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The Mifid II challenge: Can the FCA safeguard RDR rules?
by Elsa Buchanan on Jan 29, 2014 at 08:39
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.
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