The FCA has published a speech from its recent MiFID II conference entitled Investor protection under MiFID II. The speech was given by David Geale, Director of Policy, FCA.

Key points in the speech include:

• as firms prepare for MiFID II implementation over the next year the FCA will continue to examine the application of its existing conduct requirements, reinforcing key messages through its policy and supervisory work. The FCA will also challenge firms about whether they have in train the changes needed to ensure their future compliance. For example, firms may need to make changes to deal with new requirements like: (i) the application of RDR-style rules on inducements to portfolio managers; (ii) the shift from domestic guidance to tough new rules on product governance; and (iii) the introduction of new requirements governing frontline staff remuneration;
• the FCA is currently in the middle of a thematic project on due diligence – a discovery exercise to understand current practice, and potentially to provide guidance on good and poor practice to help improve standards. The FCA has looked at the roles of the different players in this market, including unregulated third-party providers of what might be called ‘due diligence solutions’, as well as advisers and product providers. Whilst the project is a discovery piece, the FCA has also been assessing firms against current suitability rules. This work is particularly important in the context of MiFID II because the implementing legislation is set to introduce more specific requirements for firms to conduct due diligence and ensure the products they recommend are suitable for their clients;
• MiFID II will refocus the FCA’s attention on inducements more generally – both for firms that give advice or manage portfolios and for those that do not. Since the introduction of the RDR, the FCA has maintained a supervisory focus on inducements, carrying out thematic work and continuing to communicate its expectations. Whilst it is encouraged by many advisory firms changing their practices to ensure their advice is not influenced by payments from product providers, the FCA remains concerned that some firms may still be receiving benefits and payments that have the potential to bias the advice they provide – in other words, that their culture may have remained unchanged;
• MiFID II will, for the first time, bring in a European regime governing the way that asset managers purchase and consume third-party research. The FCA is currently waiting to see the final implementing legislation that will determine the exact shape and operational details of the new regime. That said, it encourages investment managers and brokers, in particular, to continue to focus on driving improvements based on the findings from its dealing commission review, which it reported on last year in Discussion Paper 14/3; and
• MiFID II will expand the types of products that are to be considered complex for investors to understand. Defining a product as ‘complex’ means that firms selling these products without advice will need to assess whether a potential purchaser has the necessary experience and knowledge to understand the product they wish to purchase (the appropriateness test). The FCA is alive to industry concerns in this area because of the need to make practical changes to distribution strategies. However, it does not yet know how easy it will be for these tests to be adopted and operated by online distributors. However, it does know that firms are unlikely to be able to meet the appropriateness requirements when selling complex products through direct offer financial promotions, meaning that this channel will no longer be available for distributing some products. In addition, firms will need to assess what sorts of knowledge and experience may be sufficient for a firm to rely on when selling particular instruments. The FCA recognises that some complex products are more complex than others. The FCA will be looking at how it might be able to differentiate its expectations between products.

View Investor protection under MiFID II, 20 October 2015