Mifid II  

Advisers face ‘sting in the tail’ as Mifid II saga hots up

Advisers face ‘sting in the tail’ as Mifid II saga hots up
 Recent 10% index drawdowns

A “sting in the tail” may await advisers as Mifid II preparations turn towards legal relationships with discretionary fund managers (DFMs) and responsibility for portfolio reporting.

Consultants have raised concerns over a lack of communication between advisers and DFMs regarding the European regulation’s requirement that clients be informed every time their portfolio drops 10 per cent.

The nub of the issue is a disagreement over whether, and how, advisers must inform their clients. 

For advisers who are legal clients of DFMs, the consensus is that the latter must inform the former, but that end-investors do not need to be notified.

But if an end-client is ‘introduced’ to the DFM by an adviser – as in the majority of cases – then legal agreements may need to be amended, according to regulatory experts. This would be done to clarify whether a DFM should either contact the client directly, or ensure advisers have the necessary information to do so themselves.

Ashley Smith, head of business development at regulatory outfit Silverfinch, said: “There’s a change in the liability and may need rewording of all the contracts for DFM/adviser relationships. It’s the last thing spoken about [and] there could be a sting in the tail.”

Dennis Hall, chief executive of Yellowtail Financial Planning, said the advisory community did not yet see the issue as a priority.

“This is on the radar, but there are so many other changes that are taking a higher priority. There’s no real action at the moment to cover this,” Mr Hall explained.

The legal ramifications of the changes extend further along the investment chain. 

With Mifid II implementation less than four months away, Bill Vasilieff, chief executive of platform Novia, said the firm was in the process of contacting its clients with suggested changes to legal terms.

“People are still scratching their heads on what is suitable and what isn’t,” he said. 

“We have a view on what is suitable. It will require a contract amendment, but that can be done by side letter and is not the [biggest] issue. 

“The issue is whether [clients] will agree how to do it.”

Cockburn Lucas managing director Mike Horseman said legal agreements may also need changing in cases where advisers are deemed professional clients of DFMs.

The industry trade body was more sanguine. Ian Cornwall, spokesperson for the Personal Investment Management & Financial Advice Association, said the Mifid II rules were clear that liability rested with DFMs, meaning agreements did not need to be updated.

But he conceded: “The trouble is these relationships can vary so much, it’s about going back to basics.”

According to Mr Horseman, advisory firms could need complete transparency on DFM investments in order to comply with the rules, requiring an improved alignment of back office systems alongside a new legal agreement stipulating responsibility for reporting.

“[Advisers] had better check agreements, and if they haven’t got the right ones they had better ask why, and then check their systems,” he added.