Mifid II 

What to consider in the countdown to Mifid II

  • Learn what are the key requirements which will apply to advisers from day one of Mifid II.
  • Understand the solutions to some of the issues the new regulation may throw up.
  • Grasp what is expected of the industry under Mifid II and know how to adapt.
CPD
30min
What to consider in the countdown to Mifid II

The date, 3 January 2018, has been on the minds of those in financial services for many months, as it is the day when Mifid II comes into force.

The legislation, which has taken seven years to draw up, is both significant and substantial – it runs to more than 1.4m paragraphs. 

While most firms are by now virtually ready to comply with the new regulation, rather worryingly, it appears a number of advisers still don’t realise – or believe – Mifid II applies to them.

Regardless of whether an adviser is currently an Article 3 exempt firm, it is prudent to consider the implications and responsibilities for all advisers.

Mifid II’s mission statement is to ensure greater transparency and protection for investors. 

In practical terms, MiFID II will work by placing certain obligations on the full spectrum of financial services firms, but in this article I want to focus on the key requirements which will apply to advisers from day one of the new regulation. 

On an overarching level, there is strong emphasis on bringing in stringent measures to improve investor protection. They include communications, disclosures and transparency requirements, to name but a few.

Starting with transparency

Mifid II substantially expands the scope and spirit of the transparency requirements introduced by the Retail Distribution Review (RDR). Clients must be given a full breakdown of all fees and charges related to an investment, both before the investment decision is made and on an ongoing basis.

If RDR was primarily about disclosure – with advisers obliged to disclose any commissions they receive – Mifid II is driven by the desire for total transparency. 

Under the new rules, clients must be told, both pre- and post-sale, about any costs associated with an investment.

In practical terms this means all fees charged by the fund manager, and the adviser, as well as those of any investment platform or discretionary fund manager (DFM) used. The costs must be clearly displayed in any product illustration given to the client before they invest, and in all subsequent reports of the investment’s performance.

Mifid II also ups the ante for regular client reporting, increasing the frequency with which clients must be updated on the performance of their investment.

Enhanced communications

Going forward, firms must now inform the client where the overall value of the portfolio depreciates by 10 per cent and thereafter at multiples of 10 per cent, no later than the end of the business day in which the threshold is exceeded.

On the face of it this shouldn’t pose much of a problem but, in reality, it exposes the flaw in the ‘agent as client’ operating model where essentially DFMs do not share responsibility with advisers. 

Under this arrangement, which the Personal Finance Society (PFS) is quite rightly concerned about, the DFM does not have a direct relationship with the underlying investor. 

Comments

CPD
30min
  1. What is Mifid II's mission statement?

  2. The new regulation also "ups the ante" for what, according to Mr Abdul?

  3. Is the following statement true or false? Given the short reporting timelines involved in notifying clients of 10 per cent portfolio declines, advisers may need to engage with their platforms now to establish reporting responsibilities and use this opportunity to review their arrangements going forward.

  4. Over the past few months, what have been helping advisers to resolve issues around LEIs so as not to hold up any future trades when Mifid II comes in?

  5. Where the agreement between a firm and a client for a portfolio management service authorises a leveraged portfolio, the periodic statement must be provided at least how often?

  6. Any content published by advisers externally through digital channels must be three things. Which is the odd one out?

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