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Looming threat: Is the FCA going over the top on EU’s Mifid II rules?

The FCA has been accused of “gold plating” European rules and imposing onerous costs on advisers after proposing firms record all client conversations.

As the regulator fires the starting gun on implementing the EU’s recast markets in financial instruments directive, experts warn the legislation will have significant implications for advisers.

Last month, the FCA published a discussion paper on its approach to the Mifid II rules. It says the EU timetable for implementation is “challenging” and it wants to get firms’ views on the legislation as early as possible.

The FCA plans to consult on rule changes in December and will confirm final rules by July 2016. Firms have until 3 January 2017 to comply with Mifid II.

Independent regulatory consultant Richard Hobbs says: “The FCA is trying to warm up the industry for Mifid II and I suspect it is worried this is not high enough on firms’ agendas.”

Recording client calls

To help combat market abuse, Mifid II proposes requiring firms to record telephone, and electronic communications relating to client orders, a requirement which may extend to some face-to-face conversations.

Records must be kept for five years and provided to the client on request. National regulators have the option to extend the retention period to seven years.

When the FSA implemented Mifid I in 2007 it created exemptions on recording rules for certain firms, including advisers.

But the regulator says it is considering removing this exemption, arguing to do so will allow it to “assess firms’ compliance with the conduct of business requirements, pursue enforcement cases for market abuse and support claims of non-compliance with our regulatory requirements”.

It says requiring all firms to record calls may also help resolve complaints more quickly.

But Apfa director general Chris Hannant says: “This aspect of Mifid II is aimed at monitoring firms like stockbrokers to prevent market abuse. It is not about investment advice and the FCA is going over the top by gold plating the rules.

“Firms need to keep a record of the advice they have given but to suggest a blanket requirement to record all conversations is not what Mifid II intended.”

A senior source at another major trade body says: “Firms will have to store the data and use new technology to access particular parts of conversations. This will be difficult to do and extremely expensive.”

It is understood a medium-sized advice firm could expect to pay around £2,500 a year to record all telephone calls but additional costs would be involved in recording
face-to-face meetings and storing the data.

City law firm Reynolds Porter Chamberlain associate Sam Bishop says firms would have to record all calls as they could not know in advance whether a call related to a client order.

He says: “Market abuse in relation to advisers is unusual, so this seems disproportionate.

“However, one of the problems we see when advising firms defending complaints is firms often have insufficient documentation. So while recording calls would mean incurring an upfront cost, it could reduce costs in the long term by helping firms defend complaints and stem liabilities.”

Compliance consultancy firm The Consulting Consortium offers a RecordSure tool for advisers which records face-to-face and telephone conversations.

TCC chief executive Joanne Smith says meeting notes and other paper-based methods of recording “cannot be relied upon to be 100 per cent accurate”.

She says: “An audio recording is the only authentic validation of what has occurred during a conversation between adviser and client. Knowing there is evidence of the suitability of the advice should provide advisers with peace of mind and greater assurance against future complaints.”

Independence

The paper also sets out the FCA’s initial thinking on how Mifid II will affect its independent advice label.

In December, the FCA said it was “open-minded” about changing its independent and restricted labels after its post-implementation review of the RDR found they were not well understood by consumers.

Mifid II introduces a European-wide definition of independence for the first time.

It requires independent firms to make recommendations based on a “sufficient range” of providers’ products rather than the whole market as under the FCA’s definition.

However, experts say Mifid II’s definition may actually be stricter as it covers a broader range of products.

The FCA’s independent definition covers retail investment products while Mifid II’s independent standard also covers structured deposits, shares, derivatives and bonds.

The regulator is proposing including structured deposits within its independence requirements and developing a separate independence standard for shares, derivatives and bonds.

The FCA is asking for views on how Mifid II’s definition compares with its own but says any change to its labels risks creating confusion.

Hannant says: “The Mifid II definition is superior but whatever the standard is it has to be consistent across all products. To have one standard for retail investment products and another for other products would be a recipe for confusion.”

Law firm Clarke Willmott partner Philippa Hann says the range of products covered by Mifid II means it will become “ever more difficult” for advisers to maintain the independent label.

She says: “Very few, if any, lawyers offer advice on every aspect of law; most deal only with a relatively narrow specialism.

“Similarly, financial advisers will develop their specialisms further and we may see more styling themselves as independent ethical advi-sers or independent advisers for shares and bonds.”

