As 2020 has begun we are all preparing for Boris’s Brexit Express to leave the station and take the UK on a journey into the unknown.
We can only guess at the potential impact of leaving the EU, on various aspects of life in the UK and especially those areas, that are influenced by EU founded legislation and regulation.
Regulation of that type has and does, play a key part in forming the financial services landscape in the UK, as we know it today.
Most recently the industry has felt the effects of the Markets in Financial Instruments Directive II (Mifid II) - the follow-up to Mifid version I.
Version I came into being in 2007 and was created to increase pre and post-sale transparency and standardise regulatory disclosures in specific product areas, such as investment funds, across EU member states.
In the UK, there is a view that we were already ahead of the curve, with existing regulation in place related to fee and commission disclosure.
The popularity and independence of competing platforms also provided transparency, which did not exist in other European states.
Mifid was primarily targeted at other EU markets that were dominated by banks and insurance companies, which operated on an opaque basis, compared to the majority of UK investment and advice businesses.
We were simply being swept along with the rest of the Community.
As we know, first-draft regulation is rarely perfect, and that was the case with Mifid I.
In hindsight, it was too inward looking and allowed companies from outside the EU to gain competitive advantages in certain areas.
Mifid II objectives
So, fast forward 11 years to Mifid II, which has been with us since January 2018 and focused upon the following European Commission objectives:
- Strengthen investor protection, through appropriateness and suitability testing and improved record-keeping, together with more detailed reporting.
- Reduce the risks of a disorderly markets
- Increase the efficiency of financial markets and reduce unnecessary costs for participants, through increased transparency of costs
- Standardise practices across the EU
- Restore confidence in the industry
In terms of scope, the regulations apply to those firms that provide investment services.
These include investment/financial advisers in addition to those that manufacture and distribute financial instruments, such as fund managers.
Product-wise, it covers unit trusts, Oeic’s, investment trusts, ETFs and discretionary portfolios, which means it has an impact upon investment advisers, fund managers, discretionary fund managers and platforms.
From all of the above, I would think that ‘reporting’ and ‘increased transparency of costs’ have probably received the most attention in the UK advice market.
We should all now be comfortable with the requirement for portfolio declines of 10 per cent or more, over a quarterly reporting period, to be communicated to clients.
However, confusion initially occurred around what constitutes a portfolio and who has the reporting responsibility.
At Defaqto we had conversations, in the early days, with discretionary fund managers (DFMs) and platform providers who declared that Mifid II would have no impact upon them.
But over the last two years, I think most protagonists have come up to speed in supporting advisers with the regulatory requirements.
From a platform perspective, it may have been true that there was no actual regulatory requirement for them to report DFM managed portfolio falls.