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FCA reviews independence standards as Mifid II deadline approaches

The FCA is reviewing the standards advisers must reach to hold themselves out as ‘independent’ ahead of the introduction of Mifid II reforms in January 2017.

The Mifid II changes are designed to strengthen protections for retail investors across the EU through limits to the use of commissions, stricter requirements for product design and distribution, new product intervention powers, improved disclosure of costs and charges, and conditions for the provision of independent advice.

A paper published by the FCA today, however, acknowledges a discrepancy between Mifid’s independence threshold and the UK regulator’s.

The FCA says: “Where independent advice is sought, we continue to believe that consumers should receive advice that considers all types of products that may be suitable for their needs.

“We understand, however, that some stakeholders consider Mifid II’s standard – a ‘sufficient range’ of products from a sufficiently diverse group of providers – may allow independent financial advisers to redefine the breadth of products they need to consider before providing a personal recommendation.

“We would welcome views on this point – in particular, on how far Mifid II’s standard is practically different to our existing standard, particularly from firms holding themselves out as ‘independent financial advisers’.”

The FCA warns any material change to its independence definition risks creating “more consumer and industry confusion”. It adds: “We need to ensure that any independence standard is clear, both to firms and consumers. We already know that consumers understand independent financial advice to cover a range of products.”

The FCA says Mifid II requires member states, including the UK, to deliver an independence standard for advice on shares, bonds, and derivatives – products which currently sit outside the regulator’s definition of retail investment products.

While the FCA does not plan to include these products as RIPs, it says: “Mifid II requires firms to be able to offer independent advice on a sufficient range of shares, bonds and/or derivatives from a sufficiently diverse range of providers.

“We would expect firms to clearly disclose the scope of the service provided to a client, and ensure the client fully understood the extent of the independent advice being offered. It would seem reasonable that a firm offering independent advice based on a sufficient range of shares, if accurately communicated to their client, could ensure they met their client’s expectations in terms of the breadth and range of services offered.

“We are mindful, however, that this approach could lead to several new ways in which firms hold themselves out – firms holding themselves out as providing independent advice on shares, or bonds, or derivatives, or indeed any combination of these.

“This may lead to consumer confusion, and require the consumer to select – at least initially – the type of product they believe is suitable for them. It is unclear to us at this stage if this would deliver the optimum consumer outcome.”

To address this issue, the FCA says it could define a “sensible ‘basket’ of products” which a firm would need to consider in order to hold itself out as independent.

It adds: “Most stockbrokers who provide advice would, we anticipate, be unable to meet any independence standard (be it ‘sufficient range’ or otherwise) for derivatives, which may lead us to consider an entirely separate standard for independent advice on derivatives to be appropriate.”

In addition, the FCA says Mifid II will require it to reconsider how advice on structured products is treated domestically.


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Let’s hope we are telling the EU to take a running jump come the referendum!

  2. Sorry but telling the EU to ‘take a running jump’ wil have no impact on MiFID II except to take away our influence at the decision table. Even if the UK leaves the EU it will most likely remain in the EEA and thus be subject to the same directives without any influence over them.

    MiFID provides a European wide framework that should deliver the same standards across the member states. MiFID II appears to be bringing some aspects of RDR to the rest of Europe so at least a level playing field should exist. As always there is a danger of gold plating in the UK which we would want to avoid. I’ve worked with cross continental investment firms and the presence of a European wide directive is certainly useful.

  3. FCA: “We need to ensure that any independence standard is clear, both to firms and consumers. We already know that consumers understand independent financial advice to cover a range of products.”

    Firstly, you are absolutely right it does need to be clear to firms and consumers but it can’t be worse than it is now. Secondly, I would absolutely refute the suggestion that consumers understand the current definition as referring to a range of (packaged) products. It’s not true and the FCA have no evidence to this effect.

    The rules refer to the use of the word ‘independent’ NOT ‘independent financial adviser’ as the spokesman suggests. Which means that pure investment managers (e.g. who don’t advise on wrappers like SIPPs and ISAs) and those unwilling to consider things like UCIS for their clients have to call themselves ‘restricted’ despite acting as the client’s agent, being ‘whole of market’ and absolutely not tied to any provider. How many clients understand that their ‘independent’ financial adviser doesn’t have to even consider direct investment into things like equities and bonds? Having created this independence muddle the FCA then get upset when people refer to themselves as ‘restricted whole of market’ because it’s misleading despite being factually correct. The situation is fundamentally flawed so instead of bluster and glossing over, just fix it.

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