Execution-only

In the execution-only market, Mifid II will introduce stronger protections for consumers.

It proposes requiring firms to carry out an appropriateness test for complex products sold without advice.

Further details on which products will be classed as complex are due in January 2016. 

But the FCA says few instruments other than vanilla shares and bonds, non-structured Ucits funds and some structured dep-osits are likely to be classed as non-complex.

Zurich head of regulatory developments Matthew Connell says: “The paper sets out that for a lot of products, execution-only is not going to be an option any longer.

“But the appropriateness test has to be proportionate and not so onerous that it locks everyone out of buying a product on their own.”

Bishop says the rules place a greater onus on product providers which issue marketing materials on a non-advised basis.

He says: “Can you really continue to sell products on the basis of a direct offer financial promotion and comply with these obligations? It is going to be very difficult.”

Hann says advisers should be cautious when carrying out execution-only transactions. She says: “As the definition of non-complex products is restricted, if in doubt, advisers would be well advised to consider the appropriateness test in each case. There may be pressure from clients to avoid this step but the risk of falling foul of these new requirements simply isn’t worth taking.”

Inducements

The FCA says Mifid II will tighten inducement standards for all investment firms. In January 2014, the regulator published its final guidance on inducements, which banned “extravagant” hospitality given to advisers. This followed earlier guidance on distribution deals between providers and advisers.

For independent advisers, Mifid II bans the receipt of all benefits except “minor non-monetary benefits”.

The European Commission may publish a list of what falls into this category in its implementing measures in the summer.

The FCA says acceptable benefits may be limited to generic information relating to a product or service, participation in conferences and seminars and hospitality of a reasonable value. Benefits must also meet a “quality enhancement” test to show they benefit the customer.

The regulator says it plans to apply the “more restrictive” rules to both independent and restricted advisers to avoid the confusion of having two regimes.

Bishop says firms will have to int-roduce procedures to show they are reviewing the quality of benefits they receive rather than simply whether they fall below a certain monetary value.

Connell says: “Training, technology and research have been grey areas so this is where Europe may impose tougher standards.”

The FCA is also considering banning third-party rebates for discretionary fund managers. Under Mifid II rules, DFMs are allowed to accept commissions so long as they are passed along to investors but the FCA is considering ruling out rebates altogether.

Cost disclosure

One area where the FCA is taking a more lenient approach is cost disclosure. Mifid II requires firms to disclose all costs and charges related to a product at the point of sale and aggregate the information to show the cumulative effect of costs on the return on investment.

Experts have previously argued it will be near impossible for advisers to obtain this information and present it as a single figure.

The FCA says it recognises the “technical challenges” involved and potential overlap with the key information document set to be introduced by the Priips regulation in summer 2016.

It says it will not apply the costs and charges requirements for pension products and insurance-based investments, which includes unit-linked and with-profits policies, investment bonds and annuities.

The regulator says this is because there are a number of changes to disclosure requirements for these products in development, including the Kid and the FCA’s work with the Department for Work and Pensions on transparency of workplace pension costs.

Deloitte regulatory strategy manager Rosalind Fergusson says: “There has been a whole raft of new measures and proposals in the UK and Europe aimed at increasing the transparency of costs and charges to consumers. But the FCA seems to recognise the more information you provide to consumers, the more challenging it can be for them to make sense of it.”

Timeline

March 2015: FCA discussion paper published

Summer 2015: EU legislation on Mifid II implementing measures is adopted and formal approval process begins

December 2015: FCA consults on implementing Mifid II requirements

Early 2016: EU legislation on Mifid II implementing measures is finalised and published

June 2016: FCA policy statement on implementation of Mifid II

January 2017: Mifid II rules come into effect

Expert view

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The FCA is trying to warm up the industry for preparing for Mifid II. Part of the problem is the FCA does not control the timetable.

European regulators can cause national authorities a real headache because until they publish their technical standards, there is not a lot of information national regulators can give to firms.

The recommendations on recording client conversations gives us an insight into European legislators’ thinking.

This rule is based on a bancassurance model, where firms use call centres. It is only really the Netherlands and the UK which have a community of independent and sole trader advisers and this legislation is an example of Europe not appreciating that model.

Recording calls can be done but there are economies of scale.

It would cost a bank with a large call centre tens of thousands of pounds a year to record its calls but as it has hundreds of staff the cost per call would be relatively cost-effective. However, an IFA only doing a few interviews a week would have to pay a higher cost per call.

