EuropeanMar 17 2014

EU directive revisions reach agreement

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The introduction of adviser charging and increased professionalism requirements under the RDR has led firms to review their advice business models, in many cases focusing on a wealthier client base. Now more change is on the horizon, this time coming from the European Union (EU).

The revision to the EU Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR) reached political agreement on January 14 2014.

In addition to reforming the regulation of EU capital markets, it seeks to strengthen investor protection. In particular, it introduces some RDR-like rules to an EU market in which distribution models vary widely. There has been much speculation that these rules will overturn the RDR in the UK, as although they go in the same direction as the RDR they do not go as far in some respects.

It looks as though the UK will be able to continue to go over and above EU rules in relation to the RDR. UK firms that have already faced the challenges of implementing the RDR are likely to be in a better position to absorb changes resulting from MiFID II/MiFIR relative to some of their EU counterparts.

There will, however, be some challenges for UK investment advisers and inconsistencies are likely to remain.

MiFID II will only ban third-party remuneration for independent investment advice, whereas adviser charging under the RDR applies to all retail investment advice. MiFID II sets the bar lower than the RDR on what qualifies as independent advice and there is no equivalent definition of ‘restricted’ advice. Member states will have discretion, rather than the obligation, to ban third-party remuneration in relation to the distribution of insurance investment products (under an amendment to the EU (IMD).

Under the MiFID I implementing Directive, member states can go over and above the MiFID rules following notification to the European Commission, subject to conditions. Crucially, MiFID II should allow member states to retain the additional requirements notified to the Commission before entry into MiFID II.

In terms of where rules go further than the RDR, MiFID II bans third-party remuneration for portfolio management and brings structured deposits into scope. As UK portfolio management is typically remunerated through client fees, a ban on commission is unlikely to raise too many eyebrows. The FCA may choose to expand the RDR scope to include structured deposits.

This is in line with the EU’s thinking on the scope of the Packaged Retail Investment Products (PRIPs) initiative and therefore shouldn’t come as a bolt out of the blue to the industry.

MiFID II/MiFIR also contains further rules designed to strengthen investor protection. It introduces extensive product governance rules, including that firms must have a product approval process that specifies an identified target market of end clients, with a compatible distribution strategy.

The MiFID II reforms raise wider questions about consistency across the EU. Independent advisers will face significant challenges competing with non-independent advisers in EU countries where the latter can continue to receive commission.

Rosalind Fergusson, CFA - manager, Deloitte Centre for Regulatory Strategy