The European Commission is looking to tighten up Mifid rules on execution-only services, with one option being to ban execution-only altogether.
Mifid rules state that execution-only services can only trade “non-complex financial instruments” but a recent consultation paper from the EC reviewing Mifid rules says there is uncertainty over what constitutes a non-complex product.
It has put forward two alternative proposals. The first is to tighten up the definition of non-complex products. Possible amendments include specifying which shares and bonds would be considered non-complex products and preventing execution-only services where investors are taking out credit or a loan to finance the transaction.
Under the current framework, Ucits are always considered to be non-complex but the commission is considering changing the definition to take into account the complex portfolio management techniques adopted for some Ucits.
The second proposal would be to ban execution-only services altogether.
The EC says: “In support of this option, it may be argued that retail clients – who are essentially concerned by the provision of execution only – should always expect a higher standard of service from intermediaries, including online brokerage, which is the typical channel for this kind of service.”
Chelsea Financial Services managing director Darius McDermott says a ban of execution-only services would be “disastrous”. He points to different buying habits of European consumers compared with the UK.
He says: “Non-advised execution-only buying may be less established in Europe but it is an extremely well established industry in the UK with roughly a quarter of all units bought in a non-advised capacity. If the EU were to outlaw execution-only entirely, it would be hugely detrimental to the UK long-term savings industry. People have been buying in a non-advised capacity for around 30 years. I would expect there to be substantial resistance to the banning of execution-only brokers.”
Investment Management Association regulation adviser Susan Wright says: “A few of the member states would argue that if you want to buy an investment product you go to an adviser but the UK comes from a different direction. We are watching this development with interest.”
Evolve Financial Planning director Jason Witcombe says: “I do not think banning execution-only is the right way to go. From a consumer’s perspective, if they do not want to take advice, why should they? It is ridiculous to say everyone should take advice and is overly draconian.”