On 11 July 2023, the European Securities and Markets Authority (Esma) updated its guidance in relation to the definition of “advice”. This was rendered through a supervisory briefing which basically an update of the previous Q&As issued by CESR - Esma’s predecessor - on this topic.
The update was made to be aligned with new business models and ongoing technological developments (social media, mobile apps) that result in an increasing need for updated guidance on existing rules. The briefing is expressed not to be subject to “comply or explain” by supervisory authorities and is not binding. It serves the purpose to provide a more precise indication of how “investment advice” should be interpreted.
The major topics of the Esma briefing are:
- the provision of personal recommendations and whether other forms of information could constitute investment advice;
- a guidance on when recommendations will be viewed as based on a view of a person’s circumstances;
- perimeter issues around the definition of personal recommendation; and
- issues around the form of communication, including use of social media posts.
The briefing is in principle solely intended for supervisory authorities but ESMA expresses that it is also useful for financial institutions. Not all fund managers licensed under AIFMD have the MiFID II top up license (ancillary services) and therefore the briefing should be of big interest for them, in particular to avoid that they, inadvertently, provide regulated investment advice.
Investment advice as a regulated service
Investment advice as defined in article 4 para 1 sub (4) of MiFID II (Directive 2014/65) is “the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments”. The recommendation must be presented as suitable for that person or, alternatively, must be based on a consideration of the circumstances of that person. Investment advice requires authorization, unless an exemption applies.
A firm, and thus also an AIFM, that does not intend to provide investment advice must make sure to have a clear understanding of the services it provides. That must be reflected in staff training, information to clients and the internal systems and controls. Just describing a service as “non advised” in nature is definitely not enough to safeguard that legally no investment advice is provided by a firm. It is noted that it is difficult to clearly monitor that: in particular in face-to-face situations with clients, staff can, though inadvertently, give advice that is personal and suitable for that specific client.
What constitutes a ‘personal recommendation’?
A “recommendation” always requires an element of implicit or explicit suggestion on the part of the advisor. “Information” involves statements of fact or figures, in general terms, with objective information. “Information” does not contain judgments or specific suggestions for an investor.
Even if the purpose of providing information is not giving a recommendation, the mere provision of information may still qualify as recommendation and such situation must be clearly assessed especially to avoid deception. The Briefing contains the example of a firm paying specific attention to the advantages of one product compared to other products, to a client in such a manner that the information “would tend to influence the decision” of the client to select one investment product over another. This could qualify as a personal recommendation and thus, as investment advice.
Moreover, Esma mentions specific situations in which a recommendation is actually investment advice, such as:
- general information regarding the client objectives stating that these can be achieved by a different financial instrument than the one chosen by the client;
- the information to a client that a certain financial instrument does not meet client’s investment objectives anymore;
- a message, sent to a client about a certain financial instrument being purchased by investors in general, which investors have similar characteristics and needs as the client to whom the message is addressed; and
- recommendations concerning financial instruments, made by means of websites, investment apps or social media (including “influencers”) may under certain circumstances, be regarded as a personal recommendation and, thus, not as issued to the public in general.
To the contrary, generic advice is not considered to be investment advice. Examples of that include advice on asset classes in general or advice on investments to be made in certain geographical zones. It is therewith noted that even if generic advice is provided about the suitability of a certain financial instrument, and that advice is, in fact, not suitable for the specific client, or not based taking into account the special circumstances of that client, the firm may be in violation of articles 24 paragraphs 1 and 3 of MiFID II (general principles and information to clients).
Though the briefing shows more examples of investment advice, the general message of this article is that fund managers that don’t have a MiFID II top up on their AIFMD license, must be cautious when distributing investment information to their clients. We recommend those firms to take note of the contents of the briefing and seek legal advice as to the interpretation thereof.
Tom Loonen is professor of financial law at Vrije Universiteit Amsterdam and special counsel Pinsent Masons Netherlands, while Jan Saalfrank is partner investment funds at Pinsent Masons Luxembourg. The law firm is an Investment Officer knowledge partner.