Mifid II ‘target market’ requirements are still causing concern for fund firms and distributors, despite the recent easing of fears that other parts of the legislation would make it more difficult for retail investors to buy certain products.
In September, the FCA said non-Ucits retail schemes (Nurs) and investment trusts would not automatically be deemed ‘complex’ under Mifid II – ending concerns that investors in these products would be forced to complete appropriateness tests before buying.
However, the regulator’s consultation paper also confirmed obligations for firms to establish measures to assess the “target market and risks” for a given product – meaning greater disclosures may still be required in some cases.
Some have suggested that these rules are too broad in scope.
Martyn Gilbey, Aberdeen’s UK head of business development, said a working group had been engaging with European regulators on the idea of being “more flexible” about how to categorise funds.
“Some of this regulation is too umbrella-led. Even on a Ucits range you can have relatively simple products versus more complex products. If you are legislating at an umbrella level, is that the right outcome?” he said.
He noted that “new ideas” could be required to accurately assess complicated products.
“With some products the process is quite simple but the end result is quite complex – for example, a frontier markets equity fund [which can have volatile returns],” he said.
“By contrast, with an absolute return bond fund the outcome should be simple but the process can be highly complex.”
Another senior industry executive, who wished to remain anonymous, said discussions had focused on the use of “subtle” ways to amend documentation for such vehicles.
“A frontier markets fund would be volatile – it may have a volatile outcome – but it’s non-complex under Mifid II,” they said. “We are not necessarily looking to change that distinction but, in terms of the target market criteria, we can use subtle levers to point the investor in the right direction.
“We will point people to a risk warning put in around using this [fund] as a component of a portfolio.”
The individual added that while discussions were not looking to establish an industry-wide approach, they could form a “starting point” for peers in encouraging consistency. “If everyone makes up their own approach and you are a distributor with 500 manufacturers on your list, that isn’t going to be practical.”
Mr Gilbey added: “We are looking at new product development to see if it’s aligned [with the regulation]. To some extent we are [also] looking at our back book.”
Asset managers continue to work on a number of Mifid II-related areas and, while complex product concerns have subsided, legal firms such as Burges Salmon have warned of the risk of complacency in assuming that all Nurs and trusts will escape such designations.
Firms such as Rathbones and Schroders have converted Nurs vehicles into Ucits products over the past year, in a sign that providers may have been looking to avoid the ‘complex’ tag.