While MiFID is aimed at cross-border trading, all UK advisers will get their collar felt when the directive comes into effect. Whether the changes introduced will be beneficial is still to be seen
Most advisers will have seen the 'doom and gloom' warnings about the Markets in Financial Instruments Directive (MiFID) and cross-border EU trade over the past 12 months.
Although the directive is aimed at firms that trade across Europe, UK advisers that do not do business cross-border will also be impacted.
So why has MiFID become such a big issue for advisers even if they are not within the scope of the directive? The answer to this is that MiFID will make significant changes to the way that financial advice is given and how financial instruments are traded.
The Financial Services Authority (FSA) is using the directive as the basis on which it is conducting a complete review of its conduct of business regime. This includes the regime for advisers, especially in areas where they are in direct competition with banks which fall under the MiFID regime. There has been lobbying both in the UK (at the Treasury and the FSA) and at the EU, to ensure the interests of advisers are taken into account.
The advisory Position
The FSA has indicated the benefits the directive brings, in terms of consumer protection, will be limited in the UK because advisory firms are already highly regulated. The main beneficiaries are large securities firms, which are already dealing or want to deal cross-border.
Traditional adviser firms have little or nothing to gain from MiFID but may potentially be faced with substantial costs. Some of the new requirements are simply administrative and will bring with them either a one-off charge or a permanent increase in operating costs. But other proposals go deeper and will affect the way financial advisers do business.
To name some examples, a tedious exercise required under MiFID is the review of the current client classification system. The benefit for consumers is non-existent unless they are intending to deal with investment intermediaries in various EU member states and are concerned that they would be offered different levels of protection in different countries. But for UK advisers, the introduction of the new classifications means extra administrative work and no benefits.
Another example is the introduction of an 'appropriateness' test for direct offer purchases. Under current proposals, this will not immediately be extended to non-scope firms but be mindful that it could happen at a future date. It might be helpful, therefore, to look at it now. Ultimately, the new test is a reduced version of the suitability test, with some slight alterations, but this version will make it difficult for firms to conduct direct offer business without falling foul of the rules. Will it increase consumer protection? It remains doubtful because consumers (and indeed many in the industry) may struggle to understand the difference between suitability and appropriateness.
The Goldplating Myth
When Charlie McCreevy, the European commissioner in charge of MiFID, announced last year he would ensure national regulators could not implement a goldplated version of MiFID, many investment advisers gave him their full support. But looking at the proposed implementation of MiFID, the anti-goldplating measure in Article 4 will lead to significantly wider-ranging changes for UK firms than would have been necessary without the restriction.
And not all of the changes will make firms' lives easier. Some of them, such as the changes to the client classification regime, will merely result in them doing things differently and spending money on the changes but without benefits and cost-savings. Others will strip away current prescriptive FSA measures but will leave behind a compliance vacuum in which the ombudsman could potentially reap havoc. Areas that are particularly vulnerable are 'suitability' and 'know your customer' standards. MiFID only requires the recommendation of a suitable product and not the most suitable.
According to the FSA, consumer protection will not be affected because the gap between suitable and most suitable will be filled by the Treating Customers Fairly (TCF) principle. The regulator does not seem to be quite as willing to be as reliant on TCF when it comes to the suitability letter, which is not required under MiFID but where the deletion of the requirement would certainly cause concern. The FSA has indicated that it is minded to put forward a justification for the suitability letter under Article 4.
MiFID will leave vast gaps in the rule book and many of these will be filled by little more than the TCF principle. For small advisory firms in particular, this could mean higher bills from compliance consultants and the fear of more frequent encounters with the ombudsman.
There is hardly anybody out there who has anything positive to say about MiFID in connection with financial advisers. But is this really the case or might MiFID present a new business opportunity that advisers have been looking for? A small minority of advisers who already trade in Europe have acknowledged that MiFID will make their lives - at least in some respects - easier and it is likely to create business opportunities for them.
Most of them will be targeting the expat market in countries such as Spain and France. But there are also advisers who believe that the Spanish domestic retail investment market is ripe for the picking (due to the lack of a properly regulated investment advice industry) and that the brave will be rewarded.
There are even some voices who say that being an FSA-regulated firm could be seen as a quality mark for UK advisers operating in other European jurisdictions. And even the existence of the ombudsman could be used for positive marketing - although it is likely that most advisers would not want to shout about that too loudly.
MiFID's implementation has been subsumed into the FSA's overall handbook review and it will be very difficult to judge which changes are solely down to MiFID or whether they would have happened anyway.
But there is no doubt that MiFID and especially the goldplating restrictions will lead to a major transformation of the handbook. It is estimated that as much as 75% of the rule book will be revised.
It is too early too say whether these changes will benefit the industry or how much it will cost to implement them. However, whether an adviser undertakes cross-border EU business or not, they will feel the impact of the directive. key points
Cross-border trade through MiFID important
MiFID will make significant changes to the way that financial advice is given
Traditional adviser firms have little or nothing to gain from MiFID but may potentially be faced with substantial costs
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