For many financial advisers, the prospect of MiFID II and its impact on their firms is probably towards the back of their minds, particularly as, originally, many were not affected by MiFID I back in 2007.
They were either fully exempted from its provisions or only subjected to a limited element of the full directive. However, MiFID II – the sequel – will have an impact.
The concept of independence is being widened to include a broader range of products and, certainly within the UK, this clearly means that some products outside the retail investment product definition will have independence requirements on implementation of MiFID II.
This imposes new requirements on those firms dealing with such instruments and, indeed, those execution-only services which may also be affected, particularly if they wish to hold themselves out as remaining independent.
The new directive also makes it very clear that firms that advise on the product will also be expected to have appropriate organisational arrangements which specifically address the issue of product governance.
In order to maintain independence, the new regulation requires those firms offering independent advice to assess a sufficient range of different product providers prior to making a personal recommendation.
It seems clear from the guidance given by the European Securities and Markets Authority that independent advisers should consider a range of financial instruments proportionate to the scope of advice and adequately representative of the products available on the market. It is this definition that may give financial advisers in the UK their best idea as to whether it is practicable to consider all types of products that may be suitable for their client’s needs.
In addition is the conundrum of what constitutes a complex product. While the final definitions have yet to be announced, it would appear that a large number of the current products advised on by UK financial services firms will fall into the complex category. The definition of this European independent standard for advice includes shares, bonds and derivatives products that currently sit outside of the FCA’s definition.
One question is how will MiFID II better protect investors? MiFID includes a number of measures aimed at protecting investors in the context of the provision of investment services. Those rules take into account the type of services – for instance, investment advice or execution of orders – and the classification of clients, with higher protection granted to retail clients.
First, the scope of the directive is broadened in order to cover financial products outside the scope of MiFID I but which satisfy similar investor needs and raise comparable investor protection challenges.
In the future, the sale of structured deposits will have to comply with several MiFID II requirements, and in particular with conduct of business and conflicts of interest rules. MiFID II will also extend some of the information to clients and conflict of interest requirements to insurance-based investment products by amending the Insurance Mediation Directive 2002/92/EC.
