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Clear as mud: FOS’ problem with the new advice definition

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So the Treasury is consulting the industry about its proposal to change the definition of advising on investments as stated in article 53 of the Regulated Activities Order 2001. The proposed new definition would be based on the one in Mifid. The object of the exercise is to provide clarity so firms would know with greater certainty when they are offering advice that is regulated and when simply offering guidance, which would not be regulated by the FCA.

There are several difficulties with the proposal. First, I doubt very much whether the change would provide the clarity everybody seeks. The proposed definition would be different and would include concepts absent from the current one and vice versa. In the end an adviser would still have to decide whether what he was offering to a client was, or was not, within the definition.  He would still have to struggle with the meaning of the words and would likely be as unsure as he is now as to whether the new definition applied or not.

The consultation paper sets out the broad differences between the definitions.  In essence, the current definition says that for the advice on investments to be regulated it must:

  • Relate to a relevant investment, which includes contracts of insurance
  • Be given to a person in his or her capacity as an investor or potential investor (or as agent for such an investor), and
  • Relate to the merits of buying, selling, subscribing for or underwriting the investment (or exercising rights to buy, sell, subscribe for or underwrite such an investment).

The Mifid definition of investment advice involves the provision of personal recommendations to a customer, either upon the customer’s request or on the firm’s initiative. It comprises three main elements:

  • There must be a recommendation that is made to a person in his or her capacity as an investor or potential investor (or as agent for such an investor)
  • The recommendation must be presented as suitable for the person to whom it is made or based on the investor’s circumstances
  • The recommendation must relate to taking certain steps in respect of a particular investment which is a Mifid financial instrument, namely to buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument (or exercise a right to buy, sell, subscribe for, exchange, or redeem a financial instrument).

Those definitions are different but both are complex. And complexity is unlikely to result in clarity.

Second, and in any event, all financial advisers are responsible for what they say to clients, whether or not that amounts to, or includes, regulated advice.  Further, if what is said to a client does include regulated advice, any other related advice is likely to be regarded by a court, or the Financial Ombudsman Service, as part of the regulated advice.

Some years ago, in the context of the definition of investment advice in the Financial Services Act 1986 (which was broadly similar to the current definition), Mr Justice Jonathan Parker said:

“Advice as to the ‘merits’ of buying or surrendering an ‘investment’ cannot sensibly be treated as confined to a consideration of the advantages or disadvantages of a particular ‘investment’ as a product, without reference to the wider financial context in which the advice is tendered.  … [A]nd, as one would expect, any advice as to the merits of purchasing or surrendering an ‘investment’ is designed to be based on as full an examination of the client’s personal circumstances as the client is prepared to allow.  … [I]t seems to me that it must follow that the concept of ‘investment advice’ will comprehend all financial advice given to a prospective client with a view to or in connection with the purchase, sale or surrender of an ‘investment’, including advice as to any associated or ancillary transaction notwithstanding that such transaction may not fall within [the scope of any regulated business].”

Thus, no matter how clear the definition is to a particular adviser, and no matter how limited the advice is intended to be, a court or the FOS is likely to include and to look at everything that passed between the adviser and the client, and make up its mind whether the advice was, or was not, regulated and compliant based on that full picture. Even if it is not regulated but is negligent and has caused the client loss, the adviser would be liable.

So the change is unlikely to meet its objective. It might be better for those who feel insecure about the meaning of the current definition to put more effort into getting to grips with the existing rules and designing their methods of working to fit in with what they are seeking to achieve.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk 

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Thank you very much for this Peter. Food for thought…..

  2. The reality of the situation is such that anyone who is an “adviser” would be wise to treat everything they do and say as advice and apply that standard to it

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