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What investments do independent advisers have to consider under Mifid II?

Firms will not necessarily have to advise on every relevant investment product but it will be difficult to discount structured deposits

One of the many changes being introduced under Mifid II, which comes into effect 3 January, is an amendment to the definition of independent advice, including an extension to cover investments that do not fall under the current definition of retail investment product.

Some firms may be unaware of the implications this could have on their ability to remain independent and on CPD requirements for their staff.

Mifid II requires firms offering independent advice to “assess a sufficient range of financial instruments available on the market which must be sufficiently diverse with regard to their type and issuers or product providers to ensure the client’s investment objectives can be suitably met”.

FCA holds back on inducements due to Mifid II

The current UK standard for independence requires advisers to “carry out a comprehensive and fair assessment of relevant retail investment products” – a group of investments which includes both Mifid and non-Mifid investments.

The FCA has confirmed it will implement the new Mifid standard for independence for both Mifid and non-Mifid investments (similar to its current policy). However, the new standard applies to some investments that do not currently fall within the definition of a retail investment product, such as structured deposits, shares and derivatives.

Firms that provide independent advice need to consider a number of issues:

  • Firms will not necessarily have to advise on every relevant investment product. They may decide that certain types of products are not capable of meeting the objectives of their clients (e.g. they present higher risks than their clients are willing or able to take). Decisions to not advise on certain types of investment will need to be carefully documented. This may best be done via a firm’s investment committee. Naturally, the decisions should be appropriately documented and reviewed periodically.
  • We believe it will be difficult for a firm to decide structured deposits will not be an investment type that would be considered when advising clients. This does not mean these will always need to be a recommended product but they are more likely to be something that needs to be thought about for typical retail clients. Note that investment firms will not have structured deposits included in their regulatory permissions by default. This is something they need to do by notifying the FCA. This can be done at no cost before 2 January. After this, it will be treated as a variation to a firm’s permissions, and the usual £250 fee will be charged.
  • There is then the question of knowledge and competence of the advisers and appropriate CPD. An investment adviser should have an appropriate basic level of knowledge across all relevant investments. This will typically be achieved via the normal Level 4 qualifications they are required to hold, which is then supplemented on an ongoing basis by appropriate CPD. This should cover a basic understanding of the extended range of investments now coming under the independence standard.

What does ‘restricted’ advice really mean nowadays?

Where the firm is involved in giving advice on the extended range of investments, the expectation is that the level of CPD would be much more in depth. Also, where a firm has decided certain investments are not appropriate for its clients (e.g. via its investment committee) and will therefore not be considered, appropriate CPD should be present for the individuals who have been central to making these decisions to help evidence their understanding of the particular investments being considered.

Mike Kennedy is policy and projects manager at Threesixty

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Comments

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  1. I think Mike has been the victim of an unfortunate choice of headline by the sub-editor. He is correct that it is “difficult for a firm to decide structured deposits will not be an investment type that would be considered when advising clients”. To say that it will be difficult to *discount* structured products, however, suggests you haven’t been reading their terms lately. Or in the past three or four years.

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