Don’t be complacent on MiFID II
We will soon have MiFID II, MiFIR, PRIIPs and IDD. Ah the wonder that is plain English. And we are surprised that consumers find our market baffling.
For those troubled with acronyms those are: The Markets in Financial Instruments Directive Part 2 (MiFID II); Regulation on markets in financial instruments (MiFIR); Packaged Retail and Insurance-based Investment Products (PRIIPs); and, the Insurance Distribution Directive (IDD).
This spate of closely linked regulation is going to change our market. This is the future. All of us, whether adviser, platform or investment provider, ignore it at our peril.
Rather disappointingly, the debate so far has focused on the lack of clarity around the detail of the regulation and some rather dramatic- and almost certainly incorrect - conclusions around the detail in the consultation. Not the most helpful response and certainly not the progressive response of a forward facing industry.
This feels rather familiar. This spate of regulation may indeed shape the future but the response to this change gives me a real sense of ‘deja vu’.
Just ten years ago the market was a very different place, with commission and fund rebates the norm. Clients were often paying fully bundled charges and not receiving any form of ongoing service. Controls to protect clients and their money were not as tight and robust as they could have been. It was this backdrop that led to MiFID (effective November 2007), the retail distribution review (RDR) and the legislation we continue to implement today.
At the time RDR was the subject of debate – with similar moans about lack of clarity and dramatic outcomes. The doomsday merchants predicted advisers would leave the market in droves, and unbundling would create a race to the bottom on pricing. This in turn would leave platforms in dire financial straits and clients disadvantaged with fund groups failing to honour existing rebate discounts through more transparent pricing mechanisms. They were wrong on all fronts.
Looking around today, there is too much of the same rhetoric around MiFID.
Take discretionary fund management (DFM) services accessed by advisers. At one extreme we have commentary implying the 10% rule will destroy the DFM market! At the other extreme we have the suggestion that it will no longer be possible to access a DFM service on your preferred platform forcing clients to pay for separate custody arrangements.
This is not accurate and not helpful. The 10% rule is likely to only kick in at the most extreme market events, such as 2008 when, I suggest, it’s highly likely clients will already have a sense that something is up. Similarly, the adviser as the ‘agent’ for DFM services on a platform is well established and, so long at the platform is willing to support the report generation, is equally able to satisfy MiFID as any other construct.
Another concern is complacency. Too many businesses seem to assume there is minimal – if any - impact on them. While, the level of impact will differ depending on the choice of client proposition (and in particular the Centralised Investment Proposition), so many advisers, as well as platforms and investment groups will have work to do. For example, what additional suitability is required to recommend a fund that will be classified as ‘complex’ under MiFID? Given the wide range of funds likely to be classified as complex, excluding them from recommendation is a poor option.
Finally, excuses designed to avoid or delay adoption do not reflect well on any of us. While MiFID can, in some areas, seem complex and the regulations are not entirely prescriptive, RDR was hardly straightforward. What unifies both pieces of regulation is a clear intent to help customers through clearer disclosure and the professionals taking greater responsibility. I struggle to understand how anyone can challenge this principle.
Our market is healthier as a result of RDR. MiFID II, MiFIR, PRIIPs and IDD are merely an extension of the same thinking. I can see nothing from the market of ten years ago which was removed through reform that I would reintroduce. It’s important we keep that in mind and see the positives the MiFID reforms will bring in terms of improving client outcomes.
Of course, there will be some devil in the MiFID detail. This also makes me reflect on RDR and the role of the platform. Back then we had different platforms adopting different strategies ranging from almost total denial (remember the lobbying to retain rebates?), through minimum compliance, to embracing the change and actively helping their adviser partners to prosper.
Today, platform providers are facing a very similar strategic call.
Advisers should be gearing up for a summer challenge to their platform provider to tell them exactly how they will help them with implementing any MiFID-related change and position them for success.
For what it’s worth, I believe platforms have a key role to play in terms of enabling scalable, robust systems and processes to support advisers in delivering the required client outcomes through their chosen CIP. Let’s hope this is the answer advisers receive.
The views expressed in this article are those of the author and not Standard Life.
Standard Life accepts no responsibility for advice that may be formulated on the basis of this information.