MiFID II: pointers for financial planners

The second Markets in Financial Instruments Directive (MiFID II) may well have been rumbling on in the background for many years, but this alphabet soup of regulation is fast approaching for financial planners


For many financial planners who have been operating under Retail Distribution Review rules since early 2013, there seems to be a relaxed attitude towards MiFID II implementation, which is now set for January 2018.

However, there are still issues that all planners will need to consider ahead of this date:

  • The definition of independence, particularly in relation to investment advice.
  • The disclosure of all costs and charges to clients, including historical reporting of actual costs per client per holding.
  • Quarterly rather than half-yearly client reporting, although these can be sent electronically under certain conditions. Increased reporting if losses exceed 10%.
  • Remuneration, ensuring a formal policy is in place and that staff are not remunerated in a way that affects client interests.
  • Product governance, which is extremely complex and has the potential to prevent planners from making recommendations on certain higher risk products, even if they will form part of an overall balanced portfolio, and providing some information directly or indirectly to product providers in order for them to check that their products have reached those clients for which they were designed.
  • The requirement to record telephone and electronic conversations and store them for up to seven years with clients, where there is an intention to conclude a transaction or when a recommendation is made.

“While some of these will have already been addressed by many firms, planners (and their firms) need to start reviewing their position now so they can identify any gaps in their processes and plan accordingly,” says Natalie Wright, a senior manager at Mazars’ Leeds office.

Main MiFID II sticking points

The major change under MiFID II will be for those planners who also have discretionary approval. At present, a discretionary fund manager (DFM) falls outside RDR requirements.

However, from January 2018 the FCA fully expects discretionary planners to not only implement MiFID II, but also “apply RDR standards to their existing business”. 

Director of Regulation at the Wealth Management Association, Ian Cornwall, explains: “Financial planners that are MiFID II firms will be caught by the relevant MiFID II rules. Non-MiFID firms in many cases will also be caught by the MiFID II rules because the FCA is adopting them.”

For investment companies, this impending obligation under MiFID II is one that is being looked at closely. “Under MiFID II, disclosure of costs will be both at point of sale and on a regular basis,” says Guy Rainbird, public affairs director at the Association of Investment Companies. “The challenge is how you calculate those costs and provide that information to planners. It’s something we are working on.”

New suitability requirementsMiFID II is also increasing the scope of investment products for which appropriateness assessments must be undertaken. For planners involved in this field, it means conducting additional due diligence to ensure the more complex products they recommend are suitable for their clients.
"Non-MiFID firms in many cases will also be caught by the MiFID II rules because the FCA is adopting them"

Technical Policy Director at the Tax Incentivised Savings Association, Jeffrey Mushens, says: “Where a customer is advised, the adviser is responsible for determining whether a product is suitable.” “If the investor fails the test, they may still be allowed to buy the product but a warning will be given saying it may not be appropriate. The Directive increases expectations on existing systems and controls.”

Encouraging ‘best practice’It is not all doom and gloom, though. Some planners can see real benefits from MiFID II. “Certainly, recording conversations is good protection for both sides,” says Danny Cox CFPTM Chartered MCSI, a planner at Hargreaves Lansdown in Bristol. “A lot of planners, including those at Hargreaves Lansdown already do this – so it is more of a best practice piece really. It also helps you engage more with your client – meaning you take fewer notes by hand.

“We are obviously going to look at how we disclose fees and charges. But I have a feeling we are there anyway. In the end, it may mean a bit more bureaucracy but MiFID II won’t make a huge difference to planners, especially the majority who don’t get involved in complex products.”

For smaller advice firms, many, like Andrew Elson CFPTM Chartered MCSI at Leeds-based Beaufort Financial Planning, are still giving MiFID II a watching brief. “I am worried it’s another layer of regulation,” he says. “For smaller firms, many of whom don’t have dedicated compliance departments, who is going to do this additional work?”
At odds with FAMR?

For planners, there is also the UK Government’s recent Financial Advice Market Review (FAMR) to contend with, which is essentially trying to reduce the regulatory burden on advisers so they can serve more clients. It is easy to see why this alphabet soup of regulation is a mystery to many planners.

“MiFID II and FAMR appear at odds with each other,” says Natalie. “While the outcome of both is clearly around consumer protection, MiFID II is about creating a more robust process for advisers to go through before a client goes ahead with a recommendation, whereas the FAMR is concentrating on reducing the regulatory burden of regulation on planners so they can ultimately reduce the cost of their advice and close the ‘advice gap’ that we see in the UK today.

“Ultimately, it is about getting a balance of these two objectives and if the framework offered by MiFID II can put the client in the best position, while also providing the planner with the ability to reduce costs but without reducing the standard of advice they provide, then it would appear to be a ‘win-win’ situation.”

The impact of BrexitOf course, the elephant in the room is Brexit. The European Securities and Markets Authority will be the pan-European regulatory body tasked with implementing MiFID II and its concurrent sister regulation, the Markets in Financial Instruments Regulation (MiFIR). But as Article 50 has yet to be triggered by the UK, there is still much conjecture as to what it will mean for any laws emanating from Brussels. 

“Will we even get to MiFID II?” asks Andrew at Beaufort Financial Planning. “If I spent all my time and effort on something that might happen, I would never be able to do anything for my clients about what is happening.”

However, many commentators disagree. CISI CEO Simon Culhane, Chartered FCSI notes that “there is little doubt that MiFID II will be, and needs to be, implemented because it is a key priority for the UK, in a post-Brexit world, to obtain passporting. This will require the UK regulatory regime to be ‘equivalent’ with the rest of Europe. If Europe adopts MiFID II, then the UK needs to do the same, so MiFID II isn’t an option and needs to be in place, whether we have a hard, medium or soft Brexit.”

Published: 05 Dec 2016
  • Compliance, Regulation & Risk
  • Financial Planning
  • The Review
  • Mifid II
  • financial planning

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