Financial Advice: What’s in a name?

The Treasury consulted recently on ‘stripping back’ the legal definition of financial advice to that contained in the Markets in Financial Instruments Directive (MiFID)[1]. This was intended to give firms greater clarity about what is regulated advice and what isn’t, and, at a stroke, solve the ‘advice gap’. The problem the government is trying to solve is that people won’t pay for expensive financial advice when they can’t see the value of it, or can’t afford it.

The problem with the proposal is that it is not a solution to the ‘advice gap’ at all.

On the face of it, a simpler definition sounds attractive. But all the change would do is move the demand for clarity from “what is regulated advice and what isn’t?” to “what is and is not a personal recommendation?”, at the same time providing encouragement to unregulated firms to enter the market.

It is worth saying that not all firms have problems understanding whether their advice is regulated or not. Financial advisers may be supporting the change, but they already have a duty to act in their clients’ interest, so make sure they understand the rules. Changing the definition will have little, or no, impact on them.

The less capable appear to be mainly product providers and banks. As we can assume they are not all stupid, what is their motivation for ‘not understanding’ the rules? It seems likely some firms want to get back into selling regulated products to their customers, but without the inconvenience and liability of operating within the regulatory regime for advice. The proposed change is quite subtle, so bear with me. At the moment, regulated advice can be general (“This is a great investment product”) or with a personal recommendation (“This is a great investment product and it is suitable for you”). The first type would no longer be regulated under the government’s proposed change. What that means is that firms could ‘nudge’ people towards particular products, leaving the consumer to make their own decision (a ‘non-advised’ or ‘guided’ sale in the jargon). Regulated firms are still likely to have to abide by general FCA rules of business, but not the more stringent advice rules, including ensuring advisers had the requisite levels of qualification. Getting redress could be tougher, although not impossible.

Unregulated firms would be likely to enter the market in droves, potentially pushing high-risk products, and passing the consumer to a regulated firm for the product sale. Online, this consumer journey would appear seamless. Financial promotion rules would still apply, but there are a number of exemptions firms could exploit. There would be limited recourse for consumers through the Ombudsman service and limited regulatory oversight.

This is bad news for people wanting to exercise their pensions freedoms. Pension scams are on the increase: they almost doubled to £10.6m in the six months following pension freedoms, compared to the same period the year before[2]. It is impossible for people to tell the difference between an outright scam and an ill-advised investment. Why make their lives harder?

Language is a problem here too. We know people don’t understand the difference between (regulated) advice and guidance, and why should they? The proposal that anything that isn’t a personal recommendation should be called ‘guidance’ is perhaps the worst idea in the consultation. There is a world of difference between an impartial guide helping someone to make a decision – as Pension Wise does, for example – and a product push dressed up as help. Every other retail business calls someone who wants to sell a product a ‘sales adviser’, and the activity ‘selling’. The financial services industry should follow suit.

To conclude, the Consumer Panel would like nothing better than for people to get the help they need[3]. The new public advice body – a marriage of Pension Wise, the Pensions Advisory Service and the Money Advice Service – is a golden opportunity to get it right. The government should focus on that, rather than changing the law to no obvious consumer benefit.




[1] HM Treasury consultation: Amending the definition of financial advice, September 2016:

[2] FTAdviser article: Pension freedoms fraud revised higher, October 2016:

[3] The Financial Services Consumer Panel’s full response to HM Treasury’s consultation can be found here:

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We are an independent statutory body, set up to represent the interests of British consumers in the development of policy for the regulation of financial services. We work to advise and challenge the UK's Financial Conduct Authority from the earliest stages of its policy development to ensure they take into account the consumer interest.

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