Be honest. When the UK/EU referendum result was announced on 24 June was there a small part of you envisaging the towers of cross-border regulation toppling and taking with them any concerns over preparation for MiFID II?
Whether they voted to leave or remain, the majority of Brits were in shock when the notion of ‘Brexit’ was given the people’s seal of approval, slim majority or not.
Against such scenes of uncertainty it is tempting to look for so-called silver linings. But if any financial services professionals dreamed of a ‘get out of jail free card’ and a subsequent slackening of regulatory obligations from across the Channel, such imaginings were soon dispelled by the UK’s regulator.
“Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect,” said the statement from the FCA the same day the referendum result was announced.
Since then the regulator has reaffirmed the necessity of British firms to implement the required changes to comply with MiFID II and has issued a second consultation paper on the directive. The intent is clear: No slacking!
Why MiFID II matters to Brits
As it stands, MiFID II is due to be implemented across Europe from January 2018 and since there has already been a year-long delay that deadline is likely to stick. This means even if the newly appointed Prime Minister Theresa May triggers Article 50 tomorrow, and commences two years of negotiation with remaining member states of the EU, chances are we will still be ‘in’ when the MiFID II deadlines strike.
I have spoken before about my perception of a relaxed attitude towards MiFID II implementation among some financial professionals in the UK: The assumption being that RDR has paved the way for most of the directive’s restrictions.
But there are elements of the directive which I believe are extremely relevant to the UK market and have thus far received little attention. One of these is complex investments.
What makes an investment strategy complex? At first read, you would think it an easy question to answer; yet, in reality, there is more to ‘complex products’ than some might assume. Recent calls for changes to the MiFID II directive is once more being debated.
In its current state, structured Ucits and investment products such as Nurs, will automatically be considered ‘complex’ under MiFID II. This could include a number of UK funds of funds, which are structured as non-Ucits. Structured Ucits can be defined as a product that provides investors, at certain predetermined dates, with algorithm-based dividends that are linked, for example, to the performance of certain products.
Once a product is deemed ‘complex’ retail investors must undergo an appropriateness test before an investment can be made on their behalf. This tends to fall to the intermediary (as well as product manufacturers) to conduct.
Earlier this year, the main securities regulator in Europe, ESMA, stated the European Commission should look again at whether all non-structured Ucits should continue being classified as ‘non-complex instruments’ under the MiFID II regime, particularly if they use complex investment strategies. 2 (ESMA’s comments were in response to the recent European Council’s green paper on Retail Financial Services).
Implications of ‘complex’ label
This has some implications that many people seem to be sweeping under the carpet.
For example, if non-structured Ucits funds start to get categorised as complex investments because they employ ‘sophisticated’ strategies such as derivatives then intermediaries (and product manufacturers) could find themselves having to conduct a greater number of appropriateness tests.
By the same token, fund providers would need to take a good look at their product stables and decide whether more sophisticated investment strategies should be marketed as appropriate for retail investors. Personally I believe, like wine, it is all in the telling and complex does not need to be negative as long as the literature around it is clear, fair and not misleading.
The existing FCA Conduct of Business Rules’ appropriateness test requires a business to “assess the customer’s knowledge and experience in the relevant investment field to determine whether they can proceed with a purchase of a complex MiFID product”, according to the regulator.
ESMA has a number of objectives as a regulator but two of its key aims are; to ensure investors are provided with clear and relevant information and; to ensure investors are provided with products that match their needs and investment objectives.
I am in full agreement with both principles but do wonder if the latter will become harder to achieve if the onus for simplistic investment goes too far. Identifying appropriate client types is crucial but the administrative burden is also worth thinking about.
So what can fund groups do to help? That depends on clarification from the regulators. But if we get a better handle on what is deemed ‘complex’ we can certainly work to provide greater education for both intermediaries and their end clients.
Fergus McCarthy is head of UK & Ireland Intermediary Distribution at BNY Mellon Investment Management EMEA