By Joanne Frearson Although the Markets in Financial Instruments Directive (MiFID) will create a ...
By Joanne Frearson
Although the Markets in Financial Instruments Directive (MiFID) will create a single EU market for the sale of financial products, advisers are concerned there are still many uncertainties surrounding this legislation.
The main criticism of the directive is that each country will interpretive the regulations slightly differently, and how these discrepancies will impact advisers.
The Association of Private Client Investment Managers and Stockbrokers (Apcims) thought litigation cases may result in countries that operate under a principle-based approach as the rules were less detailed than prescriptive laws.
Guy Sears, deputy chief executive of Apcims, said: "It is possible the UK will move to a litigation-based regime as advisers will only know the boundaries after the event occurs. This situation is not helpful to everyone as there is no level of clarity. Advisers are expecting industry associations to give advice, otherwise wait for enforcement. Rules based on a principle-based approach may cause firms to become cautious when giving advice as they do not know the boundaries yet."
Another concern for advisers was that the Financial Services Authority (FSA) planned to gold plate over and above the rules. Gold plating means three are additional rules to what is normally required.
Ash Saluja, partner at legal firm CMS Cameron McKenna, said: "Advisers were waiting for an FSA paper to be released in October to see the full extent of the gold plating. This might see them at a disadvantage to other EU advisers. There were concerns as the FSA had indicated advisers who keep money in segregated accounts might have to start doing reconciliation checks every so often on it. This is not necessary under the MiFID directive and may cause an additional expense for the company."
Sears believed advisers may choose to do business in countries that were less regulated as products might be cheaper and they would not have to pay for the extra compliance measures. He believed cross-border competition for selling financial products would become higher. "It may prompt investors to buy products online if a vehicle is cheaper in a different jurisdiction."
Saluja said as many European countries do not have regulation for advisers, most countries were more likely to adopt a prescriptive-based approach. He explained that MiFID - although it had some principle-based rules - the majority were prescriptive laws. He felt that countries like Spain, which did not have any experience at implementing rules, would adopt this approach and have a more relaxed regime.
However, the FSA believed a principle-based approach would make the rules easier for advisers. The FSA was planning to change its Conduct of Business (COB) to become more principle based and is issuing a paper on the rule in October.
Robin Gordon-Walker, a spokesperson at the FSA, said: "The rules will be shorter and simpler to understand, easier to comply with and easier to amend. It will be easier for the firms to operate under the new COB and advisers will be able to treat customers more fairly rather than a lot of rules which intermediaries do not fully understand."
Meanwhile Sears also believed another concern with MiFID was how advisers will be paid cross-border.
He said: "It is likely there will be strict rules on the inducements that advisers can receive in respect of the services they provide their clients. There will be an emphasis on ensuring customers get the best price for buying financial products. It needs to be clear what the adviser gets paid and what needs to be documented in the transaction."
Elsewhere it could also cause problems for sophisticated investors as their classifications are changing and they may not be able to invest in riskier financial products. However, the FSA has rules in place to grandfather existing sophisticated investors into the MiFID definition.
Under the directive it is more difficult to be classified as a sophisticated investor. Saluja said under MiFID rules the investor must earn E500,000 or more, undertake 40 trades per year or have worked in the financial services industry for at least a year.
Another issue which Saluja pointed out is non-MiFID business and how the rules will differ. "If an investor buys a life insurance product this is considered non-MiFID, the rules for investing in these products may be easier for advisers than MiFID products. Or there might be two different procedures here which might make it confusing. A lot of lobbying needs to take place."industry comment
Michael Wainwright, a partner at legal group Eversheds, said: "In theory MiFID sounds helpful but along the way there will be pitfalls that not all countries will be ready to implement by November 2007.
"The content will be different between each country and it will take a long time to work out what each country means by the rules.
"Another issue was that in the medium term it would be a financial burden on firms. Advisers will have to make sure they have the right systems in place to handle this business. This could create financial costs to be able to provide the appropriate measures.
"But, in the long run, it will make life easier for advisers as would be able to give advice in different jurisdictions."industry comment
Angus Milne, senior adviser at the Investment Management Association (IMA), said: "Firms that operate cross-border will need to apply for a passport. To be able to gain a MiFID passport UK companies would have to increase their capital adequacy requirements from £10,000 to E50,000. This would only leave the larger adviser groups applying for a cross-border passport.
"Smaller companies that did not have the finance available for the extra capital requirements could not distribute cross-border. There will be no incentive to do it on a small scale. MiFID is really only looking for the advisers who want to do it on a larger scale."key points
Litigation may increase as a result of MiFID
Products may become cheaper in different countries
How advisers will be paid inducements still not known
The FSA has rules in place to grandfather existing sophisticated investors into the MiFID definition
More lobbying is needed to clarify the adviser position
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