There is still much uncertainty about the Markets in Financial Instruments Directive II (MiFID II), which is set to come into force on 3 January 2018 following this May’s decision to formally delay its implementation by a year.
In the wake of Brexit, firms are wondering whether we could see another delay, in order to buy more time to prepare for the introduction of the revised MiFID II.
However hopeful some firms may be about another delay, the Financial Conduct Authority (FCA) confirmed in its second consultation paper on MiFID II, published on July 29, that European regulation is still a top priority in the wake of the vote, and firms should press ahead with implementation plans.
So, as firms get ready for implementation, it is important that they understand some of the key areas of focus, which include investor protection (this simply refers to independent and restricted advice), appropriateness, product governance; and costs and charges. These will be formally consulted on in the FCA consultation expected at the end of September. So what does this mean for the financial services industry?
Appropriateness mainly affects execution-only clients. There is a responsibility on the product manufacturer and the distributor to make sure that complex products are appropriate for customers buying without advice. Where a customer is advised that the adviser is responsible for determining whether a product is suitable. So distributors are required to assess whether the product is appropriate – an appropriateness test that the investor has to ‘pass’. If the investor fails the appropriateness test, they still may be allowed to buy the product, but a warning will be given saying that it may not be appropriate.
All ‘complex’ products are captured in this. Investment trusts, non-Ucits retail schemes and AIFs, which may be considered complex, will be assessed on a case-by-case basis. Ucits funds (except structured Ucits) are not considered as complex.
Product governance requires that firms that manufacture financial instruments must have in place an approval process before those financial instruments are marketed or distributed to clients. For example, for identifying a specific target market for the product, ensuring that relevant risks to that target market are assessed and ensuring that the distribution strategy is appropriate. Financial instruments offered must be regularly reviewed.
Product governance arrangements will apply to both product manufacturers and distributors; the latter should be provided with information from the approval process, including the specified target market. Distributors offering financial instruments, which they did not manufacture, should have arrangements in place for obtaining this information.
Costs and charges will need to be calculated on an individual basis, and have to be able to be broken down to facilitate complete transparency. The methodology of charging by Ucits managers has not yet been agreed, and this is just one component of the costs and charges, both initial (and transactional) and ongoing, that will have to be able to be captured and then reported to customers.
The Tax Incentivised Savings Association (Tisa) has launched executive committees to develop best practice for these three areas – appropriateness, product governance and costs and charges covered by FCA Conduct. Tisa recognises this is a good opportunity for the industry to consider what good practice could or should look like in these areas, and help provide guidance to firms.