The FCA has published a speech from its MiFID II conference. The speech is by Maggie Craig (Acting Head of Savings and Investments) and is entitled Investor protection in the UK: new tools, new challenges.
In her speech Mrs Craig examines the new investor protection requirements that MiFID II will bring, comparing them with existing UK regulation and identifying the practical challenges they will pose.
Investor protection standards
Mrs Craig states that it is not clear to her why many of the new, higher investor protection standards in MiFID II should not be seen as equally relevant to other areas of the retail market – to sales of personal pensions, for example, or investment bonds – as they are to funds and securities. She states that a strict copy-out of the new MiFID II standards could create a regime that, in many areas, makes very fine distinctions between different instruments, services and clients and the precise details of the requirements placed upon them. A simpler approach may be possible – in some cases, the FCA might be able to strip away domestic rules and apply the same standards across the retail investment market as a whole.
Mrs Craig states that MiFID II should force firms to rethink their governance when it comes to product design and distribution. In the UK the FCA has sought to highlight the need for firms to take responsibility for the design of their products, and how they are sold but MiFID II will see the FCA codifying these expectations into rules.
Mrs Craig warns that product governance in MiFID II is not simply about new systems and processes. In many ways, what is more important is taking responsibility, at a senior level, for what a firm makes or what it sells; what it does; and in whose hands it ends up.
Suitability of advice and appropriateness of sales
Mrs Craig notes that MiFID II tightens up the conduct of business requirements in a number of areas, including the rules on both giving suitable advice and selling investments without advice. The responses to the European Securities and Markets’ MiFID II consultation on a requirement for advisers to assess whether a less complex and lower cost instrument would better meet a client’s needs show that many firms and associations regard this as controversial. Mrs Craig states that her own initial reaction to the complaints she has heard is to wonder why this is a problem on the basis that this should be something which is already covered by a firm’s usual suitability assessment.
In summary Mrs Craig believes that firms need to understand that MIFID II is not simply about prescriptive sales standards or new systems but rather it brings about changes throughout the whole business. The mind set of senior managers, system designers and staff at all levels throughout different organisations will need to reflect the new responsibilities being created when it comes to areas like product governance and staff remuneration. Implementing MiFID II’s investor protection requirements should be about ensuring that both the standards of conduct and the organisation of the firm reflect the interests of consumers and the duties owed to them.
When it comes to more specific requirements – like those on inducements, or sales of complex products – Mrs Craig feels that it will be important for firms to understand the drivers for change if they are to successfully implement them. Those firms that have been unhappy with the inducements standards that the FCA/FSA has articulated since the RDR, for example, will need to keep in mind that standards are set to rise, not fall under MiFID II, reflecting a desire for real and sustained change in this area. While large parts of the UK market have, in recent years, already seen their regulatory requirements rise, MiFID II will still bring important changes – consolidating, codifying and broadening out what the FCA expects of firms.
View Investor protection in the UK: new tools, new challenges, 19 September 2014