MiFID II… second album syndrome or
regulatory game changer?

Should any of your natural clients transact in reportable assets you will be required to supply a natural person identifier (NPI). For the majority of your clients this will be already in place because for UK nationals a national insurance number (NINO) is sufficient.

For all other nationalities you must use the appropriate identifier as set out in the guidance by the European Securities and Markets Authority (ESMA).

The MiFID II definition of independence should make little difference to advisers who have long been compliant with RDR other than a broader scope of investments to be considered. MiFID II will include shares, derivatives and structured products as well as the current list of retail investment products.

There are however a couple of changes to this area that are worth noting:

• Adviser firms can continue to offer both independent and restricted advice however individual advisers can only offer one or the other
• An adviser firm can call itself independent even if it specialises in a niche area of the market provided this is made clear in its marketing

Before recommending a product or investment a firm must determine the clients suitability by assessing their objectives, their relevant experience and knowledge and their ability to bear losses. Much of the MiFID II requirements on suitability will not come as a surprise to advisers and most will already have this in built to their existing propositions to some extent.

Periodic suitability assessments are required for investment advisers and DFMs at least annually.

Suitability is already addressed in the regulator’s conduct of business handbook and a new section will be created just for MiFID business.

There is an expectation of more clarification on the implementation of these rules from the FCA.

Under MiFID II all investment products will be defined as either:

• Non-complex – these will be available to all types of clients
• Complex – these cannot be distributed to retail investors without a suitability or appropriateness test

Complex products currently includes all non-UCITS funds.

Prior to providing advice, all clients must be categorised as retail, professional or eligible counterparty (ECP). The most notable change to rules will be that local authorities will be deemed retail clients and will have to meet qualitative and quantitative requirements in order to opt up to professional or ECP clients.

You will most likely be dealing with retail clients but you should review your client bank as you may need to re-catogorise any non-retail clients.

MiFID II will impose greater governance on product distribution to ensure that manufacturers and distributors define their target audience for a specific product and ensure that it is only delivered to that market.

This will require a greater flow of data regarding products and client suitability to flow between manufacturers and distributors. The European Securities and Markets Authority (ESMA) already issued guidance on product governance.

Manufacturers will need to provide distributors with information about the target market for complex products. Distributors must then ensure their clients meets the criteria of the target market by assessing the following factors:

1. Investor type
2. Client knowledge and experience
3. Ability to bear losses
4. Risk tolerance
5. Client’s investment objectives and needs

The MiFID II directive will increase the scope and detail of client reporting.  All clients must receive a quarterly report unless the client has online access via a portal and it can be evidenced that the client has accessed the information in the quarterly period.

The other major aspect of client reporting is where a client’s portfolio depreciates by 10% or more, there is a requirement to notify the client of the loss within 24 hours.

There is also a requirement to disclose all the costs and charges relating to a client’s investments and clients must be provided with details on costs both before and after the investment is made. This includes:

• Cost of acquisition – any upfront costs
• Ongoing costs – any management charges
• Costs of disposal – any exit fees

The information must be provided in both monetary and percentage terms.

MiFID II also requires advisers to maintain good client records. Following the consultation in March 2017, the FCA agreed that there was no need for financial adviser firms to obtain a full recording of telephone conversations but could instead provide robust note taking instead.

All conversations must be recorded relating to conclusion of transactions and the receipt, transmission or execution of client orders. Face-to-face meetings are not required to be recorded as the suitability report will be viewed as a record of the advice given.