Response to discussion on the potential review of the investment firms’ prudential framework
Q9: Should the concept of ‘ongoing advice’ be further specified for the purpose of calculating the K-AUM? If yes, which elements should be taken into account in distinguishing a recurring provision of investment advice from a one-off or non-recurring one?
Prometeia believes that the concept of “investment advice of an ongoing nature” in Article 4(1)(21) of the IFR shall be interpreted in a way that is consistent with the notion of «investment advice» provided for under MiFID II for the following reasons.
Investment firms may provide along with MiFID II investment advice service also “asset allocation” and “monitoring” services in relation to the clients’ portfolio.
In particular, “asset allocation” is usually carried out by means of one or more allocation options for the clients’ portfolio based on optimisation models and various macroeconomic reference scenarios, without providing any specific or personal recommendations to such clients within the meaning of MiFID II. Investment firms may also carry out a “monitoring” activity of the clients’ portfolio, which consists merely of a support to the client in the evaluation and ex-post control of the performance of the entire securities portfolio, without providing any specific or personal recommendations to such clients. This monitoring activity may be performed autonomously or along with the asset allocation activity.
In the opinion of this respondent, the activity of asset allocation of clients’ portfolios, when based on a general analysis of the performance of the economy and financial markets with the aim of defining investment guidelines for the main asset classes of the clients, does not involve any “personal” investment advice to the clients or any “transactions relating to financial instruments” and, therefore, shall be excluded from the definition of “investment advice” as set out in MiFID II and referred to in Article 4(1)(20) of IFR. The same holds true for the monitoring activity, which is merely aimed at identifying, among other things, measures of return and risk and the efficiency of the results obtained in relation to the specific reference benchmark, without, again, any reference to a recurrent/ongoing «investment advice» activity.
From this perspective, it is hard to understand why the stringent prudential rules set forth in the IFR shall extend to activities that do not involve any “investment advice” service under MiFID II.
It should be noted that recital (24) of the IFR stipulates that “K‐AUM captures the risk of harm to clients from an incorrect discretionary management of client portfolios or poor execution and provides reassurance and client benefits in terms of the continuity of service of ongoing portfolio management and investment advice”. Indeed, in the opinion of this respondent, carrying out an activity that does not involve the provision of “personal recommendations” to the client within the meaning of the definition of “investment advice” provided for under MiFID II does not entail the same liability risk towards the client as an investment advice which is personalized, being limited to provide support to the client in the ex-post monitoring of the performance of a portfolio.
Moreover, the interpretation proposed in this answer is in line with the guidance provided by the English Financial Conduct Authority (hereinafter, “FCA”) in their Prudential sourcebook for MiFID Investment Firms in relation to the regulation of UK investment firms’ own funds requirements contained in the Investment Firms Prudential Regime that came into force on 1 January 2022 (hereinafter, “IFPR”).
In particular the FCA, in point (1) of guidance 4.7.14 of the Prudential sourcebook for MiFID Investment Firms, expressly states that the definition of “investment advice of an ongoing nature” of the IFPR includes: “(a) the recurring provision of investment advice; or (b) investment advice given in the context of the continuous or periodic assessment and monitoring, or review of a client portfolio of financial instruments, including of the investments undertaken by the client on the basis of a contractual arrangement”. In point (2) of the same guidance 4.7.14 the FCA point out that “[i]n either case, the firm must provide investment advice as part of the relevant arrangement. This means that the firm must provide a personal recommendation to the client”. The FCA also expressly clarified that:
- “where a firm merely provides generic advice to a client that does not result in a personal recommendation, the firm does not need to include the value of any assets that are the subject of the generic advice in its measurement of AUM” (see point (2) of guidance 4.7.14 of the Prudential sourcebook for MiFID Investment Firms);
- “If the firm advises the client only in general terms to invest a higher proportion of the portfolio in equities and a lower proportion in bonds, this would not normally constitute investment advice, unless the firm also gave advice on investing in specific equities or bonds. Provided that the firm does not give advice relating to specific investments (i.e. a personal recommendation), it therefore would not need to include the value of the portfolio when measuring its AUM” (see point (2) of guidance 4.7.14 of the Prudential sourcebook for MiFID Investment Firms);
- “the scope of the firm’s duty to provide investment advice may be more limited. For example, a firm may agree with a client that the firm will provide investment advice only on a particular subset of assets or only when specifically requested by the client. In that case, the firm’s duty to provide investment advice of an ongoing nature is limited to the relevant subset of assets, or the specific financial instruments in respect of which the client requests advice. Therefore, the firm would be required to include only the value of those particular assets or financial instruments when measuring its AUM” (see point (3) of guidance 4.7.14 of the Prudential sourcebook for MiFID Investment Firms).
In our view, the guidance provided by the FCA allow UK investment firms - which, as is well known, may provide investment services in the European Union with or without the establishment of a branch - to benefit from a more favourable prudential regime given that the IFPR’s “K-AUM” - practically identical to the IFR’s “K-AUM” - applies to a notion of AUM that does not include assets relating to the provision by investment firms of “generic advice” and/or monitoring activities.
As a result, this more favourable prudential regime – which is based, in our view, on a correct and reasonable interpretation of the definition of “investment advice of an ongoing nature” – has also the effect of causing a competitive discrimination against European investment firms as it allows UK investment firms to have a significant competitive advantage in the single European market.
The clarification would level the playing field by allowing European investment firms to apply the same prudential regime from which the competing UK investment firms operating in Italy and in the European Union are benefiting, without reducing the protection afforded to the investment firms’ clients.
For all the abovementioned reasons, this Authority is kindly requested to confirm that, in the event that investment firms merely carry out “generic advice” services (i.e. “asset allocation” and “monitoring” services in relation to the clients’ portfolio) not involving any “investment advice” as referred to in MiFID II, (i) such activities shall not be included in the definition of “investment advice of an ongoing nature” as referred to in Article 4(1)(21) of the IFR and (ii) as a consequence, the value of the relevant assets shall be excluded from the definition of “AUM” as referred to in Article 4(1)(27) of the IFR.