Mid-June 2013 saw the announcement from the representatives of the European Council that they had finally reached agreement on the long awaited review of the Markets in Financial Instruments Directive (MiFID II) – over a year and a half since the original proposal to bring far-reaching changes to the directive.
And not before time, either. Although the European Parliament endorsed a previous ‘official text’ version of the proposals at the end of last year, negotiations since then have been repeatedly hampered by the many amendments that have been requested among the 27 member states that make up the Council.
This now means that the commission will enter into a “trialogue” process – which effectively means that there will be yet more compromise and negotiation amongst the varying drafts among the members. In short, it is likely to be well into 2014 before final texts emerge.
You could be forgiven for feeling confused about this barrage of alphanumeric legislative bombshells that are coming our way. But I will try to explain how these various elements fit in, and how they will impact upon retail distribution in the UK. I will, for the most part, ignore the capital markets elements of the recast directive.
What is MiFID II?
The Commission proposed a raft of changes to the original MiFID regime, including a revised Directive (MiFID Recast) and a new Regulation (MiFIR) in October 2011. This was partly borne from the commitments made by the G-20 leaders in response to the 2008 financial crisis – but it also reflected the observation that organic growth and change was to be needed in the medium term.
The new proposals, which quickly became known as MiFID II, followed two years of public consultations, plus input from the Committee of European Securities Regulators (CESR) – which is now known, by the way, as the European Securities and Markets Authority (ESMA).
MiFID II is simply enormous in its potential significance for advisers in the UK and other parts of the EU. And it’s far from being just a simple revision. There are now over 2,000 amendments that have been submitted for discussion, and the new directive will dramatically change the entire marketplace as we know it today.
Much of the change will be primarily concerned with capital markets and over-the-counter (OTC) trades. But don’t make the mistake of assuming that this won’t affect retail distribution, because there are a number of planned changes in this and associated regulations that will all have to be considered and implemented over the next two years.
Thankfully the main structure of the existing MiFID will remain – but the focus for firms will be on better management and controls, and it will include greater understanding of customers and products for greater market transparency.
MiFID firms will be required to manage their operational risks within their own firms, and they will need to have robust plans for identifying and dealing with conflicts of interest, recurring systemic issues and third-party failure.
Firms must also ensure that client orders are handled in a timely and effective manner as well as ensuring that their categories are defined and treated appropriately. As a final point, this activity will be required to be documented and reported either to regulators or clients.
FCA Review, July 2013
In July 2013 the FCA published a review of how firms have implemented the requirements of the Retail Distribution Review (RDR) – and whereas most firms are being proactive in their implementation, there are several key issues outstanding which are of particular concern because they directly map into incoming requirements of MiFID II.
- Outlining charges in relative competitive absolute terms;
- Failing to tie ongoing fees to tangible products and services;
- Claiming independent advice where it only evidences consideration of a limited number of providers or products.
Moving Beyond MiFID II
MiFID II and the planned Financial Transaction Tax (FTT) will unquestionably be the key regulatory issues being discussed between the EU’s legislative bodies in during the second half of this year. Brussels is making it clear that it is keen to settle all the outstanding topics by the end of the year, and then to permit level II measures to be initiated by ESMA.
But unfortunately, MiFID II is not the only thing on Europe’s radar at present. Also impacting on retail distribution in the coming years will be the legislative package that was presented by the EU Commission in July 2012, and which aims to raise standards and remove loopholes for the benefit of consumers.
This package consists of;
- Packaged retail investment products (PRIPS) involving key information documents;
- A Revised insurance Mediation Directive (IMD);
- A proposal on protection for purchases of investment funds currently governed by UCITS.
The proposal suggests that investment products are complex and current information provided fails to help the investor understand the risks involved. With an investment market in the EU of up to €10 trillion euros, purchasing role or unsuitable products can become a major issue.
The proposal recommends the introduction of a new, innovative standard for product information that is short and plain speaking, consequently more consumer friendly and will be named the Key Information Document (KID), produced by the creator of the investment product.
KIDs will follow a common standard regarding structure content and presentation with the products main features, risks and costs associated in that product and as compatible as possible with any other product without oversimplifying complex ones.
The IMD currently regulates selling practices for insurance products including those containing investment elements, the Commissioner concerned that more than 70% of insurance products are sold without appropriate advice.
The goal of the commission’s revision is to upgrade consumer protection across Europe in the insurance sector by creating common standards and ensuring proper advice. An incentive for this will be that it will become easier for intermediaries operate cross-border.
Almost €6 trillion in assets are currently managed in UCITS funds, which have created the basis for an integrated market that facilitates the cross-border offer of collective investment funds. But the commission has proposed further amendments to the current rules that aim to enhance their trustworthiness through greater clarification.
The proposals are to:
- Precisely define the tasks and liabilities of depositories acting on behalf of a UCITS fund;
- Establish clearer rules on the remuneration of UCITS managers;
- Lay out a common approach to help with breaches of the legal framework section.
Tomorrow, and Tomorrow, and Tomorrow…
‘Precision’ is often nothing more than a second guess when we’re talking about the timescales of EU directives – and it would be pure speculation for us to try and guess when the final text of MiFID II is likely to be agreed, and what form it might take after resolution of the differences between the various draft suggestions.
The long summer recess is to be followed by the German national elections n 16th September, which may well serve to delay matters further. And yet the EU Parliament has optimistically scheduled an indicative date of December 10, 2013 for the approval of an agreed draft. The eurocrats are probably working on the maxim that if you fail to plan you plan to fail, and it could be some time in the early 2014 before we see any approval.
Technical standards will also have to be approved by the commission once the final text has been adopted and these too may be subject to review by the EU Parliament as well as the Council. Whereas MiFIR elements will apply directly, there is up to a further two years for member states to transpose the directive into national law – so the new regime might not be fully implemented until 2015 at the earliest.
It seems like a long time from October 2011 to the present; and the distance that’s still left to travel now will probably seem like an eternity. But we can say that, once implemented, the EU financial services industry will be looking substantially different. Nobody will be left untouched by this new directive, and by the associated legislation – from the largest capital transaction institutions account right down to the vitally important retail sales operations.
Remember: If you need specific advice, contact your Compliance Professional