I have not been involved in the lengthy meetings my fellow directors have held about Mifid II. Having reviewed the bumf, though, I have now reached some conclusions about the consequences. As is normal for retail financial services, most of the consequences are unintended by well-meaning regulators. In fact, they will result in effects opposite to those they intended.
The first obvious fact is that most adviser firms will not be Mifid-ready by January. It seems to me that many small firms will never be Mifid-ready and will be unable to comply with the new rules in any meaningful sense. Will these firms really take on board the detailed changes to advice processes reputable compliance advisers are recommending?
I think many small advisers will conclude that they can probably get away without undertaking a genuine annual suitability report and that some mass-produced, jargon-heavy waffle will enable them to tick the relevant regulatory boxes. It is hard to see how the FCA could possibly tell the difference between that and a genuine effort to update suitable advice without looking at client files.
We estimate that we will need an extra full-time administrator to deal with the Mifid II requirements. If the FCA was really serious about making advice more readily available, would it be imposing these additional costs?
I do not take the argument about this being a EU directive seriously: every EU country has the choice about how to implement directives, and the UK has form in gold-plating them and adding to their requirements.
The problem goes back to the idiocy of the MPs who passed the original legislation that makes the FCA almost entirely unaccountable. The only people with any ability to change the way the FCA works are officials in the Treasury who would rather spend their time dreaming up wheezes for the Chancellor’s next Budget.
I expect ongoing advice fees to rise over the next year as advice firms get miffed.
Given the requirements for ongoing suitability assessment, advice firms are probably going to sack many of their clients. This is not just because of the obligation to produce the reports, it is the knowledge that any small failure or oversight in this process will open the advice firm up to potential complaints. Many firms will conclude that the threshold for ongoing advice needs to be raised. I guess many firms will see fees of £1,000 a year or a portfolio of £100,000 at the typical 1 per cent annual fee as a sensible minimum level.
On the other hand, some firms will try to avoid the requirements by not providing an ongoing advice service for some categories of client. So, it is back to the future: higher initial advice fees and a “call us if you need anything else” proposition.
At this point, some will be thinking robo. But the UK’s madly complex tax system means there will never be a set of algorithms capable of optimising clients’ financial arrangements. For that, you still need a human adviser. All robo can generate is simplified advice for simple situations.
But maybe there is a silver lining to this cloud. If small firms do not meet the Mifid requirements and are actually penalised by the regulator, perhaps we will be able to buy them up on the cheap.
Chris Gilchrist is director of Fiveways Financial Planning