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Chris Gilchrist: Mifid II will mean higher advice fees and dropped clients

I have not been involved in the lengthy meetings my fellow directors have held about Mifid II. Having reviewed the bumf, though, I have now reached some conclusions about the consequences. As is normal for retail financial services, most of the consequences are unintended by well-meaning regulators. In fact, they will result in effects opposite to those they intended.

The first obvious fact is that most adviser firms will not be Mifid-ready by January. It seems to me that many small firms will never be Mifid-ready and will be unable to comply with the new rules in any meaningful sense. Will these firms really take on board the detailed changes to advice processes reputable compliance advisers are recommending?

I think many small advisers will conclude that they can probably get away without undertaking a genuine annual suitability report and that some mass-produced, jargon-heavy waffle will enable them to tick the relevant regulatory boxes. It is hard to see how the FCA could possibly tell the difference between that and a genuine effort to update suitable advice without looking at client files.

We estimate that we will need an extra full-time administrator to deal with the Mifid II requirements. If the FCA was really serious about making advice more readily available, would it be imposing these additional costs?

I do not take the argument about this being a EU directive seriously: every EU country has the choice about how to implement directives, and the UK has form in gold-plating them and adding to their requirements.

The problem goes back to the idiocy of the MPs who passed the original legislation that makes the FCA almost entirely unaccountable. The only people with any ability to change the way the FCA works are officials in the Treasury who would rather spend their time dreaming up wheezes for the Chancellor’s next Budget.

I expect ongoing advice fees to rise over the next year as advice firms
get miffed.

Given the requirements for ongoing suitability assessment, advice firms are probably going to sack many of their clients. This is not just because of the obligation to produce the reports, it is the knowledge that any small failure or oversight in this process will open the advice firm up to potential complaints. Many firms will conclude that the threshold for ongoing advice needs to be raised. I guess many firms will see fees of £1,000 a year or a portfolio of £100,000 at the typical 1 per cent annual fee as a sensible minimum level.

On the other hand, some firms will try to avoid the requirements by not providing an ongoing advice service for some categories of client. So, it is back to the future: higher initial advice fees and a “call us if you need anything else” proposition.

At this point, some will be thinking robo. But the UK’s madly complex tax system means there will never be a set of algorithms capable of optimising clients’ financial arrangements. For that, you still need a human adviser. All robo can generate is simplified advice for simple situations.

But maybe there is a silver lining to this cloud. If small firms do not meet the Mifid requirements and are actually penalised by the regulator, perhaps we will be able to buy them up on the cheap.

Chris Gilchrist is director of Fiveways Financial Planning


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There are 25 comments at the moment, we would love to hear your opinion too.

  1. EU leaders met in Brussels in October 2013 to discuss ways to improve growth and competitiveness across Europe. Using data from the UK Government’s impact assessments of these rules, Open Europe estimated that the top 100 EU laws cost the UK economy £27.4 billion a year. This was more than the UK Treasury expected to raise in revenue from Council Tax in 2013 (£27 billion). 
And laws equal regulatons equals regulators.

    Those hardworking families are doing so just to keep this lot going.

    The unintended cost burdens of regulation in the UK are almost unquantifiable, certainly vast and in almost every case there are grounds to think that life could be simpler, cheaper and more fulfilling if we all took responsibility for our actions, adopted common sense in management styles, business practices, directives and substituting ‘elf and safety’ with sanity.

    Time for a rethink?

    • But how many of these laws would simply be replicated by our own Government? Most, probably. It’s a bureaucracy problem not an EU problem.

      And when it comes to EU financial regulation the FCA are behind a great deal of it.

      Plus ça change…

  2. I agree entirely Chris

    Besides, why should a client be forced into having a Suitability Report annually and pay for it if indeed they don’t want one? We are basically saying that unless you are prepared to pay for the inclusion of an annual repetition of suitability, then you cannot have an ongoing service proposition. There is also the other issue in that if clients have several very different investments/tax wrappers, are we obliged to reaffirm suitability for each investment; potentially that means I will be sending out 6-8 reports in some cases. Could be quite expensive !

  3. Agree with all of Chris’s comments.

    The irony in all this and other recent regulation (and guidance) going back 10 years is that advisers are better off. And clients are worse off – those that can afford it pay more, those who can’t are on their own.

    Perhaps the time has come where advisers stop worrying about the effect of regulation on clients and let regulators get on with it. Yes, regulators have grand ideas and mean well. And no, they have no real understanding of how clients think (for the record, dumping yet more information on them is counter-productive) and how the market for advice works work in practice.

    The truth is that advisers have never had it so good; prices are high, business is plentiful, risks (to advisers) are reducing. And it’s all thanks to misguided regulation. Instead of getting frustrated and beating ourselves up perhaps it’s time to accept the gift, move on and let the regulator worry about what they are doing to clients.

    Or perhaps I’m just getting old and cynical…

    • Nicholas Pleasure 15th November 2017 at 6:04 pm

      Spot on. My response to this is that I will put up my fees. To do this extra work without taking on more staff I will need to lose some clients. Therefore I intend to charge much more and work a little less.

      Thank you FCA; you really are the advisers friend.

      Shame about the clients though.

  4. Chris,

    I particularly like your use of the term MIFFED II.

