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Freshfields Risk & Compliance

| 5 minutes read

Understanding the definition of investment advice under MiFID – ESMA revises 13-year-old guidance

It has been a while since the CESR guidelines on “Understanding the definition of advice under MiFID” were published. To be precise, 13 years have passed since CESR, ESMA’s predecessor, clarified and illustrated situations to help firms determine whether the services they provide are subject to the requirements on investment advice.  It was therefore high time for ESMA to update CESR’s guidance, not least because MiFID II was introduced more than a decade ago and we are already in the midst of discussing the potential impact of a possible MiFID III as part of the Commission’s Retail Investment Strategy (see our recent blog post).

On 11 July 2023 EMSA published a Supervisory Briefing on understanding the definition of advice under MIFID II (the Briefing). While the definition of investment advice has not changed since MiFID I, the Briefing specifically considers its application to new business models and the use of social media and mobile apps.

ESMA’s Supervisory Briefings are not formally binding on national supervisors when deciding on whether a particular activity constitutes investment advice and are not subject to a “comply or explain” mechanism. However, like CESR’s guidelines, the Briefing can be expected to have a de facto binding effect and firms would be well advised to treat the Briefing as a clear indication of supervisory expectations.

So, what’s new?

The content of CESR’s guidance remains largely unchanged but is supplemented on certain key aspects by ESMA.

To recapture, investment advice means the provision of personal recommendations to a client in respect of one or more transactions relating to financial instruments (Article 4(4) of MiFID II). That recommendation must be presented as suitable for that person or must be based on a consideration of the circumstances of that person (Article 9 of the MiFID II Delegated Regulation).

ESMA makes targeted revisions to the following elements of the definition:

  • Implicit recommendations: The Briefing reiterates that recommendations are not only explicit statements (to “buy”, “sell” or “hold”) but may also be provided in an indirect or implicit manner. ESMA provides additional guidance on when a statement may "implicitly" or “Indirectly” contain a recommendation. For example, a statement by which a product is advertised as “best in class” in comparison with its peers or is presented as “award-winning” and having “high rates” could be considered as personal recommendation. Other examples include situations where (i) information states that the client’s objectives could be better achieved by another financial instrument, (ii)  the client is informed that the financial product the client is invested in does not meet the client’s investment objectives or (ii) the client receives a message that a certain product is purchased by an investor with similar characteristics and needs as the client. Importantly, personal recommendations do not need to contain all the transaction details (e.g., recommended purchase price or time of purchase) to meet all the conditions for a “recommendation”.
  • Copy trading: Firms may provide clients access to model or actual portfolios of “copied traders” whose trades clients can mirror. Depending on how the copy trading service is designed and provided, it can be the case that copied traders provide investment advice to the investors who are copying their trades. Insofar, ESMA points firms to its recently published Supervisory Briefing on supervisory expectations in relation to firms offering copy trading services. To recall, where one single firm is involved in the provision of copy trading services to its clients and the firm has a direct link to the copied traders, ESMA finds it highly unlikely that this firm is only providing execution services and not also investment advice.
  • Generic advice: ESMA clarifies when a recommendation is made in relation to transactions in particular financial instruments in contrast to “generic advice”. In line with CESR’s guidance, generic advice (e.g. advice on the merits of investing into a geographical zone or in certain asset classes rather than others) does not constitute investment advice. This is different, if the generic advice is already part of the investment advice process, i.e. preparatory to the provision of investment advice (e.g. information on an asset allocation proceeding the investment advice concerning a portfolio). In any case, if a firm provides generic advice about a financial instrument which it presented as suitable for the client although this is not correct, the firm may be in breach of the rules to act honestly and fairly in accordance with the client’s best interests.
  • Disclaimer: ESMA confirms that any disclaimer to the effect that a certain statement does not constitute investment advice do not change the nature of the communication in practice.  Disclaimers used by the firm cannot prevent the qualification as investment advice and cannot limit the firm’s responsibility with regard to the provision of investment advice.
  • Recommendation made exclusively to the public: ESMA reiterates the understanding that an information on financial instruments that is made in newspapers or television is no "personal" recommendation but is made exclusively to the public and, therefore, does not constitute investment advice. However, with reference to recital 14 of MiFID II Delegated Regulation, ESMA points out that this may be different in relation to recommendations made through internet websites, investment apps or social media (including through influencers), which could, in certain instances, be regarded as personal recommendations. Insofar, firms will have to consider whether the content has been personalised which may also be the case where private messaging (i.e. messages only viewable by individual participants of a given platform) or targeted messaging (i.e. the creation of content for a specific target audience) is used to address a recommendation to a particular person rather than the general public.
  • Training as investment advice: Providing training or courses on financial matters does not constitute investment advice. However, if a firm gathers information on a person’s individual circumstances and uses it as a basis for a recommendation or presents a financial instrument or service as suitable during the sessions, firms would provide investment advice during a training or course.
  • Acting on request of a professional client: If a professional client instructs a firm to find a product for him and provides the firm with detailed information on the requested product, the firm does not provide investment advice if it merely responds to this request. According to ESMA, this would only be different if the firm additionally expresses an opinion on the product and whether it is suitable for the client. 

In addition to these changes, ESMA made a number of clean-ups including (i) referring to the relevant provisions under MiFID II instead of MiFID I, (ii) clarifying that ‘investment advice’ in the meaning of the Briefing also encompasses the notion of independent investment advice (which did not exist under MiFID I) and (iii) pointing out that market abuse requirements in relation to investment recommendations are outside the scope of the Briefing. The Briefing is completed by a set of “practical cases” which illustrate the application of the Briefing.

We expect that the update of the Briefing will be well received by firms, not least because it does not contain any major surprises that would require firms to adapt to new processes and routines.The only question that remains is why ESMA did not  update CESR’s Guidelines earlier.


mifid, esma, eu, financial services, investment trading and markets, regulatory framework, retail markets