The implementation of new EU Markets in Financial Instruments Directive into UK regulation by the Financial Conduct Authority will see a refocusing on inducements that could bias advice.
Speaking earlier this week at the FCA’s Mifid II Conference, the regulator’s director of policy David Geale confirmed the European Commission is likely to publish an implementing regulation or towards the end of the year, covering many of the conduct issues.
Until this set of detailed requirements that firms will face is received, the UK regulator cannot consult on or finalise its policy approach in all areas.
But Mr Geale stated that firms should not simply sit back and wait.
One of the areas where the direction of travel is already known is that of tackling inducements, which he said will come under a new regime, banning all payments from third parties, apart from certain ‘minor non-monetary benefits’.
“For independent advisers, these new measures should feel similar to requirements we introduced in the UK through the RDR to address the risk of advice being biased by commissions – and, of course, our rules cover both independent and restricted advice,” noted Mr Geale.
“But this new European level commission ban will still be of interest in the UK – not least because it will also extend to portfolio managers, something that we did not do with the RDR – and, equally as important is the fact that Mifid II will refocus our attention on inducements more generally – both for firms that give advice or manage portfolios and for those that do not.”
He commented that while there have been improvements among firms in this area, the FCA remains concerned that some may still be receiving benefits and payments that have the potential to bias the advice they provide.
Mr Geale moved on to due diligence and suitable advice, pointing to previous work on the latter and a current thematic project on the former.
“This work is particularly important in the context of Mifid II, because the implementing legislation is set to introduce more specific requirements for firms to conduct due diligence and ensure the products they recommend are suitable for their clients.”
Firms will be required to have policies and procedures in place to ensure they understand the nature and features of the products they select for their clients, and they will be required to assess whether alternatives are available that would better meet their client’s objectives.
As for appropriateness requirements under the new EU-wide rules, there will be an expansion of the types of products that are to be considered complex for investors to understand, the regulator stated.
Defining a product as ‘complex’ is important, as it means firms selling these products without advice will need to assess whether a potential purchaser has the necessary experience and knowledge to understand the product; the ‘appropriateness test’.
This is currently applied to products such as contracts for difference, spread bets and bonds that embed derivatives, however Mifid II included all non-UCITS collective investment schemes (often known as NURS in the UK) like property funds for example.