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MiFID II – client agreements

20 December 2017

In this update, we focus on the intricacies of client agreements and agent-as-client agreements involving investors, Discretionary Fund Management (DFM) firms and financial advisers. We discuss how their wording can affect the service Brooks Macdonald provides and the impact we expect MiFID II to have on what they contain.

Advisers at risk?

On 17 July, Portfolio Adviser published an article entitled Thousands of IFAs at risk from inadequate DFM agreements, based on a Good Practice Guide by the Personal Finance Society (in association with Diminimis). This implied that many ‘agent-as-client’ agreements between financial advisers and DFM firms need to be amended, even before MiFID II’s forthcoming implementation. Such agreements should ensure that appropriate authority has been granted to enable each party involved to undertake their specified responsibilities, but Portfolio Adviser suggested that a number of cases have arisen where advisers have signed agent-as-client agreements without obtaining the appropriate authority from the underlying client beforehand.

Under ‘agent-as-client’ agreements, DFMs treat financial advisers as their clients, as opposed to the actual investor (‘underlying client’). Both DFMs and financial advisers should ensure that any agreements they have entered into make it clear who is responsible for each aspect of the relationship with the underlying client, particularly in regards to reporting. Under MiFID II, there is a new requirement to provide a notification if a client’s portfolio depreciates in value by 10% (and multiples of thereafter) during a reporting period. This will mean that all existing client agreements will have to be amended. We will discuss depreciation reporting in more detail in a separate article.

Brooks Macdonald’s existing arrangements 

At Brooks Macdonald, we only hold agent-as-client agreements with advisers who access our services through investment platforms; however, we will be updating these before MiFID II’s 3 January 2018 implementation deadline. When offering our services through investment platforms we have no direct relationship with the underlying client; we are simply appointed to provide discretionary investment services by the client’s adviser in their capacity as an agent. The agent-as-client agreements we hold are clear in identifying advisers’ responsibilities to clients, e.g. in relation to suitability. We note that in the UK, MiFID II’s requirements will build on those of the Retail Distribution Review (RDR) and as we already updated our agent-as-client agreements prior to RDR’s implementation, they already go a long way to reflect the upcoming regulation.

Reviewing agent-as-client agreements

We do not believe that MiFID II will change the broader concepts contained within agent-as-client agreements, although it will require some changes to be made and therefore provides advisers with a natural opportunity to review their existing agreements. We would suggest that advisers consider the following when reviewing their agreements:

·        Do you have the appropriate authority from the client to appoint a discretionary investment manager?

·        Do you have the appropriate regulatory authorisations in place to enable your firm to appoint a discretionary manager and hold responsibility for the matters set out in any agent-as-client agreement?

·        Check agent-as-client agreements to verify your responsibilities and whether you can comply with these.

Reviewing client agreements

At Brooks Macdonald, our general client agreements state our direct relationship with the underlying client, specifying how they employ our discretionary investment services on the recommendation of their adviser. These agreements set out the responsibilities of both Brooks Macdonald and the adviser in relation to the underlying client, with a specific focus on the demarcation of roles in terms of suitability assessments. In our agreements, we make it clear that the adviser is responsible for:

·        Collecting information about the client’s financial position.

·        Advising the client on their investment objectives and risk profile.

·        Assessing the suitability of the relevant Brooks Macdonald service.

·        Carrying out the required anti-money laundering and sanctions checks.

Likewise, it is clear that Brooks Macdonald is responsible for:

·        Creating and managing the client’s investment portfolio on a discretionary basis, in accordance with their investment objectives and risk profile.

In any client agreement advisers hold with an underlying client, such agreements in particular should cover the adviser’s role regarding suitability assessments. As noted, we expect our client agreements to be reviewed and changed in regard to depreciation reporting and we will discuss this topic in more detail in a separate article.

Definitions

The regulatory definition for “agent-as-client” is derived from the Conduct of Business Sourcebook COBS 2.4.3.

 

This article was first published by Brooks Macdonald here

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For more information please email info@brooksmacdonald.com

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