Painful - that is how Elizabeth Budd, a partner at Pinsent Masons has described the process for firms incorporating Mifid II into their business.
Ms Budd says: “It has been an uphill struggle for many people to implement a set of rules into existing processes which were established without a set of rules in mind, unless you are going to completely restructure your business. Eventually it will become business as usual but we are some way off that.”
According to a recent survey carried out for financial technology business Iress, more than half (58 per cent) of the advisers surveyed were not yet aware of the Prod rules.
There seems to be widespread confusion and concern around the steps advisers should be taking to ensure client suitability processes are evidenced appropriately.--Mark LoosmoreAdviser confidence
Some 70 per cent are unsure if they are able to evidence the suitability of products and services by client segment, while only 5 per cent say they are aware of the obligations under new Prod rules.
And only one third (33 per cent) are using their back office technology to help them segment clients.
Mark Loosmore, executive general manager (wealth) at Iress, says: “The new rules in (product governance) Prod have caught many people in the industry unaware. There seems to be widespread confusion and concern around the steps advisers should be taking to ensure client suitability processes are evidenced appropriately. There are a few things advisers must do. They need to evidence they understand the financial instruments they advise on, assess client compatibility with products and services and ensure client best interests.
“While this might sound like an onerous task, it seems only one-third of the advisers we surveyed realise the tools they need to help them comply with Prod rules are probably at their fingertips.
"Those advisers with integrated, data rich, back office technology systems should be able to run segmentation reports fairly painlessly, and save those reports to their compliance folders to evidence the suitability of the products and services advised on by client segment.”
Perhaps more worrying is the 80 per cent of advisers surveyed who were not aware of the enforcement actions the Financial Conduct Authority (FCA) could take if they found advisers falling short of the new rules.
Challenging areas
The areas that have caused challenges for firms, from what Ms Budd has seen, include transaction reporting and understanding the correct reporting processes that have to be followed.
According to Tobin Ashby, another partner at Pinsent Masons, other areas that firms have struggled with are: the product governance and the relationship between the manufacturer of an investment product and a distributor, and the information or disclosure requirements that both have; and the requirement to assess who the product is the suitable target market for.
Mr Ashby says: “There have been a lot of challenges on both of those, in terms of identifying what information is needed to comply with their own obligations, how to obtain that information, who should be providing which information, and how much information the manufacturers need to provide to distributors to enable the distributors to do what they need to do.
“The Ucits manufacturers are not covered by Mifid II rules, but someone distributing the funds who is under Mifid rules would need to put arrangements in place to get the necessary information from the Ucits manufacturer of the funds, and that can mean some disagreement on the level of what is required where it is not set out in regulation.
“It can also produce an awful lot of work for both to agree necessary arrangements and put them in place, just to be able to continue with the status quo of distribution.”
Maurice McDonald, a consultant at Bovill, says: “The biggest issue I see in the wealth space is, yes, they can design a framework that looks at types of products and the appropriateness of those clients, but I am not persuaded that all firms have gotten underneath the bare bones of what is required.”
Smaller firms have found Mifid II to be a complex and challenging hurdle to cross, especially for those with access to limited technical and compliance resources.
Product governance hurdles
Keith Maner, head of compliance at Thistle Initiatives says, one of the main issues has again been the product governance rules, which so far do not appear to have been addressed as a priority by firms.
He believes the FCA’s recent actions in relation to the contracts for difference market are likely to set a precedent for how the Mifid II product governance rules will be implemented and enforced across the spectrum of financial services firms and investments, but particularly in relation to high-risk, complex financial products.
The process of platform providers needing to gather information from investment managers to show the aggregated cost will prove challenging.-- Richard NuttallMr Maner notes: “The recent 'Dear CEO' letter should serve as a loud warning to all firms involved in the manufacture and distribution of financial products. They would be wise to consider their own arrangements as they must be able to demonstrate they have adequate product governance policies and procedures in place that match their Prod obligations, and in doing so will require careful analysis and adequate internal resources.
“Careful thought should be given to the boundaries between Mifid and non-Mifid business, distribution activities and manufacturing. The application of rules and regulation and the customer-protective intent the FCA has in implementing these rules as guidance to non-Mifid activities are noteworthy.”
There is no doubt that Mifid II has brought a number of changes to the advisory sector.
One particularly relevant area for advisers is that of revisiting and reviewing ongoing service propositions in relation to charging and service levels.
Although client reviews are already part of the service offered by the majority of advisers, Mifid II specifies that these reviews need to be undertaken on at least an annual basis for clients who hold Mifid financial instruments.
The introduction of a more prescriptive way of offering client reviews has led some advisers to review their client base and assess whether this way of working is economically viable for all.
Richard Nuttall, head of compliance policy at Simply Biz says: “Advisers then have to consider the best option for those clients who were previously on biennial review agreements, the most common routes being to either disengage with the client, or to uplift them to an agreement which will see them receive at least one visit a year, and pay accordingly.”
Another element of Mifid II which has affected advisers has been the changed definition of service, which saw a move from ‘advice’ solely covering buying and selling, to also include holding, Mr Nuttall says.
In other words, advice not to do anything (to hold) becomes in itself a personal recommendation. More of the scope of adviser activity (or non-activity) has become regulated and therefore there is more accountability and, potentially, new areas of adviser responsibility and liability.
He says: “There are some key challenges in this area which overlap with the requirements of advisers under Mifid II. One, in particular, is the disclosure to clients in monetary terms, the actual cost of holding the investment over the previous period.
“Of course, advisers already know their own costs, but the new regulation requires them to state the charges from the provider. The process of platform providers needing to gather information from investment managers to show the aggregated cost will prove challenging.”
With Mifid II now business as usual, the FCA has announced its first review in this area; the application of the new research payments rules.
Solvency II
As big as the impact of Mifid II and GDPR are, another important regulatory change which has impacted the financial services sector is Solvency II.
It is the most significant development of the regulatory framework for European Union insurers for many decades, according to Guy Vanner, managing director at consultancy firm AKG.
Solvency II concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.
As a result of the impact of Solvency II on insurers, there should be no doubting that its implications need to be considered by advisers.--Guy Vanner.Mr Vanner says there have been a number of effects, often connected, stemming from the introduction of Solvency II. These include:
- An increased pressure and focus on business models
- A flight to core competencies
- A further change in consideration of business mix due to capital considerations for diversification
- A better understanding and crystallization of capital positions and more informed management of insurers
Guy Vanner, managing director at AKG Financial Analytics, observes: “All of this has also led to some shake-up in terms of activity in domestic European insurance markets, such as the UK, with merger and acquisition and revised market selection activity, as groups and companies sought to optimise their positions ahead of, or in light of, Solvency II.
“As a result of the impact of Solvency II on insurers, with whom advisers have key propositional relationships for existing and new business, there should be no doubting that its implications need to be considered by advisers.”
For advisers, the most important question to address is awareness.
Mr Vanner says: “Solvency II and the wider adoption of risk-based capital-oriented regulation should not be a source of worry, but the nature of the change and its significance for those insurer partners with whom business has been, might be or is done must be understood.
“The fundamental financial strength of insurers is not changed by Solvency II and the other risk-based capital approaches that might follow it elsewhere, but some of its composition and communication, for example in changed capital surplus and solvency coverage ratios in the new regimes, may be.
“While it comes at a cost, ultimately this development improves the identification of risk and capital requirements within insurer businesses for their benefit, in assisting their regulators and, ultimately, to the advantage of advisers’ clients.”
ima.jacksonobot@ft.com
