With new Mifid II rules set to be finalised in April, the Financial Conduct Authority (FCA) now faces the task of safeguarding the UK’s retail distribution review (RDR) only a year after its implementation.
The fine print of the pan-European legislation will be clarified in April and full rules will be in place by 2017. However, an initial scan of proposals suggests that Mifid firms in the UK could face challenges and costs unless the FCA is able to retain the RDR regime in its current form.
The most notable hurdle for wealth management businesses is that the Mifid proposed definitions of independent and restricted services differs from those of the RDR.
Although the European Council has not clarified its definition of ‘restricted’ advice, it is expected that Mifid II would still allow advisers to take commission under a restricted model.
This contrasts with the RDR and could encourage a major shift in the market towards restricted firms and stall the development of the independent sector, the Wealth Management Association’s deputy chief executive John Barrass has warned.
‘Looking carefully at the text, it doesn’t say you have to forego the commission structure, so a restricted firm will be able to give advice, for example, free at the point of delivery to the recipient because both the restricted firm will be paid by commission by somebody else who hopes that the adviser will actually recommend the products that the commission payer is putting forward,’ Barrass said.
‘That will actually encourage, we fear (and we wrote about that at the time), a major shift in the market towards restricted firms rather than the development of the independent sector,’ he said.
Under Mifid II, independence could also be determined by a company’s ability to invest across a wide range of financial instruments in the market rather than just packaged retail investment products, which is stipulated in the RDR.
Mike Browning, director at Browning Treasury, agreed: ‘Firms were, not so long ago, jumping up and down to be classified independent . But if the FCA did concede on that point of Mifid II and they started to get commissions, everyone would want to be restricted again.’
Conceding, albeit only on that point, could mean the RDR would ‘fall apart’, he said.
However, Browning expects the FCA to do ‘anything they can to gold plate the situation and take advantage of anything they can to ensure that RDR remains as it is’.
Others have warned that Mifid II could give the FCA the opportunity to undo aspects of the RDR that are not seen to be working, for example the advice gap that some argue is opening up.
George Kirby of consultancy Knadel takes this view. ‘It seems unlikely that FCA will want to “undo” RDR, but it may use Mifid as an opportunity to regenerate the retail advisory space – and maybe the retail banks that have withdrawn may find this a more attractive model for their business,’ he said.
However, Jeanette Cook, partner and head of compliance at Parmenion Capital Partners, says Mifid’s definition of a restricted model might not affect the UK’s wealth management sector.
‘There has always been a huge divide between ‘restricted’ and ‘independent’ which, as RDR embeds, will hopefully fall away, followed by acceptance that ‘independent’ doesn’t necessarily mean better,’ said Cook.
‘Both models are actually good, it just depends what the business wishes to offer clients. Both should be seen as efficient and effective, with the main objective to deliver good client outcomes,’ she added.
‘I think there will be a large shift towards restricted for that reason, not because Mifid may allow them to accept commissions.’
If the regulator can retain the RDR regime, could this put UK firms at a competitive disadvantage to European counterparts?
Browning disagrees. He points out that the UK’s Conduct of Business Sourcebook (COBS) rules apply to EEA firms that have physical branches in the UK, so they would not gain competitive advantage in the UK in relation to the restricted advisers’ commissions elsewhere.
‘However, firms that do not have a physical branch in the UK, but passport into the UK to provide services here directly from their home state, are regulated for COBS by their home state,’ he said.
‘This would provide for restricted advisers’ commissions and potentially give them an advantage, although realistically I think they will find it difficult to provide advisory services in the UK without a branch.’