Advice could be set to benefit from a further indirect push from the regulator after the Financial Conduct Authority revealed it plans to extend the definition of products considered ‘complex’ and that therefore require either advice to be taken or for clients to be tested for ‘appropriateness’.
In a consultation paper on transposing parts of the European Markets in Financial Instruments Directive, the watchdog reveals it is considering extending the definiton to apply to a wider range of insurance-based investments and pensions.
These products are directly covered by the Insurance Mediation Directive, which is also making it ways through Europe, but the regulator states it wanted to hear views on whether it should apply Mifid II’s appropriateness test unilaterally.
As it stands, all complex products can only be sold to a consumer either through an advised sale or through a sale following the appropriateness test. This test is designed to ensure that a potential customer who does not receive advice has the knowledge and experience to understand the risks.
The regulator would apply aspects of the Markets in Financial Instruments Directive II’s test to determine when products should be treated as complex, such as a product that has a structure which makes it difficult to understand, or products that embed a derivative.
According to the paper, this would make it “likely” that any shares and bonds that embed a derivative, structured Ucits funds, non-Ucits collective vehicles and even some structured deposits will be considered complex.
The move comes after a series of measures to boost take up of advice from the regulator ahead of looming pensions freedoms, including by requiring providers and guidance providers to signpost regulated advice and pushing it directly in its own consumer-facing ‘Scam Smart’ campaign.
The FCA adds pension liberalisation “could give rise” to new risks of inappropriate sales of insurance-based investments to consumers and it will continue to monitor this closely.
Elsewhere, the FCA says if it decides to apply the amended Mifid II framework to ‘article 3’ firms, including advisers, they will need to take all reasonable steps to record relevant telephone conversations, face-to-face meetings and electronic communications relating to client transactions.
Clients must be notified that telephone conversations will be recorded. Firms must also take reasonable steps to prevent employees from using personal devices that cannot be recorded. The records need to be kept for at least five years and provided to the client on request.
The FCA wants to hear responses to its consultation by 26 May.
donia.o’loughlin@ft.com
