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Martin Bamford: Living the bureaucratic dream of Mifid II

There is a big folder in my office labelled Mifid II. Every week or two, I set aside a couple of hours to read parts of it, make notes and circulate thoughts to colleagues about how we are going to comply. From everything I have read so far, here are my observations about what it means for firms like ours.

Firstly, it does little, if anything, to improve outcomes for clients. I like to measure every rule change against the simple test of whether it will genuinely improve things for clients. In the case of Mifid II, it will not. No client was ever made better off because their adviser considered a structured deposit when making investment recommendations. Fact.

Secondly, there is nothing significant in the new rules that cannot be addressed by spending countless hours making minor procedural changes, writing up a few new business policies and adopting updated client disclosure documents. This is all time spent away from providing a service to clients. It does result in higher fees to our clients, as this work comes at a cost, so it is fair to say implementing Mifid II is widening the advice gap.

Thirdly, this bureaucratic dream is going to create some fun come January. That is if you enjoy arguing the toss with providers over whether your client is a natural entity and really does need to spend £115 plus VAT (and waste a few hours of their time) applying for a legal entity identifier before they can switch funds. We know how much providers love to gold plate the rules the FCA has already gold plated. Current tasks include determining the approach one wrap platform will take in the absence of National Insurance numbers for under-16s with Junior Isas.

As a side note, we have already seen one opportunistic Sipp provider offering to get LEIs for clients who might or might not need them for a 200 per cent mark-up. At least regulation inspires entrepreneurship.

Mifid II has also inspired regular cold calls from technology providers engaging in a spot of scaremongering around the recording client calls rule. Yes, there are new rules to record client calls. No, we do not need to spend thousands of pounds to digitally record each call and link it to our back office system. Making notes in the prescribed format for relevant calls, which we estimate to occur once in a blue moon, is fine thank you very much.

And then there is the ridiculous requirement for discretionary fund managers to notify clients when their portfolios have dropped by 10 per cent during a quarter. This (hopefully) is not going to happen too often. It has only happened a handful of times in the past 50 years, usually followed pretty swiftly by a strong recovery.

What worries me is the implications of providing too much information to clients about movements in their portfolio values. Applying short-term performance measurements to long-term objectives rarely makes sense. At least we get to earn our fees as advisers by coaching them through this noise.

The next few months will probably involve writing to a few clients with the upsetting news they have work to do and expenses to incur in order to remain as such. They will definitely involve me banging my head against the desk in despair. But, hey, at least we get to harmonise our regulatory standards across the EU, just before we leave it a year later.

Martin Bamford is managing director of Informed Choice

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. There is a list of quantifiable evidence to show how this is placing further costs on clients contradicting everything the FCA appears to stand for e.g. FAMR and their Business Plan. The hypocrisy is sadly something we have had to get used to without the accountability although the FCA will dump that on politicians. Just applied for an LEI but there is nothing there that could not have been met by simply referring to our FCA Number.
    And of course, MiFID II refers just to investments so ignores totally at great expense the financial planning professionals.

  2. Whilst I agree with most of what Martin has put, as certainly most of the transaction reporting on financial instruments is pointless, one very good reason is on shares. With all sales being more closely monitored, it really will make it very hard for anyone to get away with insider trading.

  3. Excellent piece. Nothing to disagree with. What a waste of time all this nonsense is.

  4. This is the first time I have made a comment on a forum such as this.

    I totally agree with Martin’s comments.

    My clients are going to have to pay for this madness.

    Sadly they have no idea what Mifid 2 is about and I suspect they could not give a dam about it.

    I feel pretty confident that our regulators are looking after our clients interests and probably do not need our European friends offering their help to add another layer of regulation to the already large burden that we all have to contend with.

    • You may be surprised to find that the FCA instigated and supported large parts of MiFID II. There are a few notable exceptions but they are very much in the minority.

  5. Nicholas Pleasure 1st November 2017 at 5:44 pm

    I completely agree with Martin. Mifid 2 is just another thing that takes time and resource but seems to achieve nothing of any benefit.

    Clients will pay more. We do not work for free.

    However, sometime, clients will refuse to pay ever more money and at that point advisers will close and FCA jobs will be lost.

    The government will then launch a lengthy consultation to discover what went wrong.

  6. Martin

    Well said and well put. DFMs now have to report quarterly to their clients. I thought the object was to discourage short termism. As you so far too much information – and anyway what do they thing the client will do when they get all these extra valuations? Either they might panic (unlikely) or just ignore them. Twice a year is often more than sufficient – with the second valuation occurring on April 5th.

    It really does seem to me that these rules (like so many others) have been drafted by those who neither have direct advice experience nor do they have portfolios of their own. Just like the Consumer Panel, being an ‘investors’ champion and supposing that this will be achieved by wrapping everything in red tape while at the same time bemoaning the fact that the advice industry puts up their charges as a result. I guess we seeing that the road to Hell is paved with good intentions.

  7. I think I can call this ‘Miffed’ – or actually some more appropriate expletive. These are new and onerous rules introduced with the intention of helping to improve the customer experience and costs but in our view, some of the changes are oppressive and will result in higher costs having to be passed-along to the end client. That is regression, not progress. They are EU based but we, the UK, shall adopt them and work with them regardless but some of the rules are clearly designed by technocrats who have little practical experience in the underlying work place and that is sad. We have no choice but to comply – including extra reporting of transactions and other significant IT changes which will result in higher fixed and variable charges as a consequence. For example, we shall have to double the number of investment reports to clients – to be quarterly and not half-yearly. Also, all firms must write to a client if the value of the client’s ‘portfolio’ falls by 10% or more from the last reporting point. This all sounds very helpful but an astute firm would already have processes in place to communicate with its clients if there have been global events creating investment uncertainty and no-one wants to receive a letter because Mr Gorbachev has disappeared on the Monday but is back again on the Thursday (as almost happened)… recently this will not have happened generally since around 2008/9 (unsurprisingly) but systems will need to be in place to monitor that on a daily basis and the letter must be sent-out that day!

    In the same way that these changes will take place, there are some glaring omissions in terms of who or what is not covered by these rules too. I do not know what is worse – introducing them altogether or excluding some investment ‘products’ from the mix in some arbitrary way.

    I have to say that usually out of every constraint there is opportunity to exploit the anomaly but in this it is difficult to see that. Then there is the need for ‘Legal Entity Identifiers’ for all non-private people who have relevant investments. Maybe we’ll pick-up business from charities, trusts and other organisations as a consequence as we are going to hand-hold on those needs too but it is a tenuous benefit to us. Still, we shall have even less competition through the other side I suppose as firms decide to drop by the wayside.

    That’s not progress is it.

  8. All those who voted for Britain to remain in the EU should perhaps bear in mind that by so doing they were voting to remain subject to all this needlessly bureaucratic garbage.

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