MiFID Conference – Investor Protection

On 19 October 2015, as part of the FCA’s MiFID II Conference, David Geale, the FCA’s Director of Policy, delivered a speech on investor protection under MiFID II and, in particular, the ways in which MiFID II will seek to improve investor protection and overall confidence in the markets. Below we have provided summaries of some of the key take away points from Mr Geale’s speech in regards to investor protection under MiFID II:

Product governance

The new MiFID requirements will reinforce existing messages which the FCA has previously sought to communicate to firms, both through their guidance on the responsibilities of product providers and distributors for the fair treatment of customers (known as the “RPPD”) and more specifically through their thematic work on structured products.

MiFID II will codify product governance requirements into rules for the first time and bring a new focus on management bodies taking responsibility for approving and overseeing policies towards product governance.

Suitability of advice and due diligence

The FCA has examined a number of cases where inappropriate advice was given and has identified three key reasons for this: inadequate consideration of costs, poor risk profiling or mapping and – importantly – inadequate due diligence on products and services. In this regard, the FCA are currently in the middle of a thematic project on due diligence – a discovery exercise to understand current practice, and potentially to provide guidance on good and poor practice to help improve standards.

Firms will be required to have policies and procedures in place to ensure they understand the nature and features of the products they select for their clients, and they will be required to assess whether alternatives are available that would better meet their client’s objectives.

Inducements

MiFID will introduce a new inducements regime for firms providing independent advice or portfolio management, the new regime will ban all payments from third parties, apart from certain ‘minor non-monetary benefits’.

For advisers, the FCA will continue to focus on ensuring that firms are not incentivised to sell inappropriate products to their clients, while for other firms MiFID II is likely to prompt the FCA to question whether the receipt of an inducement is genuinely designed to enhance the quality of the service to the end client.

Research

MiFID II will, for the first time, bring in a European regime to govern the way that asset managers purchase and consume third-party research. However, the FCA are still waiting to see the final implementing legislation that will determine the exact shape and operational details of the new regime. In this regard, investment managers and brokers are encouraged, in particular, to continue to focus on driving improvements based on the findings from the FCA’s dealing commission review, which was reported in Discussion Paper 14/3 from 2014.

Remuneration, performance assessment, and reward

MiFID II will codify a number of remuneration matters into rules for the first time, including requirements designed to ensure:

  • that firms do not create remuneration policies that could incentivise staff to recommend a particular financial instrument when it is inappropriate for the client;
  • that a firm’s management body is responsible for defining and approving remuneration policies that encourage fair treatment of clients and avoid conflicts of interest; and
  • that firms need to prevent or manage conflicts of interest caused by their own remuneration structures.

Appropriateness

MiFID II will expand the types of products that are to be considered ‘complex’ for investors to understand. Defining a product as ‘complex’ is important, as it means firms selling these products without advice will need to assess whether a potential purchaser has the necessary experience and knowledge to understand the product they wish to purchase – the ‘appropriateness test’. MiFID II will treat more products as ‘complex’, including all non-UCITS collective investment schemes (which are often known as NURS in the UK) such as, for example, property funds. So, in future, non-advised sales of these sorts of products will also, at some stage, involve a test of the consumer’s ability to understand what they are buying. As a result, firms will need to assess what sorts of knowledge and experience may be sufficient for a firm to rely on when selling particular instruments.

Costs and charges

With the aim of achieving greater transparency for investors, there will be new MiFID requirements for firms to disclose all costs and charges associated with a client’s investment. This means that costs that may not typically be disclosed to consumers today will need to be disclosed upon implementation of the directive (transaction costs for example).

The FCA will be looking for the new cost information to be simple and clear – to show all costs in a way that is easily understandable by consumers so they can make effective decisions about their investments.

Independence

For the first time there will be a definition of what it means to provide ‘independent advice’ across the European Union, with MiFID II introducing requirements to ensure that independent advisers consider products from a range of different providers before making a recommendation to their clients.

To view the full MiFID Conference speech on investor protection under MiFID II by David Geale please follow this link.

Should you require any further advice or information on investor protection, Cleveland & Co, your external in-house counsel, are here to help.

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