The basic advice regime under MiFID II & IDD

This update includes important information for firms selling stakeholder products using basic advice. These firms should read this update to ensure they understand the impact of MiFID II and IDD, and comply with our standards.

This update explains the impact of our implementation of the re-cast Markets in Financial Instruments Directive (MiFID II) and Insurance Distribution Directive (IDD) on the basic advice regime. It also directs firms to further information which we have previously published on providing streamlined advice to consumers.

The basic advice rules were introduced in 2005 to enable firms to provide simpler and lower-cost advice to consumers on a range of stakeholder products using pre-scripted questions.

Streamlined advice is a separate term, unrelated to basic advice, which describes advisory services that provide a personal recommendation that is limited to one or more of a client’s specific needs. Streamlined advice does not consider the client’s circumstances which are not directly relevant to those needs.

Products in scope of MiFID II

The implementation of the first Markets in Financial Instruments Directive (“MiFID I”) in 2007 required that we modify the application of the basic advice regime for MiFID (and third country) investment firms (see COBS 9.1.2R). These modifications did not affect firms, including many retail investment advisers, which were exempt from the requirements of MiFID I under Article 3 (the optional exemption) of the Directive (firms exempt from MiFID under Article 3 are also known as “Article 3 firms”, or “MiFID optional exemption firms”). On the basis of our current engagement with the market, we are not aware of any firms providing basic advice on MiFID products. However, there are a number of firms providing streamlined advice services (see below for more details of our guidance in this area).

MiFID II requires us to apply various conduct requirements to Article 3 firms (including suitability requirements) which are ‘at least analogous’ to those which apply to MiFID investment firms. When we implemented MiFID II, we made a decision to apply the MiFID II suitability rules in full to Article 3 firms (and these are transposed in COBS 9A).

This means that Article 3 firms can no longer provide basic advice on stakeholder products within the scope of MiFID, under the rules in COBS 9.6. So, when an Article 3 firm provides a personal recommendation on a stakeholder product which is also a MiFID financial instrument, that firm must comply with the suitability rules in COBS 9A.

Article 3 firms, like MiFID investment firms, may continue to provide basic advice in respect of non-MiFID stakeholder products such as stakeholder pension schemes. Equally, firms can provide streamlined advice on all MiFID and non-MiFID products.

Products in scope of IDD

The basic advice regime is also not fully compatible with the requirements of the Insurance Distribution Directive (IDD). To implement the IDD suitability requirements in full, we are making a similar change to the application of the suitability rules that will prevent firms selling stakeholder products which are insurance-based investment products (IBIPs) for the purposes of the IDD under basic advice rules. We are only aware of one firm providing basic advice on IBIPs.

The IDD requirements were due to take effect on 23 February 2018. The European Commission has, however, proposed a delay to the application date of the IDD to 1 October 2018. The Treasury has announced that the government will delay transposing IDD in the UK until the outcome of this proposal has been confirmed. After that we will make our final rules with which firms will need to comply from 1 October 2018.

Streamlined advice

Our work on the Financial Advice Market Review (FAMR) highlighted the desirability of a simple and clear way to provide regulated advice for consumers with less wealth or simpler needs. We also know that consumers tend to seek advice at particular trigger points in their life or when they have a specific need and do not always want or need full advice involving consideration of all of their financial circumstances and needs.

Our suitability rules allow firms to narrow the scope of their recommendation from considering all of a customer’s needs and objectives (‘full advice’) to a sub-set of them. This approach is referred to as ‘streamlined advice’.

In order to help firms who wish to set up streamlined advice models we have published guidance setting out the main considerations when developing such models along with cases studies illustrating how this can be done for particular products.

Further information

If firms have any questions in relation to the application of the basic advice regime under MiFID II, please contact us by emailing Michael Wooldridge or by post to: The Advice and Distribution Team, Financial Conduct Authority, 12 Endeavour Square, London E20 1JN.

If firms have any questions in relation to the application of the basic advice regime under the IDD please contact us by email or by post to: The Insurance Policy Team, The Financial Conduct Authority, 12 Endeavour Square, London E20 1JN.