Definition of Financial Advice Changing

Definition of Financial Advice Changing.

Following the Financial Advice Market Review (FAMR), a review to assess how to make it easier for the consumer to access financial advice as well as encouraging financial advisers to offer advice in markets and areas that they would not normally do so because of red tape or liability or lack of profitability, the Treasury has a yesterday launched a consultation into changing the definition of financial advice.

The problem with financial advice is that there is no statutory limitation for liability. For most industries in the United Kingdom consumers can claim for negligence or compensation or faulty goods or workmanship within six years. However, for financial advice there is an open ended liability. In short, the financial adviser is liable for life. This is why financial advice is not cheap and why many consumers are not able to access high-quality advice when needed due to the cost of the advice or a lack of availability of financial advisers in any particular field. This is commonly known as the "advice gap" and the government is trying to close this gap to ensure that all consumers have access to professional advice or guidance when needed.

Current solution

Consumers can currently access only regulated financial advice or seek guidance only which does not constitute advice.

Guidance Problem

The problem being that guidance is usually not offered by qualified financial advisers and it is merely generic guidance. Guidance means it cannot be personalised to your own specific needs or requirements and it certainly cannot even mention the name of a regulated financial product let alone naming a specific pension or investment company.  For example:

• You need a pension and you will receive tax relief on personal contributions. This is guidance.

• You need a personal pension. This is regulated financial advice.

• You should consider paying more into a pension. This is guidance.

• You should consider paying around £100 per month into a pension. This is regulated financial advice.

• Legal & General offer a range of personal pensions that may be suitable. This is potentially a personal recommendation and therefore regulated financial advice.

• You already have a pension with Aviva and the fund performance is satisfactory. This is an opinion and therefore a personal recommendation and again regulated financial advice.

This is all about costs and liability. A financial adviser very easily becomes liable for what they say or write down and as a result they charge for their expertise.

Two Definitions of Financial Advice

The difficulty for the financial industry and in particular financial advisers is that there are two definitions as to what constitutes financial advice:

• Under European rules under the Markets in Financial Instruments Directive (MiFID) there is a definition for "investment advice". This means there is a personal recommendation to a consumer.

• In addition to the MiFID definition, in the UK we also have the Financial Services and Markets Act definition under article 53 of the Regulated Activities Order which stipulates that that does not have to be a personal recommendation but as soon as you mention a regulated investment or insurance contract, the person or firm talking or writing about this must authorised and regulated.

In short, financial advisers cannot even mention a product without it being required to be regulated.

The Treasury's Proposal

The Treasury is suggesting that the UK uses the MiFID only definition so that non-regulated firms can offer lower cost guidance services and still mention specific products, without any personal recommendation, to take a particular course of action.

Comment

It makes total sense for there to be a requirement to be regulated only if you are making personal recommendations. If the Treasury does pursue this route we will be able to offer guidance services at a fraction of the cost of fully regulated financial advice. Consumers will have greater choice and greater access to help with their finances although we suggest that there should be a minimum qualification level for those that offer guidance only such as the Chartered Insurance Institutes eight paper Financial Planning Certificate (equivalent to an NVQ level X, or A-level).