As a defence against potential complaints, recording calls is very useful and some advisers might take that view.

But for a trusted, local IFA, if you set up a tape recorder in a meeting a lot of clients would really hate it and it would be an impediment to the client relationship.

Some people may even hang up if they call a firm and are told the call will be recorded. 

The loss of potential or existing clients is a very serious consequence for firms.

This is part of a wider trend towards increasingly intrusive oversight techniques and further evidence of the rising tide of regulation.

Richard Hobbs is an independent regulatory consultant

Adviser views

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Lee Robertson, chief executive, Investment Quorum

We currently record all calls and as a firm with discretionary investment permissions, that is a nice safeguard for us. Our professional indemnity insurer really likes it and it helped resolve a potential client dispute a few years ago. But not every client would be comfortable having meetings recorded, particularly face-to-face, and the Mifid II requirements could cause huge data storage problems for advisers.

Aj Somal, chartered financial planner, Aurora Financial Planning

Some clients might be uneasy about recording calls or meetings, particularly new clients. It all comes down to how you introduce the concept. Most advisers are aware Mifid II is coming down the track but there is a lack of knowledge about what the legislation involves. There needs to be more information out there, particularly when there is a short deadline.

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 9th April 2015 at 9:27 am

    What if you don’t take “client orders” over the phone? As I understand it, the rule now is that you can’t accept a verbal instruction even for something as simple as actioning a recommended fund switch. It must be by way of a signed letter or an e-mail. It’ll be a right PITA if we have to record and then archive every flipping client conversation.

  2. We record everything anyway including FTF meetings. No customer EVER complains about it. No advisor has any problem with doing it and it doesn’t cost any money to do- only storage costs which hopefully will reduce in the future.

  3. The trouble with bureaucracies, , like the FCA, that are paid for by the people they administer is they always expand not just in numbers of people, but in things to control and increased prices/costs – ” we have to pay the going rate to attract the right calibre people you know”.

    There is no real control over their expenses and they certainly have no incentive to be either cost effective or even efficient. Why does the UK always implement very single EU dictat 100% because? The people writing the laws are bureaucrats and need to expand their own jobs, departments and expenses/salaries – they also have no need to be efficient or cost effective.

    How many lawmakers does the US need and how many does the UK need – we have more than twice as many and are 30% of the population and maybe 20% the GDP. The FCA is just another symptom of gross expansion of the state spending our money more wastefully than we would do ourselves.

  4. The worry about recording all telephone calls isn’t what was said during the conversation but rather, what wasn’t said!

    ‘You didn’t mention risk again, you didn’t mention capacity for loss again, you didn’t mention fees again’ etc etc….a defence of ‘This was a client of mine that I’d sat down with only a month ago and covered these very areas’ perhaps won’t wash.

  5. Dennis Burling 9th April 2015 at 1:22 pm

    This is all getting ****** ridiculous !!

    Small one/two man businesses just cannot afford ever increasing requirements like this and still make a profit so what’s the point in taking on ever increasing potential liabilities in the future with declining income now !! With ever increasing FCA, FOS & FSCS levies, licences, software, admin system costs and now the latest EU bureaucracy on top, if this keeps going at this rate, we might as well shut up shop now, like many that have already done so !

    When the FCA overcharge us do they reduce the next levies to adjust things ? – Nooooo they just pay themselves even more salary and add on even more costs to cover them regulating even more things that they can think of to make our lives even harder. The level of the FOS levy has increased 50% recently and they seem to be a law unto themselves as well these days and area afraid to support the man in the street now when big insurance companies put profit over customer promises – too much of a vested interest to keep the big payers happy I suspect.

    Where this is all going to end is that we won’t have a viable industry anymore to regulate and I for one am getting very close to now throwing in the towel while I still have a towel to throw !!

  6. Happy to record everything as long as the FCA, FOS, FSCS and all Government employees do the same and make them public. After all we employ them surely we should have the right to see and hear what they are doing and saying. It would save a lot of time and expense as we could challenge them before they get it wrong time after time after time.

    We have no legal long stop, they want to intrude in to every corner of our lives, it seems only right we should be able to do the same.

