Mifid IISep 13 2018

What are the most recent regulatory reforms?

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What are the most recent regulatory reforms?

The year 2017 was a very busy year for advisers as many firms braced themselves for an onslaught of major regulatory reforms.

Among these, were Mifid II and the General Data Protection Regulation (GDPR), which have had a big impact on the market.

To say the scope of Mifid II, which came into force in January 2018, is broad is an understatement.

It applies to:

  • Firms providing investment services (such as investment advice) to clients relating to Mifid financial instruments (such as shares, bonds, units in collective investment schemes, and derivatives). Some requirements also apply to firms when they sell, or advise clients in relation to, structured deposits.
  • Venues or institutions where financial instruments are traded.

Key areas for advisers are:

  • Compliance with the client costs and charges and disclosure requirements.
  • Compliance with the new telephone taping requirements, with an exemption for Article 3 advisers.
  • Additionally, product governance (Prod) rules, which require advisers to segment their clients into groups (target markets) and to allocate suitable products to each group.

Although many financial advisers who do not hold client assets or money and do not do business outside of the UK, known as Article 3 firms, had been exempt from Mifid, they are subject to a number of requirements under Mifid II. These include a range of authorisations, conduct of business and organisational requirements.

[Mifid II] has fundamentally shifted the compliance burden another gear.--Gareth Malna

Under disclosure of costs and charges rules, the Financial Conduct Authority (FCA) states that advisers need to disclose all costs and charges that relate to their retail recommendations.

Indications of expected costs and charges also need to be provided pre-sale, and details of the actual costs and charges need to be provided post-sale, where applicable on at least an annual basis.

These need to be aggregated, and expressed both as a cash amount and as a percentage.

In broad terms, the following must be disclosed:

  • All one-off and ongoing charges, and transaction costs, associated with the financial instrument;
  • All one-off and ongoing charges, and transaction costs, associated with the investment service;
  • All third party payments received, and the total combined costs of these three categories.

These disclosures must also be accompanied by an illustration that shows the cumulative effect of the overall costs and charges on the return.

Gareth Malna, a lawyer at Burges Salmon, says: “Mifid II was effectively a wholesale regulatory change. It has fundamentally shifted the compliance burden another gear. It was already a very heavily regulated sector. Now you have gone from almost the sublime to the ridiculous.”

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