The Financial Conduct Authority said in its recent discussion paper on transposing the Mifid II directive into its own rules that it wants to hear views on whether to extend the definition of products considered ‘complex’ to ‘insurance-based’ investments and pensions.
All complex products can only be sold to a consumer either through an advised sale or through a sale following an ‘appropriateness test’. The move could provide a further boost for specialist advice, which is also being championed in the wake of pension freedoms.
This test is designed to ensure that a potential customer, who does not receive advice, has the knowledge and experience required to understand the risks of a given complex financial instrument.
However, according to some in the industry, it could also pose a threat to default pension funds, which to manage volatility often employ derivative investments that would be a key determinant of a product being classified as complex.
Speaking to FTAdviser, Matthew Connell, principal for government and industry affairs for global life at Zurich, warned that the Mifid II definition would consider a product complex where the “underlying investments are derivatives”.
Mr Connell said a complexity warning “is not a bad thing” and if people are told this is a complex product and therefore to seek regulated financial advice “that is a good thing”.
But he also stated “serious concerns” in applying the appropriateness test to pension products in an auto-enrolled environment, calling for the FCA to include a specific carve out for occupational pensions.
“The concern is that complexity is defined by products that contain derivatives, however some investment contain derivatives in order to reduce the volatility, so it is designed to make it a bit more consumer friendly.
“At European level, they have said that derivatives are so risky that it is better to ban some products or restrict some products from execution-only, even if they are designed to reduce volatility.
Mr Connell added that this could be a “big deal” if it’s applied to auto-enrolment, as then there could be no default pensions. “They have derivatives in to there to reduce volatility in order to give the scheme members a bit of a smoother ride.”
Aegon told FTAdviser its default workplace funds do not contain derivatives, however regulatory director Steven Cameron agreed there are reasons as to why default funds would contain such investments and that a carve out should be written into the rules.
“We agree that the FCA should not extend Mifid voluntarily to pension schemes as it would cause issues with auto-enrolment.”
Mr Cameron noted that at the moment, Mifid rules are designed around a product holding a single fund. As pensions do not have a single fund, questions remain as to whether the ‘complex’ definition would in principle apply to the pension products or an underlying fund.
“We really don’t want any unintended consequences of a voluntary Mifid extension when we don’t need to do one, particularly for auto-enrolment. We urge the FCA not to bring pensions under the Mifid microscope at this stage.”
An Aviva spokesperson added: “A small number of our default workplace funds do invest in derivatives and we are working to make sure we comply with Mifid II when it is introduced.
“All auto-enrolment workplace schemes now have governance oversight - either trustees or Independent Governance Committees - and they will consider the appropriateness of default funds on an ongoing basis.”
The FCA’s formal consultation paper will be published within a few months, with final rules set to be implemented by the end of this year.
donia.o’loughlin@ft.com