  7. Last month at a distribution technology seminar in London, the panel said that the problem with advice was record keep (or lack of) rather than suitability of advice. I asked them why therefore they didn’t just get firms to record meetings and phone calls as required for dealers as we had been doing this for over a decade for phone calls and 8 years now for meetings.
    as Jane Hodges said above earlier “We record everything anyway including FTF meetings. No customer EVER complains about it. No advisor has any problem with doing it and it doesn’t cost any money to do- only storage costs which hopefully will reduce in the future.”
    I do however agree, the issue is actually over omission as recording actually demonstrates that a compliant process is actually IMPOSSIBLE, which I proved in 1993 when my then employer decided they wanted everything done on a laptop in front of client in a set structure with ALL Mandatory and preferred compliance issues covered of you failed role plays. I volunteered for the video version so I could prove that in the time a consumer would allow an adviser for a meeting, it was not possible to cover everything compliantly AND be a human being with the client in under 2 x 2 hour meetings (if you were lucky). I can do things by the book when required, but one has to learn where corners can be cut especially when you think that even in the 1990s when training as an adviser we had 2 weeks intensive training, which effectively is what you have to do to a consumer in the time they allow you i.e. condensed in to 4 hours over two meetings!
    A recording shows INTENT of the adviser, was the thing the adviser trying to achieve for the client the RIGHT outcome? Did the consumer understand the main points (even if not all of them), is there more risk if the consumer does NOTHING than acting without a full picture or fully understanding something? Inaction is a decision in itself and as with my car, which I have a pretty good understanding of it’s workings (having been trained by the Army as a mechanic at one point), I would not dream of trying to sort out my own car if I can pay someone to do it better and quicker than me without me having to WORRY.I later trained as an armourer, so in theory I could repair small arms…. in practice, I don’t have any gauges or tools to enable me to do that, so I’d have to get someone else to do that for me or risk killing myself. It is very similar to advice from that point of view, the problem with the F-pack and compliance staff is whilst many did the job as an adviser for a little while, none of them stuck with it either because they were awful salesmen OR because they could not balance the impossibility of fully complying with rules that are actually not achievable.
    I suspect as a result or writing the truth here (as I did with the Longstop) I will get another snotty letter from the FCA supervision department as I know from previous experience they read what we write on this blogs if we do it under our own name rather than pseudonyms, but to be quite honest, if anyone says all I’s are dotted and t’s crossed they are liars as so0me always get missed.

  8. If a firm notifies the FCA of its intention to record a compliance visit, it is told in no uncertain terms that it must not do so and that, if it does, this will be treated as “failing to deal with the regulator in an open and cooperative manner”. The prime reason for this is that the FCA’s follow up reports commonly bear little if any resemblance to what was actually said (as frequently reported by Adam Samuel) and, if you have no recording of the meeting, it’s difficult to argue the differences between fact and fiction. The FCA doesn’t even have to defend its version. It just rejects yours. There’s no quid pro quo in regulation. It’s a rigged deck and the FCA holds all the cards. Truth, accuracy and fairness don’t come into it.

  9. @Julian – Have you yourself had the FCA ask you Not to record meetings or is this something someone else has told you? To be fair to the FCA, the FCA have always accepted my recording of my dealings with them provided I give them a copy too.
    There have been occasions the FCA have not specifically asked me about recording and I will have sent them an email before speaking to them (you’ve seen my email footer I believe Julian), so if they have chosen not to read it… that is their problem as it was clear, fair and NOT misleading. I also use a second email footer addition at times for things I want made public;

    THIS Email IS SUBJECT TO FREEDOM OF EXPRESSION – ARTICLE 10 THE HUMAN
    RIGHTS ACT 1998: This guarantees the right to pass information to other people and
    to receive information that other people want to give you. It also guarantees the
    right to hold and express opinions and ideas. Journalists and people who publish
    newspapers and magazines can use Article 10 to argue there should be no restrictions
    on what they write about. Artists and writers can use it to defend themselves against
    people who try to censor their work. Article 10 is a ‘qualified’ This means that the
    Government or a public authority may be allowed to restrict or interfere with the
    right in certain circumstances. The Government or the public authority must show
    that there was a clear legal basis for the restriction or interference. Its actions must
    pursue one of the eight aims set out in Article 10, which include: No 1 the prevention
    of crime; No.2 the protection of morals; No.3 the protection of other people’s rights or
    reputations; No. 4 the protection of confidential information. It also has to show that
    the interference was ‘necessary and proportionate’ (that it was done for a very good
    reason and went no further than it needed to).

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