Regulation has become a word that is increasingly feared and negatively looked upon.
Changes in the advice sector have come thick and fast, with guidelines being implemented what feels like every day.
The “improvements” have been big, but nothing was as disruptive as the Markets in Financial Instruments Directive II (Mifid II), which came into effect on 3 January 2018.
It was brought in to regulate financial markets across the European Union and improve protections for investors.
Mifid II extended the 2007 Mifid requirements in a number of areas, including:
- Market structure requirements;
- New and extended requirements in relation to transparency;
- Changed rules on research and inducements; and
- Product governance requirements for manufacturers and distributors of Mifid ‘products’.
Recently, International Adviser interviewed Antony Champion, head of intermediaries at Brewin Dolphin, who said that Mifid II still a big concern for advisers.
The big question is how much has this affected the financial adviser market across Europe?
And at what cost?
Business change
IA spoke to a number of firms and it seems that they had enough time to make changes to their business ahead of the long awaited Mifid II.
But there have been some issues of inconvenience.
“The main difficulty was the inconsistency in providing key information documents where it seemed to be a free for all among the investment companies as to how they presented their costings within the designated framework,” Eamon Porter, principal at Dublin-based Aspire Wealth Management, told IA.
“In addition, the broadening of their risk scales has added confusion versus [the European Securities and Markets Authority’s (Esma)] [synthetic risk and reward indicator (SRRI)] scales. These issues make it even more difficult to explain to clients.
“Mifid II can truly be described as a camel which started as an intended horse, designed by committee.”
Sam Barber, director at SJB Global, also said to IA: “It has increased integrity and changed the mindset of advisers to put clients first.
“It also shows the importance of regulation if you want the best outcomes for clients.”
Cost
But regulation is invariably associated with cost.
Recently, Canada Life released a survey that found 81% of UK IFAs said the most expensive burden has been compliance.
But it does not look like Mifid II has had much impact on the European financial adviser.
“The introduction of Mifid II did not change a great deal of [our] day-to-day functionality,” John Westwood, group managing director at Blacktower Financial Management, said to IA.
“We have expanded our compliance team operating out of our Gibraltar head office, to secure a second line control function and centralise internal processes.”
Patricia Isherwood, head of compliance at Blevins Franks, told IA: “Mifid has not impacted [us] in quite the same way as, for example, a discretionary investment manager with a broader range of regulatory permissions.
“The Mifid side of our business accounts for approximately only 5% of the overall business that we write.
“Whilst there has been some additional cost to ensure that we comply by way of legal advice fees, since Mifid is only a small part of our business we have relied on internal resources to deal with the impact as opposed to recruiting any additional resource.”
Richard Alexander, director at Richard Alexander Financial Planning, added: We’ve not had to hire additional people, but it is causing additional time adopting new systems. However, this is integrating with our direct authorisation and establishing our back-office data base.
“There’s no real additional cost associated to Mifid II, therefore.”
Flaws
Alexander may not have been stung financially but he does have some grievances about some of the specifics of the regulation.
“I still have concerns at the lack of coordinated information that is being provided by product providers and other intermediaries that we deal with, in terms of past charges and future charges etc., that need to be disclosed,” he added.
“It is my opinion that clients receive an overload of information and that, although these regulatory changes have to be adhered to, if they are presented piecemeal, then they are not user-friendly for clients and we would ideally like to consolidate information as far as possible into one document.
“However, this is not practical at the present time.”
Aspire’s Eamon Porter added: “Most clients trust their adviser to guide their decisions as they are not interested in the mechanics. My long industry experience is that clients very, very rarely read the regulatory required documentation.
“Such documentation only usually gets reviewed when a legal action is pending through mis-selling or a fraud.
“As someone who has produced a lot of expert witness reports over the years for legal cases, I can attest that it is just not my clients who ignore regulatory documentation at the inception of a financial product purchase.”
Innovation
Getting to grip with the complex processes associated with regulation takes up so much focus, it leaves very little time to be creative.
Service provider Dynamic Planner recently unveiled a financial planner client review process, which helps firms meet Mifid II requirements, which it plans to expand out to European advisers.
And it seems some firms may need that helping hand from time to time to be innovative.
Blacktower’s Westwood added: “The introduction of Mifid II, while imposing higher quality infrastructure and demanding better financial governance, has also somewhat curtailed creativity for financial management businesses.
“As the dust settles, 18 months on from what was the most significant upheaval for the industry in recent years, financial advisers and firms alike have had to exhibit the utmost transparency across all ways of working.
“There is nowhere to hide in the industry now; regulators can serve jail time and, indeed, the courts are behind the regulators. If your practices are not compliant, then you will get caught.”
But not all firms have struggled creatively post-Mifid II.
Barber said: “For firms who perhaps didn’t have this in place, innovation problems could be true.
“For SJB Global, it has created more innovation through not just increased transparency for new business, but also for existing clients and valuations.”
Future
As the industry looks back at the introduction of Mifid II, what does it think about the future of regulation for advisers across Europe?
“Regulators have not stood still since January 2018,” said Blevins Franks’ Isherwood. “Various pan-European reviews and consultations are already underway.
“However, if the intention is to continue to offer greater transparency and protection to all investors across all asset classes, Mifid III may be the logical next step and, if it’s anything like Mifid II, this may be another seven years in the making.”
Barber added: “Qualification standards should be increased in line with the UK to ensure advisers are better educated to advise clients on their life savings.”
