Staying on the transparency theme, advisers who choose to offer complex products must determine whether the client has the necessary experience and knowledge to understand the risks involved and therefore whether it is appropriate.
Now, what is a complex product?
While recent Financial Conduct Authority (FCA) guidance was not definitive – for example, it stated that non-Ucits Retail Schemes (NURS) are neither automatically non-complex nor automatically complex – it is important for advisers who distribute NURS, including investment trusts on a non-advised basis, to revisit their processes for assessing appropriateness is fit for purpose.
There are, of course, a number of other crucial issues for advisers to consider as the 3 January approaches.
For instance, another key disclosure obligation will see transaction reporting require certain clients to have legal entity identifiers (LEI) to be able to undertake specific types of trades. They include company shares, venture capital trusts, exchange traded funds (ETFs), and investment trusts.
There is an argument to say that all corporate clients should get an LEI because they may diversify into those financial instruments at some point. Individual investors can use their National Insurance number for this purpose.
Over the past few months, platforms have been helping advisers to resolve issues around LEIs so as not to hold up any future trades when Mifid II comes in.
Recording and note-taking
A notable communication measure will see phone calls with clients either being recorded, or a sufficient level of notes being made, if the conversation ‘intended to result in a transaction being undertaken’.
While advisers will choose their own methods to comply, the FCA wants firms to use a consistent method to avoid ‘gaming the system’.
This may well take some getting used to, particularly if advisers speak to clients on a mobile phone.
The rules also apply if a meeting takes place in person. As well as the conversation, the date and time, initiator of the meeting, details of the client order and transmission or execution information must be recorded.
Another, more administrative, task requires firms to provide each client with a periodic statement every three months containing information regarding activities carried out on behalf of that client.
Indeed, it should be noted that 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 once a month.
Perhaps not the most taxing of changes, but an important one to remember.
It is important that quarterly statements should not be confused with the requirement to implement a periodic reassessment of suitability of personal recommendation. There is a hope that this may help to close the ‘suitability gap’ – the confusion that often arises over who is responsible for risk profiling when an adviser refers a client to a DFM.