Industry trade bodies have reiterated calls to overhaul Mifid II proposals that treat non-Ucits products as ‘complex’ instruments, amid signs European regulators may be close to backing down.
As part of the regulation, due to come into force in January 2018, non-Ucits products such as investment trusts and many multi-asset funds would be designated as complex. This means retail investors seeking to use these products would need to complete a questionnaire on the risks involved.
Some fund groups have considered converting their multi-asset funds into Ucits vehicles so as not to jeopardise retail business. These moves would limit the products’ investment scope, potentially hurting intermediaries who use them as a diversification tool.
Hopes have been raised, however, that the Mifid rules may be relaxed.
One individual familiar with the discussions, who wished to remain anonymous, said a leaked version of the European Commission’s forthcoming delegated acts suggested the approach could change.
Similarly, the minutes of a recent FCA round table with trade bodies on Mifid II implementation noted reports of “possibly narrowing the scope of instruments judged to be complex for the purposes of the appropriateness test”.
Trade bodies have now reiterated calls for a new approach.
Ian Sayers, chief executive of the Association of Investment Companies, said: “I have been arguing that we shouldn’t try to define what is and isn’t complex based on legal form.
“It should be tested on consistent criteria, such as whether you can lose more money than you put in.”
He noted that under the current proposals, disparities could arise, with “identical” products given different definitions.
For example, an investment trust listed on the London Stock Exchange could be dubbed complex, while an identical Aim-listed vehicle may escape this designation.
“Under the criteria, our members that are fully listed would be automatically complex. But if they traded on Aim, they would be tested on criteria and could be dubbed non-complex,” he said.
“It seems odd that the most highly regulated trust will be called complex but an identical fund on Aim isn’t complex.
“The idea of trying to define what is and isn’t complex with a tick-box approach isn’t going to work.”
Florian van Megen, retail markets specialist for the Investment Association, said an alternative solution – a ‘qualitative’ test – had been put forward.
This test could use criteria from original Mifid I rules, he added, examining where there exist “frequent opportunities to dispose of, redeem, or otherwise realise that instrument at prices that are publicly available to market participants”, and whether “adequately comprehensive information” on a product’s characteristics was publicly available.
“We want to apply a qualitative test and not just a legal black and white [definition].”
Like Mr Sayers, he noted that similar products could fall into separate categories.
“The broad industry view is that this blanket definition of complex and non-complex products isn’t reflecting market reality,” he said.