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Summary of key MiFID II areas

7 December 2017

MiFID II provides one of the biggest regulatory challenges the UK wealth management industry has faced in recent years. Its implementation will impose new mandatory requirements on firms within the industry, increasing their ongoing workloads.

In this article,Claire Bennison, director, head of Services and Product Development, Brooks MacDonald, provides high level summaries of some of the key aspects of MiFID II that professional adviser firms should be considering (although this list is not exhaustive).

Transaction reporting – Legal Entity Identifiers

All legal entities will be required to obtain a Legal Entity Identifier (LEI) to be included in their transaction reports. LEIs have to be renewed (and paid for) annually. Trusts, charities, corporates and small self- administered schemes (SSAS) will be impacted by this requirement. It will impact entities that are currently managed (which do not already have an LEI), as well as those established going forward. Every entity must have obtained an LEI by 3 January 2018 or it will not be able to undertake any trading.

Information to clients – costs & charges

MiFID II is expected to require an increased level of information on costs and charges to be provided to retail customers. The Wealth Management Association (WMA) and Investment Association (IA) are both working on providing guidance on the best way to deliver this information (this guidance could become the generally-accepted industry standard). We will consider this when determining how to present information on our costs and charges to clients, although MiFID II is expected to require every client to be provided with a full breakdown of all the costs and charges impacting their investments on an annual basis from 2019.

Reporting

Periodic portfolio reporting (including valuations) will move to a minimum frequency of three months under MiFID II (versus the Financial Conduct Authority’s (FCA) current stance of a minimum of every six months). There is also a new requirement to communicate to clients if their portfolio’s value falls by 10% over a single reporting period. If your clients’ portfolios are managed by Brooks Macdonald, we will be providing these reports via a durable medium. If they are managed elsewhere, you will need to explore how the new requirement is being interpreted and what plans are being put in place to accommodate it; for example, if the 10% fall will be applied to individual or combined accounts.

Advice

MiFID II will remove some ambiguity surrounding what is classified as advice. For example, the definition of ‘personal recommendation’ will be altered slightly, in that the reference to “…through distribution channels…” will be removed. Otherwise, changes to this regulation will arguably be more relevant to organisations that provide ‘advisory’ services.

Suitability

MiFID II will be similar to MiFID I in terms of suitability requirements, albeit with some additions regarding firms obtaining information about each client’s risk tolerance and capacity for loss. Most of the new suitability requirements are already being practiced by firms impacted by the FCA’s Retail Distribution Review (RDR), although more reporting may have to be undertaken by some firms given an increase in obligations regarding ongoing suitability.

Appropriateness

MiFID II will be more restrictive than MiFID I in regard to products that can be treated as ‘non-complex’. The types of product that are subject to ‘appropriateness tests’ at the point of sale will change. For example, structured deposits and shares or bonds that embed derivatives or incorporate structures that make them difficult for clients to understand will be deemed complex.

Fair, clear and not misleading

This topic covers all information, including marketing communications, addressed to clients or potential clients. Where there is information on future performance, the information on performance scenarios will have to be based on both positive and negative market scenarios, while reflecting the nature and risks associated with the specific types of instruments incorporated within the analysis.

Telephone recording

This refers to both the recording of telephone conversations and retention of electronic communications relating to transactions concluded and advice given in relation to client order services. Changes will relate to the reception, transmission, advice and execution of client orders. All phone calls at Brooks Macdonald are now recorded, but the requirement for telephone recording will also impact advisers that transact on behalf of their clients.

Inducements

For professional advisers and discretionary fund managers, no monetary benefits and no more than ‘minor’ non-monetary benefits (i.e. those that are not capable of enhancing the service provided to clients) will be permitted under MiFID II. In addition, the provision of third-party investment research to firms providing portfolio management services will either have to be paid for by the business itself or from a separate client research payment account.

Best execution

The definition of ‘best execution’ will be amended slightly under MiFID II. Firms will have to take “all sufficient” steps to provide best execution to their clients, rather than “all reasonable” steps. MiFID II will obligate firms to be able to provide evidence that they have undertaken best execution to both the regulator and its clients on request. This evidence will need to be customised depending on the class of financial instrument and type of service provided. Where firms specify only one trading venue/entity, they will need data to support their assumption that results from that venue would be at least as good as results that could “reasonably” be expected using an alternative.

Product governance: distribution

Firms will need to put adequate governance arrangements in place to ensure that the products and services they sell are compatible with the needs, aims and characteristics of their target market. Distributors will have to obtain and provide enough information to ensure that the products and services they provide are not mis-sold. They will also have to identify any group of investors for whom these are not suitable. This will impact products and services that are accessed on platforms, including Brooks Macdonald’s Managed Portfolio Service, Multi-Asset Funds and the Defensive Capital Fund, where additional information may need to be obtained and provided.

Client agreements

There will be no major change to how client agreements are treated under MiFID II. However, changes to regulation in other areas, for example, best execution, will mean agreements and terms & conditions documents will need to be amended.

 

This article was first published by Brooks Macdonald here

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Important information
While the information in this article has been prepared carefully, Brooks Macdonald gives no warranty as to the accuracy or completeness of the information. The information in this article does not constitute advice or a recommendation and you should not make any decisions on the basis of it.

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