You may have heard the term MiFID in the media in recent months, but what exactly is it - and more importantly, how will it affect you?
By now, UK retail investors are probably well-aware of the Retail Distribution Review (RDR) – if not the nitty-gritty then certainly that you now have to pay for independent financial advice.
For those of you not in the know – RDR kicked in at the start of 2013 and was implemented by the UK financial services regulator in a bid to help protect consumers when it comes to financial advice.
A number of factors led to the introduction of RDR – those being: concerns over the selling of commissioned-based products and the general of lack of consumer understanding about financial services and products and financial decision making.
While RDR has been focussed on the UK financial advisory market, the Markets in Financial Instruments Directive (MiFID) is aimed at the European asset management sector as a whole. It was implemented initially in 2007 to promote the ‘integration, competitiveness & efficiency of EU financial markets’.
This was a serious bid to significantly change the way the EU financial service markets operate. The European Commission introduced 42 measures that make up the Financial Services Action Plan - within which lies the Markets in Financial Instruments Directive (MIFID).
MiFID is specifically designed to protect investors, enhance transparency and promote competition between financial institutions and exchanges. Having it in place also allows for consistency of regulation throughout the retail investment market.
MiFID has now been revised to include changes to the directive as well as a new regulation MiFIR – to come into effect on 3 January 2017. One of the key aims of MiFID II/MiFIR package is to strengthen investor protection.
But what exactly does all of this mean for you?
The ‘Investor Protection’ section in MiFID covers a whole range of subjects from conflict of interest, client reporting – which affects your meetings with your financial adviser, and their need to make extra costs disclosure to record keeping.
Some of the Directive looks at ground already covered by RDR, but allows for more unity in the European market.
According to a Financial Conduct Authority spokesman the package: “…introduces changes that will have a large impact on the EU’s financial markets. It will strengthen protection for retail investors through limits on the use of commissions; conditions for the provision of independent investment advice; stricter organisational requirements for product design and distribution; product intervention powers; and the disclosure of costs and charges.”
Once MiFID II kicks in – the aim is work towards a market that has:
Full disclosure of costs and reporting requirements
For example, there will be a requirement for quarterly reporting for portfolio managers – this can be done electronically, but the twist is that your adviser must confirm that you have been given access to the report.
There is also a requirement to report losses greater than 10 per cent, and the same on an instrument basis if it is leveraged.
Appropriateness tests
Complex Products: All shares in non-Ucits collective investment products, such as investment trusts, may be defined as complex.
The label of “complex” will mean that your adviser has to complete an appropriateness test every time you approach them expressing that you wish to invest in the asset on a non-advised basis. While this may seem lengthy – ultimately it protects you.
No trail commission share classes
Pre RDR, UK fund investors have had to pay for trail commission, as fund managers included it in their annual management charges (AMC). This AMC is typically in the region of 1.5% and charged within the fund, so it's not a fee you'd have to pay separately. Some of the AMC, between 0.3% and 0.5%, was used to pay commission to the promoting broker. However, post RDR ‘clean share classes’ within funds are now in existence which have a lower AMC (in the region of 1%) since they don’t have to pay trail commission any more.
The same is being introduced across Europe via MiFID II – investment firms will not be permitted to receive fees, commissions or any monetary-benefit when providing independent advice or portfolio management services.
