The latest draft of the European Commission’s markets in financial instruments directive, Mifid II, introduces a range of measures which seek to address issues raised by the financial crisis, such as improving investor protection, increased transparency and regulation of more opaque markets and the unbundling of services and products.
The European regulator has also published its view on commission payments across Europe. There are areas in Mifid II that conflict with the UK regulatory rules. Mifid II proposals state that in order to qualify as independent, advice should be based on a “sufficiently large number of financial instruments available on the market”. However, the FSA’s definition of independent advice is wider than the Mifid II definition. The regulator has introduced the term “restricted advice” in the RDR papers that does not exist at EU level.
Treasury financial secretary Mark Hoban has said that he is concerned about proposals that would clash with the RDR such as the intended ban on commission. Mifid proposes that a ban on commission should only apply to IFAs, leaving the rest of the tens of thousands of non-IFAs able to take commission as they do now from product providers. Under the RDR, advisers giving restricted advice will not be able to receive commission.
The Mifid directive will need to be transposed in the national laws of each member state, which in itself can be a lengthy process. We do not yet know if Mifid II is to be goldplated into the FSA’s rules, meaning the UK exceeds the requirements of Europe, making the UK unique and standing alone as it implements the more rigorous RDR intentions of a ban on all commission. I believe that the FSA must not be given any exemption from Mifid, otherwise there will be a clear case of discrimination of UK financial advisers within the EU.
However, if the commission ban is not goldplated, additional rules and guidance on status disclosure are needed. Without these, I fear that some lFA firms will register as restricted advisers to take commission and will refer those that need complex in-depth financial planning to a whole of market IFA who sits at the back of the office. The IFA may refer new clients to the restricted arm of the firm, remembering that the RDR intends to allow clients to be passed down to other chosen distribution.
This may become a common introduction if more commission can be generated from the client than the adviser charging agreed fee. Does this treat clients fairly?
The Mifid paper is at the level one stage of drafting and will go out to the 27-member states for further negotiation. It needs to be passed by the European Commission and adopted by the European Parliament which is always a lengthy process which may go on for years.
I hope common sense prevails and the consumer is not forgotten in all this high level negotiation.
Kim North is managing director of Technology & Technical