How MiFID Will Affect Advisers

[This article was first published in the September issue of ETF Report UK, our quarterly magazine for UK financial advisers]

It is not long before a new European directive will sweep the nation. The Markets in Financial Instruments Directive (MiFID) will be implemented in 2017, requiring almost everyone in finance to up their game, enforcing higher levels of qualifications and maintaining rigorous continual professional development. The Retail Distribution Review (RDR) in 2013 may have already raised standards for UK-based financial planners, keeping them safe at the top of the regulatory tree, but will that always be the case?

Graham Bishop is widely recognised as an authority on European financial policy and has been named one of the “top 40 British EU policy influencers,” speaking widely in the media and at conferences. His independent research has even resulted in Jose Manuel Barroso, the 11th president of the European Commission, appointing him to the commission’s expert group on debt redemption fund and eurobills.

Bishop sat down with ETF Report UK to discuss the future of MiFID and how it affects UK advisers.

What’s likely to be the biggest outcome of MiFID for our readers in 2017?

I think the biggest single thing is advisers will be required to demonstrate they are knowledgeable and competent, and that they must avoid conflicts of interest and act in the best interest of their clients.

Would you expand on your first point about MiFID requiring advisers to be competent?

OK, financial competence. Let’s start with that, as it’s a no-brainer. Article 25 of MiFID says: “Member States shall require investment firms to ensure and demonstrate to competent authorities on request that natural persons giving investment advice or information about financial instruments, investment services or ancillary services to clients on behalf of the investment firm possess the necessary knowledge and competence to fulfil their obligations.”

What’s very clear is that the European Securities and Markets Authority (ESMA) takes a big interest in consumer and investor protection. The potential impact of this article falls on retail or wholesale investors who engage in the dealing with or processing of transactions. According to a MiFID appendix, “dealing” means reception and orders in relation to one or more financial instruments, execution of orders, portfolio management, investment advice—and so it goes on.

First of all, advisers must understand the key characteristics, complexity and total cost of relevant products or services, as well as how the markets function, the market structure and impact of economic data. It’s all self-evident. There’s going to be a lot of cost and effort involved—but who can be against properly qualified and informed advisers of citizens?

Then of course there are internal procedure compliance rules—less likely to hit one-man bands—but if you have a firm of any size, you have to show the regulator that your staff are properly qualified. Firstly by a suitable exam, and then they’ve got to keep up to date with it.

The analogy is you wouldn’t want a doctor who is 30 years behind the times. On the face of it, this shouldn’t be seen as a revolution or anything remotely like it, as that’s what you expect from professionals.

And the UK already has one of the highest levels of adviser education in Europe, given we have RDR ...

Precisely so. But what ESMA is saying is there have to be adequate professional standards across the entire EU. So this is a potentially very big change.

So European education will simply be brought up to the UK’s level?

I think that will be the starting point. And never underestimate the fact that the Financial Conduct Authority (FCA) and Financial Services Authority in the past have always been prime movers in getting European standards to move to their level.

I’ve been told that the FCA seems to be going on trust—in terms of advisers getting effective CPD and retaining what they’ve learnt—and not being required to prove it.

Well, I can quote Article 25 again … That does sound like that CPD will become significantly tougher. You’ll actually have to prove that you understand it.

European authorities seem intent on scrutinising so-called closet index funds, which are actively managed funds that hug their benchmark and do not justify a higher fee for investors. Is that kind of thing going to be under the spotlight by MiFID?

IOSCO [International Organization of Securities Commissions] announced in June that it was looking into asset managers, and more specifically it was consulting on the international standards on fees and expenses of investment funds—it seems the game is up for these sorts of people. Particularly in a world of low returns, you can’t just take away the income by the fees and leave the investor with the capital risk.

The other point is the question of research. Investors will have to be asked by their investment manager under MiFID how much they want to spend on research and whether the research they’re paying for is worthwhile.

That money will have to be separated into a research payment account rather than bundled up with execution, so this is something which should be very good news for us—independent research providers—and very bad news for the integrated investment bank, as they’ll have to charge a market rate for the research they currently provide. They may well be surprised by how little the investors actually are willing to pay for this.

Does this issue include the recent scandal in which it was discovered that fund managers and other participants were paying for face time with CEOs?

Yes. That is a very good example of the FCA taking the lead across Europe, by saying all research should be paid for out of the P&L [profit and loss] of the investment manager, and the customer should pay for nothing except the skill and judgment of that investment manager, who is informed by research that their firm is paying for.

Is the investor paying for their broker to arrange introductions to the finance director of a company in which they hold a 5% stake? That’s outrageous. The FCA is already cracking down big time on that kind of thing.