CESR consultation paper on understanding the definition of advice under MiFID

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1 CESR consultation paper on understanding the definition of advice under MiFID Date 14 December 2009 The Nordic Securities Association (NSA) represents the common interests of member firms in the Nordic securities dealers associations towards external stakeholders primarily in the Nordic market but also on European and international issues of common interest. Members of the NSA are the Danish Securities Dealers Association, the Finnish Federation of Financial Services, the Norwegian Securities Dealers Association and the Swedish Securities Dealers Association. The NSA welcomes the opportunity to comment on the CESR consultation paper on understanding the definition of advice under MiFID Secretariat address Finansrådets Hus Amaliegade 7 DK København K Contact phone mail@finansraadet.dk General remarks: The NSA acknowledges CESR's work with clarifying the definition of advice under MiFID. However the association finds that CESR's interpretation of investment advice excessively is widening the scope of investment advice under MiFID. The CESR interpretation implies that many types of information that clients today demand and expect to receive on an ongoing basis could be considered advice. The CESR approach would seriously impede the performance of European banks and investment firms (firms) and would rather reduce than enhance investor protection. Widening the scope of investment advice as suggested by CESR would mean that providing clients with the requested information would be impossible to do in practice, regarding the requirements on "know your customer". File no. 152/24 Doc. no v2 In the Nordic countries financial services are frequently provided through the internet as e-banking and information to the client is provided without personal contact. As e-banking is expected to be emerging in the rest of Europe in the near future the NSA finds it important to emphasise that CESR should bear in mind not to set up a new interpretation of investment advice under MiFID which would be an obstacle to e-banking. E-banking and filtering technology could bring many benefits to investors. It is thereby very important not to create barriers for an efficient use of new technology without very good reasons and impact assessments.

2 By focusing on the risk of firms trying to circumvent the MiFID regulation on advice CESR's description of advice becomes difficult to understand and raises a number of additional questions. A more expedient approach would be to describe the characteristics of advice, information and investment research respectively supplemented by separate considerations on the risk of firms circumventing the regulation. Page 2 The NSA finds that a description of advice under MiFID should take the starting point that investment advice is a service under MiFID which clients can ask for or which firms can offer to the client in the same way as any other investment service under MiFID. CESR instead seems to assume that advice is often given by "accident" an assumption that would be relevant when describing the risk of circumventing the regulation, but not relevant when describing the characteristics of investment advice. Furthermore it is important to take into consideration that corporate finance advice is a business model very different from retail investment advice and according to our opinion CESR's interpretation in the consultation paper seems to overstretch MiFID article 19. It should also be noted that there are other mechanisms in place that prevent misleading information and communication to consumers, such as Directive 2006/114/EC concerning misleading and comparative advertising. Finally the NSA finds that the consultation paper does not recognize that giving investment advice would normally be an ongoing process which relies on a number of connected and conditional actions. Especially CESR's dismissal of disclaimers gives cause for concern. Specific remarks Q.1. Do you have any comments on the distinction between the provision of personal recommendations and general information? The NSA finds it important to enhance the importance of the word personal in relation to the definition of investment advice. "Personal recommendation" means that the investment advice is provided in a situation where the investment firm is clearly recommending investment products specifically to the client in question and based on information concerning that specific client. The mere information about financial products or market surveys sent by e- mail without personal and individual recommendations should not be interpreted as investment advice. However, CESR's interpretation could be read as if CESR equates information that contains comments or valued judgements with advice. The NSA finds that such an interpretation of investment advice is far too wide. It should still be possible to give information that contains comments, judgements etc. Furthermore the NSA cannot support the CESR assumption that information, investment research or investment

