Fund houses fight to label own ‘complex’ products

The regulations – due to come into force in January 2018 – will see certain products labelled as complex, meaning retail investors would need to complete a questionnaire on the risks involved in order to invest.

The European Commission will provide further clarity later this year, but current readings appear to show this affecting all non-Ucits funds and potentially absolute return strategies.

However, European regulators will only provide a basic classification of whether a product is complex, leaving the granular decisions to distributors or even asset management firms.

Jeffrey Mushens, technical director at the Tax Incentivised Savings Association, said a consensus was forming around the need for manufacturers to have greater involvement in product designation for their customers.

As such, he said the trade association was set to raise the issue with the FCA. He added that regulators could not be left to classify products given the sheer number of funds on offer.

“A consensus is emerging that, in practical terms, it should be with the manufacturer to determine whether [a product] is complex or non-complex,” Mr Mushens said.

“There will be a discussion [between asset manager and distributor],” he said.

Fund groups are already considering the impact a complex designation could have on their offerings. Some have been converting multi-asset funds into Ucits structures to protect their businesses.

While some have welcomed the involvement of manufacturers as a “rational” way to avoid inconsistent definitions, others have raised the prospect of a conflict of interest.

Mike Horseman, managing director at advice firm Cockburn Lucas, compared putting asset managers in charge of such a designation to “putting an alcoholic in charge of the wine store”. He said a “committee of experts” that included fund providers and distributors to give strong guidance on complex products would be more appropriate.

“The responsibility lies [with a distributor] to ensure a product meets the proper standards between complex and non-complex, via standard due diligence as per [the] current position.”

But Hargreaves Lansdown senior analyst Laith Khalaf said: “It seems to me that it naturally sits with the manufacturer.

“This is a better solution, because otherwise what happens is you get various distributors reaching different conclusions. It seems rational that the asset manager makes that decision.”

Mr Mushens said product manufacturers did not want different distributors coming up with different definitions.

“There’s going to be a debate about who’s going to carry out the assessment [of what is complex],” he said.

“Manufacturers and distributors work pretty closely [together]. We came to the view that it’s probably the distributor’s obligation but they will seek guidance.”

IA urges ‘qualitative test’ to assess products

With the implications they could have on distribution, decisions on what products are dubbed ‘complex’ under Mifid II have already prompted interventions from the asset management industry.

Earlier this year trade bodies reiterated calls to overhaul proposals under the regulation for all non-Ucits products to be treated as complex, amid signs European regulators could back down on the issue.

The minutes of an FCA roundtable with trade bodies on Mifid II implementation, held earlier this year, noted reports of “possibly narrowing the scope of instruments judged to be complex for the purposes of the appropriateness test”.

Trade bodies, including the Investment Association, have weighed in, making the case for a “qualitative test” to be applied when assessing products for complexity, rather than a “black-and-white” definition based on legal form.