The Devil’s in the Detail

How is MiFID II for you? Many advisers spent the latter part of 2017 working out what they should be doing to ensure compliance with the new regulations that came into force in January and many entered the new year with some trepidation that they are fully prepared.

A positive outcome for advisers that has happened under MiFID II is that there is the opportunity to remove any ambiguity from agreements with third party investment providers…but it will be down to you the adviser to take advantage of this or it’s likely nothing will change.

We estimate that at least 90 per cent of UK-based advisers using model portfolios on platforms supplied by discretionary investment firms are operating under an Agent as Client framework. This approach addresses the key issue of ensuring advisers are responsible for the suitability of recommending a portfolio management service, but it has some very undesirable consequences for advisers should clients become unhappy and seek redress.

MiFID II opens the door to a new operating model – Reliance on Others – where the responsibilities of each party in the chain is much clearer, making it easy for advisers to fully understand where their responsibilities lie.

The Reliance on Others process sets out in clear terms who is responsible for what, allowing advisers to enter into an agreement fully furnished with all the necessary information – something that doesn’t happen under Agent as Client. Unfortunately, there is no requirement for discretionary managers to change their terms of business to adopt Reliance on Others and there is very little incentive for them to do so. Therefore, the ball really is with advisers to be aware of their terms of business with discretionary managers and to be proactive in demanding a change to the Reliance on Others framework.

Another area where advisers need to be clear on the detail is with the new client investment reporting requirements, particularly in relation to who contacts clients should there be a sudden 10% or more drop in the value of the investments. The MiFID II regulation demands swift action so being prepared in advance for this will ensure advisers avoid falling foul of the rules.

With such important elements regarding investment management now in force, PortfolioMetrix has produced a paper called ‘Regulation in a Tangle’ to help advisers understand what they may need to do to improve their situation. The paper examines the Agent as Client/Reliance on Others options as well the controversial 10 per cent drop rule, where there are perhaps more questions than answers in terms of what the right course of action should be.

Both issues are classic cases where the devil is in the detail of the agreements advisers have with third parties. Investing time now in understanding what is covered in the terms and conditions you have with third parties will not only save time later, it could save costly fines and claims for compensation.

This article first appeared in the February edition of The Trade Press publication.