When you read headlines about MIFID II, is your first response anxiety about compliance with a fast approaching deadline, or excitement, as you plan how to use it as a springboard to move your business forward?
Major regulation has a habit of reshaping markets; we may understand that we should view it as a strategic opportunity, but daily business pressures may mean we feel we don’t have that luxury.
An influencing factor in how advice businesses respond to regulation like MIFID II is how well their business is supported by their platform provider. As custodian of your client’s assets, a platform is core to your business. It should help you deliver your client proposition and run an efficient, well controlled business.
As a regulated adviser, you assume certain responsibilities for your clients. MIFID II adds to these responsibilities in a number of investment-related areas. Given the data it holds, your platform is best placed to support you with these requirements, but it’s not always compelled to do so.
A platform provider with a track record of simply complying with minimum requirements may help you attain minimum compliance, but neglect the client experience this creates.
This can add unnecessary complexity and cost into your business.
A recent example of this would be the complexity created by providers protecting legacy platform pricing structures and share classes rather than moving in bulk to a clean model. Platforms have an obligation to advisers and their clients.
Taking short cuts can be costly in the long term, but a platform partner that consistently takes a progressive view of regulation can help you improve client service and deliver strategic advantage to your business.
Why platforms must step up and support the MIFID change
• We have a collective responsibility to improve the client experience: The investment industry has contributed to the need for regulation in the first place. Historically, it may have focused on product design rather than client needs.
This has manifested as complex, opaque products and often as an absence of quality, ongoing service. Regulation that includes MIFID II, has intervened to address this. It aims to protect clients and increase confidence, by improving transparency, oversight and communication.
An exclusive focus on minimum compliance standards alone means we are not addressing these fundamental client needs, which also increases the risk that regulators will demand further change in the future.
• Platforms are a digital enabler: This isn’t marketing rhetoric. It’s precisely a platform’s role in an advice business. Advisers must hold their platforms accountable during times of regulatory challenge and should expect full support to meet compliance and client needs.
The MIFID II changes and how Standard Life is supporting its adviser partners
We aim to help our partners turn compliance with MIFID II to their advantage. I’ve picked out the elements of MIFID II where the platform technology can help advisers do business more effectively.
There are of course other aspects to MIFID II – such as knowledge and competence requirements – which don’t rely on platform technology for support.
• Discretionary portfolio statements and the 10% drop
DFMs and advisers with discretionary permissions must deliver quarterly client reporting. You must also tell clients of any depreciation of 10% (and subsequent 10% drops) within each reporting period.
Standard Life will automatically create the quarterly (monthly if there are leveraged instruments in the portfolio) statements. We’ll automatically let advisers know about any 10% drop and which clients are affected.
We’ll also create a client document with further details of the drop. While these communications will be rare, they will demand immediate action and should be factored into your overall client communications approach and processes.
• Client disclosure of costs and charges
MIFID II requires you to provide your clients with aggregated information about costs and charges. This includes transaction costs of trades and a breakdown of DFM fees.
Platforms hold the key to efficient reporting and you should expect reports to break down costs and charges into pounds and percentages, before and after sale. For transaction costs, Standard Life will take all the relevant information from fund managers and present through a charges information document.
We’ll do this after each transaction and in the yearly statement. We’ll also show the DFM fees through the same documents, so everything is in one place. Transaction level detail for discretionary models will go into the contract notes.
• Product governance and your target market
MIFID compels fund managers to decide and clearly articulate the target market for their products. They will then monitor sales to ensure their products are being recommended to the right people. It naturally flows that it will become an adviser’s responsibility to ensure their recommendations are aligned to this guidance.
As a result, advisers must be clear on their target clients and understand the appropriate target clients and understand the appropriate products and distribution method for them. Standard Life will bring together target market data from fund managers, as well as help provide the data required by fund managers to monitor sales.
• Client Suitability
This is about formalising best practice for assessing and reporting on advice to hold a particular fund. The regulation creates a requirement to repeat this each year if your advice is ongoing. It’s worth considering whether you could improve your ‘know your client’ process.
Or perhaps review how often you check a client’s attitude to risk and whether there are any specific trigger points (like at retirement). Standard Life’s platforms will provide easy access to the investment information advisers need to support suitability assessments.
• Legal Entity Identifier and National Identifier
If your advice firm carries out advised transactions within Exchange Traded Instruments (ETIs) on behalf of a legal entity, that legal entity will need to provide a Legal Entity Identifier (LEI) in order to trade.
You’ll also have to capture the National Identifier (NI) of any client trading in ETIs, usually their National Insurance number. As investment decision makers, firms with discretionary permissions must also provide their own LEI as well as the NI of the individual in the firm making the investment decision.
Standard Life will support the data capture and transaction reporting with fields for both the LEI and the NI.
What next?
MIFID II comes into effect on 3 January 2018. Once you’ve got your head around the changes, it’s vital to understand the impact on your business and how your partners and suppliers will help you.
You may need to upgrade your processes, reporting and client communications. The best platforms will be able to describe how they can help you do this. It’s also important to look beyond the immediate regulatory requirements. How can you improve your business and value proposition over the longer term? This may mean simplifying your business model.
MIFID requirements may mean that dealing with multiple investment and platform providers will become more complex. It may also create opportunities to differentiate your CIP. Direct to customer propositions will have to be absolutely ‘plain vanilla’ from an investment point of view.
In a robo-enabled future, giving advised clients access to increased investment sophistication could really demonstrate added-value that can’t be accessed without you.
By keeping a collective focus on improvements for the long term, we’ll help protect clients, create greater confidence in advice and build sustainable businesses that are in it for the long haul.
To see how Standard Life can help, visit www.standardlifeadviser.co.uk
This information is based on our implementation plans as at today’s date (16 October 2017) and is subject to change. Standard Life accepts no responsibility for advice that may be formulated on the basis of this information. Standard Life Assurance Limited is registered in Scotland (SC286833) is registered in Scotland at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH. Standard Life Assurance Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. www.standardlife.co.uk © 2017 Standard Life Aberdeen
David Tiller is head of adviser and wealth manager propositions
