On 11 July 2023, the European Securities and Markets Authority (ESMA) published a supervisory briefing on understanding the definition of advice under MiFID II.
Article 4(4) of MIFID II provides that investment advice means the provision of personal recommendations to a client, either upon their request or at the initiative of the investment firm, with respect of one or more transactions relating to financial instruments. Article 9 of Commission Delegated Regulation 2017/565 provides that for the purposes of the definition of investment advice, the recommendation must be presented as suitable for that purpose or must be based on a consideration of the circumstances of that person. The Directive also provides a number of other tests for firms to consider in determining whether they are providing personal recommendations.
The supervisory briefing contains a diagram which illustrates the key tests and hence the thought process that a firm needs to go through to determine whether its services constitute investment advice.
The supervisory briefing, among other topics, covers:
- The provision of personal recommendations and whether other forms of information such as investment research could constitute investment advice.
- The presentation of a recommendation as suitable for a client or based on the client’s circumstances.
- Perimeter issues around the definition of personal recommendation.
- Issues around the form of communication, including use of social media posts.
The supervisory briefing is not subject to any ‘comply or explain’ mechanism for Member State competent authorities and it is not binding, though it provides a clear indication of the expectations around the understanding of investment advice by firms.