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The pace of change

The regulatory alphabet soup facing advisers is growing rapidly, with more than a dozen high-impact directives, reviews and consultations under way, creating uncertainty, causing a drain on resources, adding cost and piling on confusion for investors.

While some, such as the retail distribution review, have been ongoing for many years, many have sprung directly from the 2008 financial crisis. However, the overlapping nature and increased issuance pace of the many proposed rule changes means companies, including advisers, could be working to one set of rules, only to turn around in a few months and have to make others – some of which will be contradictory.

It is even more difficult to work out whom each one covers and what they will contain as the directives come from not only the UK but Europe and the US. In many cases, even the bodies affecting rule changes are themselves in a state of flux. For instance, CESR, the group of European regulators behind Ucits, is currently being reformed into the European Securities and Markets Authority while the UK’s FSA is split up to create the Prudential Regulation Authority and the Financial Conduct Authority.

According to those in industry working on such matters for their respective companies, it is not just the headline consultation they must concern themselves with. Each underlying directive or legislative change contains many systems, legal, compliance, monitoring, reporting and fiscal implications. Then there is keeping all the varying implem-entation deadlines straight and how they all may or may not interact with one another.

Among the key pieces of rule change affecting the investment products on which IFAs advise (or on which their own businesses are impacted) are: RDR (which includes the platform paper); Mifid II; Ucits IV (and soon Ucits V); Solvency II; the alternative investment fund managers directive; packaged retail products (Prips); Foreign Account Tax Compliance Act (Fatca), securities law directive; tax trans- parent vehicles; protected cell regime; investor compensation directive and Dodd-Frank Act (US consumer protection). Scarily, this list does not include the myriad of pension reforms and reviews also under way.

While many of these are for specific areas of the industry or designated products, there are several overlaps as well as unintentional knock-on effects into other areas. For instance, the AIFMD may be targeted at hedge funds but its initial proposals had significant implications for UK investment trusts. As the most publicised of the forthcoming rule changes, most are aware RDR affects the UK’s distribution regime but to a degree, so too do the EU directives on Mifid II and Prips. The aim of the EU’s Prips regime is to aid consumers with a consistent approach to disclosure as well as the provision of advice and sale of financial products. Sound familiar? Meanwhile initial Mifid discussions potential explore the elimination of execution-only sales, which if it went ahead would be some-what contradictory to RDR.

The overlaps do not just end just there. European funds directive Ucits IV may seem a mild up-date to Ucits III but included in it is a new form of investor communication document, known as KIID. Already, the industry has criticised this new format as unclear and it could contradict rules already applicable in the UK. KIID may also be contra-diction to Prips and Mifid.

Fidelity managing director (UK retail) Gary Shaughnessy says the sheer amount of forthcoming regulatory change is posing a challenge for the industry. For example, he says, there still remain many unanswered issues within RDR. One area he highlighted as still creating confusion is the issue of fund and product switches and different rules that apply if a switch is considered to be legacy or new business. “That single interpretation has a whole host of knock-on impacts from communications to systems as well as costs. It makes a massive differ-ence to us, advisers and their clients.”

In addition, while market partic- ipants may have become used to RDR-specific issues, they may find that once it is going, its impact may have been underestimated, especially how it interacts with other rule changes coming down the pipeline. Although Shaughnessy does not believe Mifid or Prips will fundamentally unwind any of the RDR requirements, they could add more on top, he says. “The impact of Prips could be quite extensive and with so much attention on RDR, it is not really on a lot of people’s radars just yet,” he adds.

So what exactly is behind this sea of regulatory change? Shaughnessy and others believe it is a combination of factors, not the least of which has been the financial crisis. Another factor though is the demographic situation in Western economies, which has created the need to shift greater fiscal responsibility to the end consumer. In order to do that, proper protection must be in place and be robust enough to generate consumer trust, something financial services as a whole has not been great at in recent times. But Shaughnessy points out that with so much change afoot today, there is a real danger of “unintended consequences” and this swathe of regulatory changes could achieve the opposite of their underlying goals.

He says: “The principles are sensible – you cannot argue with what they are trying to achieve but the compounding effect and level of complexity involved means we run a real risk of investors becoming even more confused.”

Legal & General Investments product development director Andrew Thomas agrees that too much regulation could undo much of what the industry has been striving towards. He says: “We are increasingly an innovative industry, pushed by changing demographics, evolving markets and changing inves-tor requirements as well as regulations. We do need a greater range of products for a broader range of investors and the natural response is to regulate and control that innovation. However, we are already a strongly regulated industry and the increasing pace of change does concern me. Change is good and needed to maintain investor confidence but it also needs to be done on a proportionate and considered basis.”

The plethora of changes will undoubtedly change the way that advisers do business. In the meantime, only one thing appears certain – the pace of change will not slow down any time soon.


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