InvestmentsDec 15 2014

Industry grapples with regulatory changes

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So it was heartening that some of this work was acknowledged by the G20 in its communiqué in September this year and further detailed in the progress report issued by the Financial Stability Board (FSB) at the Brisbane Summit later in November.

However, what is clear is that this process, while thoroughly under way, is not yet finished.

The FSB is highlighting the need to adjust its focus towards “new and constantly evolving risks” and “building trust and co-operation” in the next phase of its activities.

It is the latter phrase that has been the focus for a number of us within the investment industry. There is a growing consciousness of the role the industry plays in an individual’s future plans, and to ensure that the manner in which we manage our business and the risks posed by our operations always keep in mind the underlying trust placed in us by the end consumer.

The importance of trust and increased transparency is also practically embedded in a number of the key regulatory changes proposed by both the FCA and the European regulators, in particular through changes brought in by Markets in Financial Instruments Directive (Mifid) II relating to investor protection.

As firms grapple with the intricacies of the impact of Mifid II rule changes and engage in continual dialogue on issues such as the right level of cost disclosure, it is clear that regulators are constantly reminding those involved in the manufacture or distribution of investment products that each party in the distribution chain must always act in the best interests of the end consumer.

While this is clearly a philosophy that many firms have always had at the heart of their businesses, the regulatory message is more nuanced and is likely to have an impact on the established distribution chains for such products.

Across Europe, it will no longer be sufficient for a manufacturer to develop a product without always having an eye on what an investor actually needs from a product and it will no longer be enough for a distributor to market the product without obtaining regular training.

Some of us in the UK may think this is something we already do. These are concepts that are well embedded in our consciousness due to the implementation of the ‘treating customers fairly’ regime and the guide on the responsibilities of manufacturers and distributors. But for some in Europe, to have these concepts set out explicitly within the regulatory framework will be novel.

Aside from the wider market changes brought about by Mifid II, firms will also need to keep a watch on the developments set out in the follow-up to the Ucits VI consultation paper.

There is clear recognition among regulators and firms alike that the Ucits brand is important and therefore any increase or contraction in the types of eligible assets will need to be well thought through and justified.

In addition, it will be interesting to note the development of the exchange-traded fund (ETF) industry – will 2015 be the year of ETFs?

Certainly, when you look at the appetite in the ETF market to embrace the regulatory changes and explain how their products meet these new and improved standards, there is momentum.

So going back to implementing this sea of regulatory change, we cannot safely say that we have completed the task of addressing all of the concerns outlined by the G20, though we should be able to take some comfort that the global regulatory community appears to recognise that we have made headway.

What is clear is that in 2015 the industry will continue to press ahead with mapping out and practically implementing key changes brought about by Mifid II, while also ensuring that it keeps a mindful eye on changes that may affect the development of new kinds of investment products.

As firms increasingly grow their businesses and market on a cross-border basis, one will also need to focus on the cross-border application of regulatory change across the business as we move towards an increasing trend towards global principles applied at a local level.

Monica Gogna is a partner in the financial regulation and investment management team at Ropes & Gray LLP

Mifid II rule changes: Key dates

December 2014 – Mifid II: European Securities and Markets Association’s (Esma) final technical advice for delegated acts.

February 23 2015 – Vote of European Economic and Social Committee on money market fund regulation expected.

June 2015 – Mifid II: Esma to submit final regulatory technical standards to the European Commission.

July 2015 – Esma opinion due on whether to extend the Alternative Investment Fund Managers Directive (AIFMD) passport to non-European Union AIFMs and AIFs.

December 2015 – Mifid II: Esma to submit final implementing technical standards to the European Commission.

Start of 2016 – Packaged retail and insurance-based investment products: deadline for the delivery of technical standards.

March 18 2016 – Date by which member states must transpose Ucits V into national law.

June 2016 – Date by which the delegated acts under level two must be transposed by member states (24 months after Mifid II entered into force).

July 3 2016 – Member states to adopt and publish measures transposing the Mifid II directive into national law.

January 3 2017 – Mifid II officially comes into effect.

July 22 2017 – The European Commission will start a review on the application and the scope of the AIFMD.

FCA on Mifid II: Understanding the changes

Maggie Craig, acting head of savings and investments at the FCA, speaking at the FCA Mifid II Conference 2014:

“Implementing Mifid’s investor protection requirements should be about ensuring that both the standards of conduct and the organisation of firms reflect the interests of consumers and the duties owed to them.

“And, when it comes to more specific requirements – such as those on inducements, or sales of complex products – I think it will be important for firms to understand the drivers for change if they are to successfully implement them.

“Those firms that have been unhappy with the inducements standards that we have articulated since the RDR, for example, will need to keep in mind that standards are set to rise, not fall under Mifid, reflecting a desire for real and sustained change in this area.

“While large parts of the UK market have, in recent years, already seen their regulatory requirements rise, the new directive will still bring important changes – consolidating, codifying and broadening out what we expect of firms.”