Regulation  

‘Complex’ Mifid product debate wrangles on

‘Complex’ Mifid product debate wrangles on

The ‘complex’ and ‘non-complex’ designation of investments under the incoming Markets in Financial Instruments Directive rules are becoming a real bone of contention, KPMG have warned.

Speaking at an event this morning (30 June) organised by Tisa, KPMG’s senior manager for funds and investment management Sally Rigg, said: “The complex and non-complex designation of investments is becoming a real bone of contention and will have to be a focus for the FCA in their implementation.”

The Financial Conduct Authority asked for industry views, in its recent discussion paper on transposing the Mifid II directive into its own rules, on whether to extend the definition of products considered ‘complex’ to ‘insurance-based’ investments and pensions.

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Under the latest iteration of the EU rules - due to come into force at the start of 2017 - all ‘complex’ products can only be sold to a consumer either through an advised sale or through a sale following an ‘appropriateness test’.

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.

According to the FCA paper, it is 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.

This may mean that investment trusts would fall into the complex group, according to Ms Rigg, something which both the Association of Investment Companies and the Wealth Management Association are continuing to lobby against.

Previously, Matthew Connell, principal for government and industry affairs for global life at Zurich, warned that, as a result, it is likely default pension funds would be killed off. Ms Rigg added that exchange-traded funds which have underlying derivatives will be considered ‘complex’ investments as well as peer-to-peer lending.

Jeffrey Mushens, Tisa’s technical director, previously said it is “critical” that Mifid does not extend the scope of complexity to include P2P loans or UK-listed investment trusts.

However, another speaker at the event, IFDS’ associate director for compliance Chris Selden, suggested that there has to be an argument for them to be non-complex. “It’s still a category we don’t have any information for, [and] until we get Esma [European Securities and Markets Authority] clarity we don’t know what will change.”

Esma has been asked to develop guidelines to help firms determine when a product is deemed complex, which are due to be published next January.

Stephen Hanks, the FCA’s Mifid co-ordinator in the markets policy department, added that many European members states want a blanket approach to non-Ucits funds, which could have a “serious impact” on things like investment trusts.

He pointed out that the only real opposition is coming from the UK as it is the only European country that really has an industry for them.

Ms Rigg concluded that the issue of complex versus non-complex is a live debate and currently under consultation, awaiting a decision by the European Commission.