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Simon Collins: Preparation key as regulatory upheaval looms


When reviewing business plans for the forthcoming years, advice firms should aim to build the impact of the new Mifid and capital adequacy requirements on financial and operational forecasts into the process.

Mifid II

Many advice firms were not particularly affected by Mifid coming into effect back in 2007, either being fully exempted from its provisions or only subjected to a limited element of the full directive. But can the same be said of the new and improved Mifid II?

In short, the answer is probably no. The concept of independence is being widened to include a broader range of products.

In the UK, this means some products outside of the retail investment product definition will have independence requirements once the new directive is implemented. This will not necessarily mean more products will be included in the RIP definition but it will impose new requirements on firms dealing in such instruments if they wish to hold themselves out as independent.

Mifid II will also affect firms previously outside the remit of the original Mifid directive (for example, article 3 firms) with the potential for relevant telephone calls to be recorded.

These are likely to include external and internal calls plus those made on company mobiles. It is also very likely the current exemption for recording calls for discretionary managers will disappear, requiring such firms to implement new recording systems and the controls that surround them.

Product governance has been seen as very much the responsibility of product providers in the past but the new directive makes it clear firms that advise on a product will also be expected to have appropriate organisational arrangements that specifically address the issue of product governance.

It has always been a requirement that firms should understand the products on which they are advising to ensure they are suitable for the clients’ circumstances but Mifid II will make this more organised and formal, increasing expectations on existing systems and controls. Mifid II is still some way off but forewarned is forearmed.

Capital adequacy

Meanwhile, the FCA and its predecessor, the FSA, have wanted for a number of years to increase the minimum capital adequacy requirements for financial advisers and wealth management firms from standards set back at the dawn of regulation.

However, it has deferred doing so as a result of concerns over the extra costs for firms, coming on top of additional expenditure arising from other regulatory initiatives. This was particularly the case with the implementation of RDR in 2013, where the proposed new minima were due to be incrementally implemented but were deferred until 31 December 2015, with full implementation to be achieved by the end of 2017.

The original intention was to increase a firm’s prudential requirement in accordance with its level of expenditure and so bring firms more into line with the requirements for other parts of the financial services sector.

However, although firms may be – and should be – gearing themselves up for the first incremental increase at the end of 2015, the FCA has issued a further consultation aimed at changing the calculation but, importantly, not the date of change. It seems as though the increase in financial resource requirements for many firms is actually going to happen, although the nature of the change is not yet certain.

The new proposal is to base a firm’s financial resource requirement on its relevant investment income, as this is seen to be a fairer method of calculation.

While it remains to be seen if these changes will proceed as consulted, the question that appears to have been overlooked is why this is likely to be of concern when not only will most firms’ financial resources exceed the new minima anyway but, if they are well run, should they not already have more resources at their disposal to operate a sustainable business?

The minimum requirement is just that: a minimum figure to be benchmarked against when filing financial returns.

Firms that challenge such changes should ask themselves whether they are treating their customers fairly if they adhere only to the regulatory minimum and, as a result, are unable to deal with clients in an orderly fashion in the event that the firm is unable to continue.

Many investment firms are required to have a minimum of three months’ expenditure to ensure they are meeting their regulatory requirements, so achieving a level playing field across as much of the intermediation market as possible seems a sensible way forward.

Simon Collins is managing director, regulatory, at Eversheds Consulting



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