On 6 June, the European Securities and Markets Authority (ESMA) published its MiFID II and MiFIR Q&As, covering a wide range of topics on the subject of investor protection. 

The very last question in the document is on appropriateness and complex financial instruments and is causing much concern.  For the sake of brevity, the question and answer can be summarised as:

Q. Can shares in non-UCITS collective investment undertakings be deemed non-complex financial instruments?

A. No.

On the face of it, that might not seem too surprising, given that the list of instruments classified as non-complex in Article 25(4) of the Directive includes shares traded on a regulated market, but “excluding shares in non-UCITS collective investment undertakings”.  However, there is also a catch-all category of “other non-complex financial instruments”.

So where does that leave NURS funds and investment trusts that in many cases are no more complicated or difficult to understand than most UCITS funds?  The FCA, in its Consultation Paper CP16/29, said that, in its view, NURS funds and investment trusts are not automatically complex or non-complex.

Why does it matter?  Any instruments classed as complex need, at the very least, an appropriateness test to be carried out to ensure that clients have sufficient knowledge and experience before they can invest in them.  Non-complex instruments can be sold to any investor on an execution-only basis.

As the FCA is due to issue another MiFID II Policy Statement later in June, much of the fund industry is waiting anxiously to see how it reconciles this difference of opinion.  If some sort of compromise can’t be reached, ESMA’s view will prevail.