We came across a staggering static this morning: two thirds of firms (64% to be precise) are not confident they will be able to comply with the MiFID II deadline of January 2018. Will your business be ready? We recently read this excellent summary of the five keys areas of MiFID II that might impact financial advisers.
Making Sense of MiFID II
As you will be aware, MiFID II provides one of the biggest regulatory challenges the UK wealth management industry has faced in recent years. Its implementation will impose new mandatory requirements on firms within the industry, with the aim of improving the functioning of financial markets and strengthening of investor protection.
The five key areas in which advisers may be affected are:
» Independent and non-independent advice
» Appropriateness and execution-only services
» Recording of telephone and electronic communications
1. Independent and non-independent advice
MiFID II makes a distinction between the provision of independent and non-independent advice. However, it is not expected that the impact of the MiFID II will significantly change the Financial Conduct Authority’s (FCA) rules on independent and restricted advice. Firms must continue to tell clients on what basis investment advice is given in advance.
The European Securities and Markets Authority’s (ESMA) interpretation of the new directive has indicated that advisers may also be required to alert clients of the potential need to review their investments periodically. These reviews can be updates, rather than completely new reports.
MiFID II has put a greater emphasis on risk tolerance and includes more explicit references to “ability to bear losses”. Investment firms and advisers will be required to report to clients where the value of their portfolio depreciates by 10% between valuation points in any quarter. However, it is not yet clear whether this will require a new interim valuation report to be produced. There will also be more onerous obligations on investment firms to determine suitability, although many FCA-regulated firms will be familiar with the additional suitability obligations being put in place.
Firms giving advice will be required to disclose whether they will provide the client with an ongoing assessment of the suitability of the relevant product or service. In addition, firms must specify to clients the basis on which the recommended investment is suitable for them.
MiFID II will prohibit advisers from receiving and retaining payments from third parties, such as fees, commissions, or monetary or non-monetary benefits. The prohibition of the non-monetary benefits may have a similar impact as the FCA’s stance on purely social / sporting events and therefore make it increasingly difficult to host, or receive invitations to, sporting and social events without breaching the inducements rules.
MiFID II has also had a particular focus on the receipt of investment research. It is likely that ESMA will take the view that advisers should only be able to receive research by paying for it.
4. Appropriateness and execution-only services
Where an adviser provides clients with investment services in addition to investment advice or portfolio management (e.g. credit facilities), the adviser must assess the appropriateness of the product or service provided.
This is not required for execution-only services for non-complex instruments, which MiFID II has now defined as:
» Shares admitted to trading on a regulated market.
» Bonds and other forms of securitised debt admitted to trading on a regulated market.
» Shares or units in UCITS vehicle (except structured UCITS).
» Structured deposits.
» Other non-complex financial instruments designed to provide a similar function to the above instruments.
5. Recording of telephone conversations and electronic communications
MiFID II will require advisers to record or make notes on telephone calls related to “the reception, transmission and execution of orders, or dealing on own account”. Last month the FCA revised this down from the need for advisers to adopt the same level of recording technology as investment managers and dealers. These records must be kept for five years. The FCA has ruled out the requirement for face-to-face meetings to be recorded – although ESMA has advised that the content of face-to-face conversations with clients should be documented by a file note.
The obligations relate purely to communications intended to result in transactions. This suggests that pre-transaction discussions and advice ought to be recorded.
Clients must be notified that telephone conversations will be recorded (audio or written). Such records will need to be provided to the client on request, within a reasonable timeframe and at no cost to the client.
MiFID II is wide ranging and will likely have an impact on the client service, IT and HR systems of advice firms. It is likely that the FCA and other competent authorities will have little or no discretion over how to implement the changes, which will take effect across the European Union, beyond additional “gold plating” of the current legislation. Therefore, firms need to start planning for the changes ahead of MiFID II’s implementation in order to be ready for 3 January 2018.
As always your comments are most welcome. You also might like this article on MiFID II we prepared a while back.
*Research study by corporate finance adviser Duff & Phelps surveying 183 senior financial services professionals, including compliance professionals and investment managers, across Europe, US and Asia.
This article was created for the DISCUS website based on an article created by Brooks Macdonald on MiFID II originally posted on the Brooks Macdonald website. To find out more about Brooks Macdonald’s discretionary investment services, visit the Brooks Macdonald page ›