Your IndustryJun 24 2015

Implementing MiFID II reforms

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

This month I am looking at the FCA’s discussion paper (DP 15/3) titled Developing our Approach to Implementing MiFID II and briefly look at the CII’s new chartered firm criteria.

Implementing MiFID II is a really important topic if we are likely to stay in the EU. I say this in expectation of David Cameron gaining some EU treaty reforms and then to successfully win a referendum to stay in the EU, although I am sure there will be elements of his own party who would prefer an exit. Clearly the FCA cannot work on second guessing the political parties or a referendum and must work on the status quo. By issuing a DP, the FCA is outlining its initial views while also calling for input from the market. Unlike a consultation paper that is looking at the policy detail, the discussion paper is about shaping the agenda for the CP.

DP 15/3 is a fairly long document that embraces a range of different issues, but for most readers three key topics spring out.

1. Adviser independence (chapter 6)

2. Applying MiFID II remuneration requirements for sales staff and advisers to non MiFID firms (chapter 7)

3. Recording telephone conversations and electronic communications (chapter 8)

I doubt many firms will argue against the recording of telephone conversations. If the client is willing, I can see a strong argument for all client meetings (face-to-face and electronic) to be recorded as this ensures records are accurate and offers the strongest consumer protection, as well as protection for the adviser should a complaint be made. I know several advisers who automatically record their client meetings because of this.

Equally, applying MiFID II remuneration requirements across all markets appears to me to make eminent sense.

However, it is the definition of independence (and the rest of chapter 6) that is likely to be of most interest to readers. In chapter 6 (point 6.3) the FCA states: “MiFID II requires firms offering independent advice to assess a ‘sufficient range of different product providers’ products prior to making a personal recommendation.” The FCA goes on to say: “We expect the criteria for ensuring that products and providers are ‘sufficiently diverse’ to be established by the level 2 implementing measures later in 2015. The European Securities and Markets Authority’s technical advice suggests independent advisers should consider a range of financial instruments proportionate to the scope of advice, and adequately representative of the products available on the market.” To me this sounds awfully like a pre-RDR definition of ‘multi-tie’ and not what the consumer or our clients would consider to be independent. Yet, as a non-executive director of a firm of independent financial advisers, I have long argued that the FCA’s current definition of independence is flawed.

For example, I can see no reason why a firm should not be allowed to specialise and still retain its independence label. Thus a firm that only deals in (say) life insurance should be able to state that it is independent. Clearly it would need to be able to offer products from the entire market and it must be totally independent of any restrictions or commercial ties (including platforms). The FCA currently allows a firm to limit itself to a “relevant market” (the DP uses the example of Sharia investments) while still retaining the title of independent. My argument is that this could be extended to areas of specialism that would then allow advisers and firms to concentrate on their areas of expertise and where necessary refer their clients to other specialists while still maintaining their independence. This would then make our profession much more aligned with other professions such as law.

DP 15/3 now offers the FCA the opportunity to look again at the UK definition of independence and make it clearer and more effective. I hope that the FCA will consider this – although worryingly the FCA still appears to be under the false impression that independence is merely a communication issue (see 6.11).

Finally I would like to briefly mention the CII’s new chartered firm requirements it is now phasing in. The main change is that from 2020, a firm of chartered financial planners will need to have a minimum of 50 per cent of its planners individually chartered. To me this makes sense, but I realise this will require some advisers to continue beyond level 4.

Dr Peter Williams is an independent business consultant and chartered financial planner.