A Mifid II requirement for clients to be informed when portfolios fall 10 per cent or more has created confusion among advisers, discretionary fund managers (DFMs) and platforms over who must take responsibility for the communication.
The obligation has divided the retail investment industry because of the difficulty involved in situations such as the use of model portfolios on platforms.
Existing FCA guidance is unclear over whether advisers are liable to meet the reporting requirement if they are not involved in day-to-day client portfolio management.
John Jackson, managing director for intermediary business at DFM Cornelian, said the onus must fall on advisers, working alongside platforms.
“It’s a grey area that needs to be addressed,” he said. “Any client-specific reporting cannot be done by the DFM. Generally the platform will report, but sometimes platforms do not find it easy to do.
“The DFM [could have] no idea when an individual client has dropped by 10 per cent, because they are looking at a model and not the client. So the reporting would have to be done by platforms themselves. But they could be acting blind, also not knowing what has happened in that client’s portfolio.”
One interpretation of the current rules suggests reporting requirements lie with ‘Mifid’ firms – which for model portfolios would mean DFMs.
However, in these situations the guidance also suggests the DFMs must treat advisers as ‘clients’ unless explicitly agreed otherwise by end investors. This means DFMs would meet their domestic regulatory obligations simply by informing advisers – leaving it open to interpretation whether advisers must then inform end-clients. The regulator has yet to clarify how it will marry the Mifid requirement with its own rules.
Fraser Donaldson, a wealth management analyst at Defaqto, said the delegation of responsibilities must be made clearer across the value chain.
“There are gaps in the chain and there need to be formal arrangements. There are some propositions where they would write a four-way agreement between platform, client, adviser and DFM but most prefer not seeing the client.”
Mr Donaldson agreed with Mr Jackson that the onus for reporting a 10 per cent drop must remain with the adviser, but admitted the logistics of this would be “tricky”.
He added: “It is an area that needs tightening up. Platforms should be increasing their relationship with DFMs facilitating this reporting. But it is grey. I don’t know how they would do this on an individual basis.”
The Mifid II rules taking effect next January also require clients to receive quarterly performance updates instead of biannually. The Lang Cat consulting director Mike Barrett said the industry was “sleepwalking” into Mifid II due to a lack of clarity over final rules.
“The responsibility will sit with the adviser to decide with the custodian and the DFM where the reporting will go to. Then the adviser will take on the responsibility themselves. There’s a lot advisers have to get their heads around.”