15Mar

HM Treasury has confirmed that it has accepted the recommendation of the Financial Advice Market Review to change the definition of financial advice. Authorised firms will now only be considered to have given advice when they make a personal recommendation to a client, and not when they provide general guidance or advice on clients’ financial affairs.

According to the Treasury, the change to the definition has two main advantages:

• It will give firms confidence to assist clients with their financial needs without having to worry about inadvertently giving regulated advice
• The risk of consumers falling victim to scams will be reduced

When the changes come into force on January 3 2018, a firm that is regulated by the Financial Conduct Authority (FCA), and that does not hold the ‘advising on investments’ or ‘agreeing to advise on investments’ permission, but which holds another permission, will be allowed to give general advice on financial products and services. They will need to seek one of the ‘advice’ permissions if they wish to make personal recommendations.

Firms without authorisation from the FCA will still not be able to give any form of financial advice.

Under the new definition, for advice to constitute a personal recommendation:

“There must be a recommendation that is made to a person in their capacity as an investor or potential investor (or the agent of an investor or potential investor)”

and

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

Examples of general advice which does not amount to a personal recommendation include: letting an individual know that they have unused ISA allowance, highlighting that they haven’t increased their pension contributions, and providing information on the risk profile of the funds available within an investment product they hold.

The financial regulator says there is no need for any firm to apply for changes to its permissions as a result of the announcement.

This brings the definition of advice used by the UK regulator in line with the definition in the European Union’s Markets in Financial Instruments Directive.

The Treasury’s paper, setting out the responses to its consultation on the subject, speaks of “a growing trend towards consumers making and executing their own financial decisions, and that for consumers with relatively straightforward needs or relatively small amounts to invest the cost of regulated advice may outweigh the benefits.”

The majority of the 63 respondents to the consultation supported changing the advice definition.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.