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Mifid prompts fears of inappropriate advice

The markets in financial instruments directive could prevent IFAs from giving the best advice to clients and outlaw any exposure of low-risk clients to high-risk investments, say lawyers.

Eversheds partner Matthew Allen says advice could be deemed inappropriate under Mifid, even if the firm has fulfilled all suitability and know your customer requirements and discussed the investment fully with their client.

Although EU rules are yet to be confirmed, Allen says there is confusion over the interaction of current suitability requirements with Mifid’s more objective appropriateness test.

He says clients could even claim compensation from IFAs, citing a failure to meet the appropriate test, which foc-uses heavily on the investment track record of the client.

Allen says the problem could be exacerbated by the implementation of Ucits III and Mifid, set to come into force in November next year, which will enable more high-risk pan-European investments.

Allen says: “We may get to the strange situation where advice is judged inappropriate, even if it has been discussed fully and deemed suitable. As the rules stand, there is confusion between suitability and appropriateness and when, if ever, does appropriateness trump suitability requirements?”

Although Mifid does not directly affect the vast majority of advisers, the FSA is rewriting the conduct of business handbook to incorporate the changes, meaning that most firms will be affected.

Fishburns Law solicitor Harriet Quiney says the focus on the experience of the investor as part of Mifid’s appropriateness test could prevent firms from advising low-risk clients investing a lump sum to take out a small high-risk investment as part of their portfolio.

She says: “Advisers may not be able to build the ideal portfolio for their clients. Advice that is perfectly OK now may not be OK in the future.”

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