HM Government is proposing to amend the meaning of 'regulated advice' in article 53 Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to bring it into line with the European Union's definition as set out in the Markets in Financial Instruments Directive. Should this happen?

In this article we look at the British Government's (and the British Financial Advice Market Review's) argument that the law should redefine 'financial advice' to bring it into line with MiFID's definition.

In a world of increasingly complex financial decision-making, where politicians have decided to give individuals greater autonomy and responsibility for their financial future, it is obvious that consumers need access to professional financial help now more than ever.

The advice gap

However, with the Retail Distribution Review (RDR) prompting advice firms to shift their business models over to cater to wealthier individuals, such professional help is usually out of reach for the poorer segments of the population. HM Government has been aware of this advice gap and has sought to close it not only through setting up public guidance bodies such as the Money Advice Service (MAS), The Pensions Advisory Service (TPAS) and Pension Wise but also by conducting a Financial Advice Market Review (FAMR) which last year came up with several recommendations to broaden access to financial advice.

One of these recommendations was to redefine and clarify the definition of financial advice to bring it in line with the definition in the European Union's second Markets in Financial Instruments Directive, where a service is only classified as advice when there is a personal recommendation. The idea behind this came after firms said that they felt nervous sending out generic information or reminders to clients about (say) ISA limits when they were not sure what constituted financial advice.

Aligning the definition of financial advice with the definition provided by MiFID makes for a neater regulatory boundary. However, if the ultimate aim of HM Treasury is to encourage financial advisors to offer a broader range of services (including those that target consumers with simpler financial planning needs), then I believe that this falls short. My conversations with members of the Association of Professional Financial Advisors and others in the advice community indicate that most firms will continue to offer a full advice service with all the costs that providing such a service entails.

An amendment of the definition might help (at the margins) by encouraging firms to edge nearer the boundary in terms of offering support to existing customers, such as reminders or other generic information. However, this is risky because firms may also be allowed to offer unregulated communications that appear to the consumer to be advice even though they are not. The Financial Conduct Authority should monitor market developments in the wake of any change to the definition of 'financial advice' and quickly offer further guidance or clarity should there be any cause for concern in this respect.

APFA's response to FAMR

In our response to FAMR, we at APFA called for the creation of a new category surrounding the provision of simplified financial advice. This, if it came to pass, would involve providing advisers with a ‘safe harbour’ governed by a set of simpler guidelines that would have to operate with a limited number of safe products (i.e. those that could essentially be suitable for anyone, thereby reducing the need for detailed information about the consumer but which would still require a personal recommendation).  This would help fill the gap between full advice and guidance services and could be effective in broadening access to professional financial help as the safe harbour would give advisers the confidence to get involved in this area.

Although there were some useful recommendations which arose from the FAMR, it was a missed opportunity and failed to suggest the kind of radical reforms which could help more consumers access professional financial help.  For instance, the proposals regarding the Financial Ombudsman Service (FOS), a body about which advisers continue to have concerns when it comes to its decision-making abilities, simply recommended further transparency and better communication with businesses. The review failed to tackle the lack of any independent right of appeal against Financial Ombudsman Service decisions – a cornerstone of natural justice.

A matter of natural justice

The FAMR also did not properly consider the arguments of advisors in favour of a time-limit (or long-stop) of 15 years on their liability for advice they have given. Its final report dismissed the case for a long-stop by saying that the number of cases it affected was small. It failed to recognise that although the quantum of cases affected may be low, it is the cumulative effect of the uncertainty surrounding open-ended liabilities that makes advisors cautious when it comes to entering new markets or offering new services such as simplified financial advice.

Closing the gap
 
The proposal to redraw the definition of 'financial advice' to tie it to a personal recommendation is sensible. However, both the re-definition in itself and the FAMR recommendations more generally will not achieve the significant change needed to encourage financial advisers to offer more simplified financial advice to those with simpler financial needs and situations. It is now up to the UK's financial advice community to push the government and regulator to do more to close the advice gap.