Mifid was introduced in 2007 to harmonise securities trading and financial services legislation across the European Economic Area. It was agreed that Mifid would be reviewed after three years, the result is a new tranche of legislation, dubbed Mifid II, currently scheduled to be implemented in January 2017.
For advisers, the most relevant aspects of Mifid II relate to conduct of business. The RDR has already implemented many of the standards but there’s still plenty of other changes that are set to keep advisers busy. Here are some of the major ones.
Tighter rules on complex products
The definition of a complex product is set to be widened. For funds this will include all Ucits that embed a derivative, as well as all Non-Ucits Retail Schemes.
Complex products sold non-advised will require distributors to conduct an appropriateness test of their client’s experience. Potentially where a fund’s appropriateness is in question, the customer may choose to seek advice. More likely is a much greater focus on distributing vanilla and non-structured Ucits for non-advised sales.
Both product manufacturers and distributors will need to define their target markets and take steps to ensure that products only end up in the hands of the intended market. This will demand extensive two-way information sharing between advisers and providers.
Advisers must be prepared to develop a distribution strategy to meet the needs of their target market. In addition, the rules demand ongoing assessment, meaning that a change in objective or charges for a fund could trigger another review of the fund managers’ and distributors’ target markets.
Total costs disclosure
Distributors will be required to provide the customer, pre-sale, with a personalised single figure for all costs of investing in a product, including advice and platform charges, against the expected return. Total costs incurred during the year will need to be disclosed annually.
Telephone and electronic client communications, where there is an intention to conclude a transaction (whether during that communication or in the future), will need to be recorded and kept for seven years, with the customer having the right to obtain a copy on request.
Quarterly portfolio statements
Discretionary portfolio managers will be required to send clients valuations on a quarterly basis.
In addition to the complaints handling process, firms will need to maintain comprehensive complaints management information to identify and address risks and issues arising.
Rules on allowable commissions and non-monetary benefits between advisers and other firms are set to be tightened. Expect a greater focus on enhancing the quality of a service and the client’s best interests before payment.
Mifid II makes an explicit link between remuneration of staff and conflicts of interest. Where remuneration is driven through sales targets, quantitative and qualitative measures will need to be put in place to demonstrate they are designed to encourage fair treatment of clients and responsible business conduct.
Mifid II will broaden out some of the governance standards in the Capital Requirements Directive from banks and certain investment firms to all investment firms, including advisory firms. A notable impact will be a limit on the number of directorships an individual can hold.
Mifid II will ban discretionary fund managers from accepting and retaining third-party commissions. The European proposals have suggested DFMs will be able to receive payments provided these are passed to clients in full. However, the FCA is exploring the idea of banning all client rebates in the UK.
It’s clear to see RDR may be over, but the evolution of adviser regulation is far from finished.
Stephen Wynne-Jones is head of marketing at Cofunds.