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Passport control

In this week’s question for Money Marketing’s expert panel, an adviser seeks views on whether Mifid is a potential escape route from the RDR requirements. Our panel are on hand to answer questions about the potential future market landscape and where firms may want to think about positioning themselves, as well as broader issues underpinning the review. If you have any queries you want answered or any nagging questions you do not feel have yet been addressed in these pages, email the panel at rdr@centaur.co.uk

Would a UK adviser be able to sidestep the potential changes brought about by the retail dirtibution review by becoming a Mifid adviser?

Richard Hobbs: This is a rather sophisticated question. I think it seeks a view on whether this could be done within the UK. One could almost certainly passport advice in from another jurisdiction, say, Ireland, but this is clumsy and is surely the wrong approach for customers. Within the UK, the FSA and the Treasury have gone to some lengths to exclude IFAs from Mifid to make life simpler. The better view of it is that, if advisers sought this approach, the UK authorities would make a case to Brussels for distinct national treatment.

Gill Cardy: If you want to be regulated in another EU country, then fine. I cannot imagine that making your application for authorisation in French or Spanish could be any easier than trying to cope with the FSA.

Phil Billingham: I do not think this works in this format. However, if you mean becoming a firm based in Greece or Spain and passporting back into the UK, then this is an idea that has merit and I am very serious about that.

Geoffrey Clarkson: A UK financial adviser might decide to opt in to Mifid because they think that they can avoid risk-based capital adequacy. Provided that they do so for passporting only – not providing discretionary management services or handling client money – they will be classified by the FSA for capital adequacy purposes as CAD-exempt.

The capital requirement directive prescribes the capital requirement for Mifid firms. The FSA’s powers to exceed these requirements for Mifid firms are limited owing to the fact that Mifid is a maximum harmonisation directive which means that individual member states are prevented from gold-plating their implementation requirements, save in a few special cases. As a result of the Article 3 exemption, the FSA could impose higher capital-adequacy requirements on non-Mifid firms. This would be unfair as it would create an uneven playing field between Mifid and non-Mifid firms.

Currently, the FSA’s capital-adequacy rules already exceed the Mifid requirements. There are greater complexities in this issue but I have touched upon the key element which I hope is helpful.

Kim North: The majority of IFA firms should have been outside Mifid’s scope but the regulatory changes brought in from November 1 do affect all advisory firms. You need to take a step back when considering the implications of Mifid as it is complex. Do remember that the background is to put a level playing field across Europe for the distribution of financial services. However, across continental Europe, distribution is dominated by the big providers, the majority being banks, while UK distribution is owned by intermediaries.

The responses received to date by the FSA on Mifid’s introduction have comprehensively been to not extend the additional requirements contained in Mifid to non-Mifid firms. The Mifid “appropriateness test” will apply if a client is responding to a personalised communication from a Mifid firm. This is an important change as the firm needs to establish whether the client has the knowledge and experience in order to understand the risks involved in the transaction envisaged. If not, the firm must warn the client not to invest. Mifid advisers will need to adopt a process to obtain and assess the client’s experience and knowledge and record the evidence.

But should advisers choose to opt in or stay out of Mifid? If advisers choose not to opt in to Mifid, the new conduct of business sourcebook introducing a more principles-based approach to regulation will still apply to all UK advisers. The overriding principle of treating customers fairly still applies and the RDR, whenever it is introduced, will definitely still be applicable.

So staying out of Mifid does not mean that you do not need to effect business changes. It may also mean that more astute European clients choose not to seek advice from you.

From January 2008, the FSA intends to make available a list of the advisers who have opted in to Mifid. It makes sense to me for advisers to become Mifid advisers as this will become a business hygiene factor which will appease the regulator and astute clients.

Mark Twigg: Possibly but the resultant reduction in scope of advice is likely to be very unattractive.

Simon Morris: No, there is no escape. There are two reasons. First, life products do not come under Mifid. Second, only by selling fund products remotely from, say, France, could this be done under the French regulator’s rules rather than FSA rules and remote selling – telesales, direct mail and so on – falls outside the main thrust of the RDR.

Adam Samuel: I do not think that Mifid can force the FSA to abandon its RDR plans. If it could, we would all be quickly researching the capital requirements for IFAs under the new capital-adequacy regime for Mifid advisers.

Money Marketing RDR panel:

David Elmschief
executive, IFA Promotion

Gill Cardy
principal, Professional Partnerships

Richard Hobbs
managing director, Beachcroft Regulatory Consulting

Kim North
director, Technology and Technical

Adam Samuel
compliance consultant

Brett Davidson
managing director, FP Transitions UK

Mark Twigg
account director, Cicero Consulting

Robert Reid
managing director, Syndaxi Financial Planning

Phil Billingham
director, Perception

Simon Morris
partner, CMS Cameron McKenna

Geoffrey Clarkson
group regulatory director, Tenet Group

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