  5. Thought provoking and erudite as usual Chris.

    The issue of ongoing suitability assessments and reviews is something that, we are considering in detail. As always, we are interested to reduce the burden of compliance whilst helping firms raise their oversight and management capability.

  6. The FCA backed down on telephone recording – they must back down on this one too. This is a very good article Chris and low net worth clients will be dropped and although they will have the option to contact us, they will not. Even if they do, it will cost more time and money to bring them back on board and I doubt the client would pay for it.
    It is a nonsense. And I would question whether the FCA are independent in the sense that they will stand up to MPs and say you are wrong e.g. pension freedoms. Repeat a great article Chris which the FCA and MPs should note given FAMR and FCA Business Plan which is proven to be tosh!

  7. Unfortunately this is what happens when people that don’t have any clue how things actually work, or the amount of work involved in their waffle make the decisions.

    Sorry but nobody making any decisions at the FCA should be allowed to do so, unless they have significant experience within the private sector.

    • Precisely so, Duncan – but Financial Services are not the only area where it happens.

      Some idiot once decided to try to keep blocks of flats warm by sticking panels of the same stuff they make carrier bags from on them.

      You change its name – “polyenthylene” not “polythene” or “Financial Conduct Authority” not “Financial Services Authority” and pretend there is no disaster waiting to happen.

  8. I was reading this and thinking that you were making a good point, however was also not sure of how much you had understood, given you have only reviewed the Bumpff.

    However Chris, what a really
    crass statement to make!

    “If small firms do not meet the Mifid requirements and are actually penalised by the regulator, perhaps we will be able to buy them up on the cheap”

    Is this what you see as an opportunity, other firms going to the wire?

  9. My concern is that having reviewed the product and investments, how many will be suitable and need to be changed, and at what cost?

    We already have issues with regulators pushing costs and charges.

    We have learned that our research as advisers is insufficient to protect against claims when it suits the regulator (Arch, Leamans) even when we have paid for Morn Star, Trustnet reports and AKG. It really makes a complete joke of the system and requirements.

    At what point does it end? Most small firms are supposed to be MiFID2 exempt, how much of this is actual regulation and how much is being pushed by over salsas compliance and industry consolidators?

  10. Grey Area is the one who has got this bang on the money!!

    If you just strip back to the bone all the crap this is really what you end up with

    Grey Area old and cynical…. well after 26/7 years in this business I am (probably) considered a dinosaur, bought and paid for the tee shirt and worn it out !

  11. I voted for the UK to break free from this type of bureaucratic madness (and much else). Those who didn’t will be getting what they voted for so they have no grounds for complaint.

  12. Whilst I don’t disagree with the potential implications for the cost of advice or treatment of clients, MiFID2 does not represent any material difference to the expectation introduced under RDR…….or indeed the general expectation that advisers should ensure the ongoing merit of their advice. The reality is the economics of a large number of firms depends on ongoing fees, but the service delivered for that fee is not worth it…..and in some instances non-existent. As Chris implies, I am not convinced MiFID will change that without much more material intervention by the regulator, but if it does the likely outcome is fewer clients serviced by fewer advisers

  13. The biggest issue in my opinion, is not the on-going suitability itself, we already issue letters to review clients and this will become the norm.
    It is the timing.

    For no changes reviews you are supposed to issue the letter “at the time of, or prior to the advice” Now, we all know a review meeting is one meeting, how then do you issue a letter before you have reviewed the client circumstances!! This needs to be changed by the FCA, it makes no sense!

    With regards to transactions at review (bed & ISA’s/fund switches etc), the suitability letter needs to be signed before the transaction takes place. In other words, you issue the suitability letter after the review and wait for it to be returned. Again, this is daft. It’s extra cost/time/administration when a simply one liner or application form from the client should be sufficient.

    I bet there are a lot of networks out there that haven’t even briefed their advisers on this nonsense.

    • As we allready record client meetings and act on their verbal instructions in thsoe meetings and by phone, havoing to get a signature again is actually a backward step. It also discriminates against the blind and illiterate and as mosdt of us know, people act on what is said to them and agreed, rather than the pages of drivel we are forced to put in front of clients which they never read, but invariably sign saying “I trust you”. This will be a charter for paper over any meeting of minds.

  14. I note several advisers justify MiFID II on the grounds that it forces advisers to give an ongoing service on the grounds that they do not do so already. Maybe, but many advisers are working on marginal profits delivering ongoing services at barely profitable margins. I dislike this argument intensely as it presupposes all firm are overcharging their clients. All this is too prescriptive, too expensive and utterly inappropriate for UK markets. Breaches principles of FAMR and FCA’s own business plan.

    • I agree with you Sam, especially about the too prescriptive. We work for our CLIENTS, not the FCA, UK or European Govts.
      This is not what my clients wnat. not what I want, but is just someone whose never udnertaking a relationship roles idea of what should happen. It’s totally unrealistic.

    • Sam this is exactly what you get when the regulator (for ease) sheep pen an industry and broad brush the rules….

      It captures everyone but applies to very few !

      We are then taxed collectively, governed collectively, fined collectively, and punished collectively……

      Common Law, fair treatment, or even the Geneva Convention act do not apply to us !

  15. The lunacy of all this is summed up in one new rule:

    Regular reviews have to be at least annually

    Therefore, if you have a client who has a small fund value who you service once very two years to make it cost effective for everybody, you now have to either increase your charges, or sack him!

    What utter nonsense this **** is!

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