Implementing aspects of the Markets in Financial Instruments Directive as it currently stands will cause challenges for advisers, particularly where the onus will be on them to obtain all product costs and information from third parties, an expert has said.
Speaking to FTAdviser, Clive Cunningham, partner for financial services regulatory at law firm Herbert Smith Freehills, warned of the upheaval advisers face if the regulator implements the Mifid II rules as currently proposed.
In March, the Financial Conduct Authority called for views in a discussion paper, as to how far the Mifid rules should be implemented. Under discussion was whether a more modest European definition of ‘independent’ advice is “practically different” to the FCA’s own standard and how charges and costs should be disclosed to retail customers.
Mifid raises the bar on cost and charge disclosure, as the European Securities and Markets Authority wants to extend to professional clients more granular and comprehensive information up-front and regularly post-sale, Mr Cunningham said, warning there are “logistical difficulties”.
He flagged up further disclosure would include the costs of the service provided, as well as the costs of any financial instrument recommended or marketed to the customer, such as distribution and management fees, as well as payments to and from third parties, including broker commissions and platform fees.
All these fees would be “aggregated” to enable customers to compare the overall cost and cumulative effect of their investments, Mr Cunningham said.
“Esma’s expectations are high: using actual (not estimated) costs where possible and presenting the aggregated figure as both a cash amount and a percentage.
“Logistical difficulties include how firms can obtain all relevant data from third party product providers (across potentially thousands of products) and how to present the information in a way which helps rather than confuses customers.
Mr Cunningham added: “The FCA may exercise its Mifid II discretion to require disclosure in a standardised format. That would help firms know what is expected and increase consistency, but finding a workable format will not be easy – as the FSA’s ineffectual ‘costs menu’ for packaged products illustrated.”
A spokesperson for the Association of British Insurers told FTAdviser that the industry is still awaiting certainty on the format of disclosure under Mifid II [packaged retail investment and insurance-based investment products] however it would urge a joined-up approach with the FCA/DWP requirements on the disclosure of transaction costs for workplace pensions, “to prevent several different reporting regimes coming into force within a few years of each other”.
She explained: “Obtaining information from third parties certainly represents a challenge, particularly where that information is held overseas, and the costs of obtaining the information for disclosure should not be disproportionate to the benefits of doing so.”
Mifid II is also looking to introduce definitions of independent and restricted advice, however the UK and EU concepts of ‘independent’ arguably differ, “although the FCA seems unsure about this”, Mr Cunningham added.
“Research for the FCA’s first post-RDR review (December 2014) found customer confusion about the ‘independent’ and ‘restricted’ labels. The EU approach could remedy that, but the FCA needs to find a workable formula,” he noted.
Mifid II requires an IFA to consider “a sufficient range” of financial instruments which are “available on the relevant market” and only products which are not in some way connected to the firm.
However, Mifid II also applies to a wider range of products. While the Retail Distribution Review only applies to retail investment products, Mifid II also covers shares, bonds and derivatives.
Mr Cunningham said: “That begs questions about what ‘relevant market’ independent advisers should consider when advising on these other products. ESMA’s draft level 3 guidance introduces a jamboree of further concepts, which the FCA must translate to help firms understand what is required in practice.
“Given the data, systems, customer documentation, staff training and other practical steps firms wishing to remain ‘independent’ must implement to be ready, early clarity on the requirements is important.”
The FCA declined to comment as its Mifid II discussion paper is still open for views.
donia.o’loughlin@ft.com
