm or adviser do not amount to all of the above, it is likely to be classed as guidance, and therefore is not regulated activity.
Problems with the previous definition
The previous definition of advice was extremely broad, and firms could easily find themselves giving information classified as advice. Whilst the boundaries are clearer, further work is required to define financial guidance so that it will not be construed as advice, which will ultimately enable regulated firms to provide greater support in helping consumers make informed decisions. The caution this invites is often cited as a major contributor to the UK’s ‘advice gap’.
Some activity which would have previously have been advice will not be from now on. For example:
An intermediary firm using its website to classify third-party products into risk categories, i.e. low medium and high risk. If these differ from that given by the product provider, this is likely to have been viewed as regulated advice, as the intermediary had given an opinion on the risk rating.
Under the new definition, this is not advice; the website has not personalised the information, presented it as suitable to any one customer or related it to a particular investment. Therefore, this is not a personal recommendation.
How is regulatory risk reduced?
Generally, the narrowing of the definition will result in a reduction in regulatory risk, as regulated firms can give information without worrying about it being regulated activity.
Clearly, for firms who don’t have the permission to advise on investments, making sure they don’t stray into advice is essential, or they will be breaching the Financial Services and Markets Act (FSMA) and could be subject to enforcement action from the FCA.
For firms who already have the permission, there are still some regulatory advantages by not crossing the advice boundary anyway, as:
- Complaint handling and expected regulatory standards would be lower if making a personal recommendation
- The Training and Competence (TC) sourcebook will not apply to staff providing guidance
So what new opportunities does this change create?
The ‘personal’ element of a personal recommendation means that regulated firms can provide better quality information to customers (compared to the previous definition) without crossing the advice boundary. They can also make non-personalised opinionated statements without giving advice, providing firms ensure the statements are not misleading.
The change in definition is likely to greatly benefit firms using online and telephone distribution channels, but the benefits to each firm really depend on their activities. Here are some examples of where new opportunities could be created:
- Firms can facilitate business at lower cost compared to the cost of providing advice
- Firms providing guidance have more freedom over how they present information
- Marketing communications must still conform to financial promotion rules, but there is increased flexibility without straying into advice
- Firms offering execution-only or non-advised services can give better quality information
- Greater scope for websites to use filtering techniques (i.e. filter by fund/product) which will no longer be classed as advice, as long as the filtering does not present certain products as ‘suitable’
- Websites can develop and implement more flexible online tools to improve the customer experience
Considerations for firms
Firms either providing guidance or advice may wish to review their strategy and processes to see how they can take advantage of any new opportunities which could trigger new products and services.
You could say that past regulatory change has often caused additional burden and complexity, but this time, it is likely to result in some much-needed simplification.
Our White paper: The FCA 2018/19 Business Plan 2018/19 provides vital practical insight and considerations around advice.