Retail investor protection in the context of provision of investment advice
At the EU level, there is a special investor protection framework applicable to investment firms providing investment services and advice to retail clients under MiFID II[1] articles 24-30. In the UK, the competent authority for these purposes is the FCA, which authorises and supervises investment firms, and has implemented the Directive as part of its Handbook. MiFID II, compared to its predecessor MiFID I (passed in 2004), strengthened investor protection through the introduction of new requirements on product governance and independent investment advice and the enhancement of requirements on the responsibility of management bodies, inducements, the provision of information and reporting to clients, cross-selling, investment firm staff remuneration and best execution. A brief overview will be provided for the purposes of this chapter. ‘Investment advice’ is defined by MiFID II as ‘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’.
Investment firms must act honestly, fairly and professionally in accordance with the best interests of their clients. Marketing communications must be fair, clear, not misleading and clearly identifiable as such. Firms are obliged to provide detailed information to clients including information on the relevant financial instruments, investment strategies and associated risks, and on costs and charges; firms must also specify whether their investment advice is independent or not. If a firm purports to offer independent advice, it must assess a sufficient range of financial instruments available on the market and not only those offered by the firm itself and connected persons to it and must not accept fees, commissions or any other benefits by any third party. Firms must also ensure that the design of variable remuneration for their staff does not undermine their duty to act in the best interests of clients e.g. by setting sales targets. Relevant staff must have all necessary knowledge and
Business conduct regulation 115 competence.[2] In order to fulfil their duty to act in the clients’ best interests, firms must obtain information on every client’s knowledge, investment experience, objectives, risk tolerance and capacity to bear losses, and must warn their clients if sufficient information is not provided or if the firm judges that a certain product or service is not appropriate for them. Furthermore, firms are obliged to ‘take all sufficient steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature’ and any other relevant consideration, unless the customer has provided a specific instruction on the way the order is to be executed.
- [1] Consumer Rights Act 2015 s 64. 2 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (recast) [2014] OJ LI73/349. 3 See FCA Handbook» Conduct of Business Sourcebook and Product Intervention and Product Governance Sourcebook. 4 For a comprehensive discussion of the legal and economic aspects of MiFID II» see Danny Busch and Guido Ferrarini (eds), Regulation of the EU Financial Markets (OUP 2017). See also Mario Comana, Daniele Pre-vitali and Luca Bellardini, The MiFID II Framework: How the New Standards Are Reshaping the Investment Industry (Springer 2019). 5 MiFID II, art 4(1) (4). 6 MiFID II, art 24(1). 7 MiFID II, art 24(3). 8 MiFID II, art 24 (4). 9 MiFID II, art 24 (7). 10 MiFID II, art 24 (10).
- [2] MiFID II, art 25 (1). 2 MiFID II, art 25 (2) and (3). 3 MiFID II, art 27(1). 4 Merricks argues that the FOS has developed a very different model from that of the civil courts and is the preferred alternative for most retail consumers of financial services. See Walter Merricks, ‘The Financial Ombudsman Service: Not Just an Alternative to Court’ (2007) 15 Journal of Financial Regulation and Compliance 135. 5 FOS is funded mostly via a levy on FCA-regulated firms which depends on each firm’s size and complexity, and ranges from approximately £1,000 to £1,000,000. 6 FSMA 2000, Sch 17, para 3 (2). 7 FOS, ‘Schedule of Matters Reserved for the Financial Ombudsman Service Board’ (2018)