3 recommendations itself can turn into advice. For instance a fact sheet or an investment analysis itself would not turn into advice, unless it was presented in connection with other initiatives such as telephone calls or letters containing advice, whereby it could be argued that the telephone call or letter would in fact be the investment advice not the fact sheet or the investment analysis itself. Page 3 Investment advice is a financial service provided to the client by the firm, and it does not contribute to clarification of the definition of advice to emphasize the subjective reference to the client s understanding like CESR is doing throughout the consultation paper. The use of interpretative language leads to legal uncertainty, which does not strengthen the investor protection nor improve the functioning of the market. As examples hereof could be mentioned section 5 the client reasonably believes that a personal recommendation is being provided, section 44 if the presentation of the information seeks to influence the client s choice then the firm might be making an implied personal recommendation and section 53 if the firm has information on the person s circumstances and in all other ways created a reasonable expectation that this information will be taken into account in making a recommendation. In our opinion the examples mentioned cannot contribute to a clearer definition on advice. Q.2 Do you agree that the limitation that filtered information is likely to be perceived by the investor as, assisting the person to make his own choice of product which has particular features which the person regards as important. is a critical criterion for determining whether filtering questions constitutes investment advice? The NSA finds that the most important characteristics about the advice are that the recommendations given are personalised for that specific client and are clearly based on an analysis of a person s individual investment objectives, financial situation and knowledge and experience. It is equally possible to use filtering questions and not to give personalized recommendations to a specific client as it is to use filtering questions and give personalized recommendations to a specific client. It is also equally possible to provide investment advice without the so-called filtering questions. Therefore whether investment advice is given or not must be considered on a case-to case-basis and does not rely on filtering questions. Q.3. Do you believe the distinction between general recommendations/generic advice and investment advice is sufficiently clear? Do you have examples of types of advice where the designation is unclear? The NSA finds that the CESR definition of advice takes a very subjective approach which causes the definition to be unclear. Furthermore the NSA finds that a clarification of the term " financial analysis" in par. 34 is needed.

4 Q.4. Is there sufficient clarity as to when an implicit recommendation could be considered as investment advice? If not, what further clarification do you think is necessary? Page 4 Wishing to providing clarity about the definition of investment advice under MiFID CESR ought to take the starting point that investment advice is not given implicitly or by accident. A firm should be able to recognize when it is providing investment advice. In that connection it is important to bear in mind that investment advice can only be provided on the basis of a suitability test, and that MiFID regulates which information should be included in a suitability test. However par could be read as if all information on a person's circumstances could be basis for investment advice. Furthermore the NSA is concerned by CESR's dismissal of disclaimers in par 47. By doing so CESR focuses on the risk of disclaimers being misleading communications. However, the effect of a disclaimer will always depend on the specific wording and on the context in which it is presented, why disclaimers as such should not be dismissed in general. Disclaimers are important client information which when fulfilling certain standards such as being clear and unambiguous is an important tool in the process of advising customers. By using disclaimers the range and scope of the advice can be made clear to customers e.g. that advice does not include advice on tax issues. Q.5. Are the circumstances where it is clear the firm is making a personal recommendation sufficiently clear? Would further clarification be helpful? CESR's considerations in par that if a firm possesses information about a client's circumstances it might reasonable be expected that this information is being used to form the basis of the recommendation - raises a number of questions. As mentioned above investment advice can only be provided on the basis of a suitability test. The information required for a suitability test is regulated in MiFID. If the firm is obtaining any other information or in any other context the firm is neither making a suitability assessment, nor recommending investment services or financial instruments to the client or potential client. Furthermore as mentioned in the general remarks it is important to bear in mind that many clients expect a flow of ongoing information, which in the nature of things cannot be based on the client's circumstances even if the firm is in possession of such information. Clients should still have the option to receive information without receiving advice and when clarifying the definition of advice it is important not to constitute an obligation to give advice. Q.6. Are there other criteria you believe should be considered when determining whether messages to multiple clients constitute investment advice?

5 The NSA does not agree with CESR's considerations on messages sent to multiple clients. The main distinction between investment advice and other communications should be the question whether recommendations are personalised and are clearly based on the client's individual circumstances. Communications sent to a larger number of clients as s, short term recommendations, general marketing material and other types of information to customers that would contain comments or valued judgements but not being based on the individual clients circumstances should not be considered investment advice, even though they cannot be considered investment recommendations under MAD or investment research under MiFID. Page 5 Q.7. What information would be helpful to assist in determining whether or not what firms provide constitutes investment advice or corporate finance advice? The NSA is of the opinion that the distinction is already clear to all market parties. Corporate finance services relating to mergers and the purchase of undertakings are a separate service according to MiFID and should be seen as separate from investment advice. Q.8. Are there specific examples of situations you would like considered, where it is difficult to determine the nature of the advice? The NSA has no examples. Yours sincerely Merete Hjetting meh@finansraadet.dk