MiFID II – Clarification on independence

In the second of our articles on Independence under MiFID II we highlighted what we believe is a lack of clarity in the rules. You can read that article here.

Having debated the topic extensively within ATEB we decided that the only way to settle the matter was to ask the FCA for clarification.

You can read the FCA’s response below.

 

ATEB QUESTION ONE

“(1) COBS 6.2B.11R does not require a firm providing independent advice to assess every relevant product available on the market before making a personal recommendation.”

We presume that this supports the notion that firms need to assess a sufficiently diverse range of products rather than EVERY relevant product. Is that a correct interpretation?

FCA ANSWER
This is correct. COBS 6.2B.11R states that independent advisors must assess a sufficient range of products that are sufficiently diverse (in terms of type, issuer and provider) to ensure that the client’s investment objectives can be suitably met. COBS 6.2B.19G states that independent advisors do not have to assess every available product on the market. This reflects the position described in Recital 73 to MiFID II and Recital 71 to the MiFID Org Regulation. 

 

ATEB QUESTION TWO

“Notwithstanding (1), since the assessment conducted by the firm must be such as to ensure the client’s investment objectives can be suitably met, a firm providing independent advice should be in a position to advise on all types of relevant product within the scope of the market (for the purposes of COBS 6.2B.15EU) on which it provides advice. When the client is a retail client in the United Kingdom, this means being in a position to advise on all types of financial instrument, structured deposit and other retail investment products.”

The bold text appears to be clear. We interpret it as meaning that a firm might be ‘whole of market’ or ‘focused’ (per COBS 6.2B.15EU) but only needs to be in a position to advise on those relevant products within its stated range of focus, however limited that focus might be. Do you agree with this interpretation?

FCA ANSWER
The firm is correct in understanding that an advisor can hold themselves out as independent whilst also limiting their advice to a specific product range (e.g. pensions) or market type (e.g. sustainable investment), providing that they assess a sufficiently diverse range of products (COBS 6.2B.11R) and providing that they are able to advise on all types of product within the scope of the market on which they provide advice (COBS 6.2B.19G). 

 

ATEB QUESTION THREE

Yet the last sentence suggests that, where the client is a retail client in the UK, the firm must be ‘in a position’ to advise on all types of product – regardless of any limited / focused independence the firm might adopt. Any clarification you can provide on this would be helpful.

FCA ANSWER
A firm which provides ‘broad and general’ independent advice to retail clients in the UK should be in a position to advise on all types of financial instrument, structured deposit and other retail investment products. If a firm marketed itself as only providing independent advice on pension products, for example, then it would not need to be in a position to advise on shares, units and structured deposits. This is explained in paragraph 6.29 of CP 16/29: “A firm providing independent advice to retail clients which is narrower in scope than all RIPs, financial instruments and structured deposits may include the word ‘independent’ in its name as long as its marketing materials are sufficiently clear as to the nature of the service provided by the firm. For example, a firm which provides advice only on pensions might describe itself as providing independent advice (e.g. Evans Independent Pensions Advisers”. It would however need to ensure that any marketing materials explained that the firm only provided advice on pensions. The firm would need to ensure that it was in a position to advise on all pension product types within its service offering and, once providing advice to a particular retail client, would need to consider a sufficient range of pension products which were sufficiently diverse, in terms of their type and provider, to suitably meet the client’s objectives.

 

ATEB QUESTION FOUR

We also seek clarification on the meaning of the term ‘be in a position to advise’. The example given in note (5) of the guidance states –

“If a firm that provides focused independent advice is not able to recommend a financial instrument that would meet the investment objectives of a client, the firm should not provide that client with a personal recommendation. For example, if a firm providing independent advice on shares considered that a client’s investment objectives would be better met by way of investment in an accumulation product, it should not provide that client with a personal recommendation.”

That is clear enough in itself, but we believe that such a firm would require to have at least the knowledge and competence in respect of those other options in order to able to identify when what they can advise upon is not suitable or that what they cannot advise upon would be more suitable. So, we would interpret ‘be in a position to advise’ to require, as a minimum, that advisers have the relevant knowledge / competence on all financial instruments, structured deposits and other retail investment products, even if the firm chooses not to advise on some of these by dint of being ‘focused independent’. This would require at least training and CPD on those products and might in some cases require a specialist qualification. Comments?

We might go further and suggest that a firm can only truly ‘be in a position to advise’ where it not only has the knowledge / competence referred to above but also has the relevant permissions. Thoughts?

 

FCA ANSWER
COBS 6.2B.19(5) does not create any new T&C requirements. In PS10/6 we stated: “A firm, holding itself out as independent within a relevant market, should establish and maintain systems and controls to ensure that it does not make a personal recommendation to a retail client if there is a retail investment product outside the firm’s relevant market that would be able to meet the retail client’s investment needs and objectives. If a firm, holding itself out as independent within a relevant market, is not able to consider that product, it will be unable to assess whether the retail client would be better served purchasing that product and is, therefore, unable to make a personal recommendation to that retail client. We would expect the firm to direct the client to an adviser firm that is able to consider all products which would meet the retail client’s investment needs and objectives.” 

So, the requirements do not expect advisers to have detailed knowledge of products outside the relevant market on which they provide advice. But they should be able to recognise when to recommend a product within their market would not be suitable for the client and to be able to recognise that a different type of product would better suit the client’s needs. There is a difference between being able to recognise that a different product may be more suitable and having the knowledge to provide a personal recommendation satisfying the suitability.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

The FCA acknowledged that our questions were valid and that the answer was complex. Despite us billing their response as a ‘clarification’, there remains some work for firms to do in assessing whether and how their service meets the standards of independence under MiFID II.

The clarification is useful as far as it goes but clearly still leaves firms with a need to formally consider …

– if and how they meet the MiFID II independence standard;

– how far along the spectrum of full or focused independence they sit;

– how to accurately describe those services to clients in disclosure documentation,

In our view, there remain some anomalies in the rules but at least we now know that they are there and unlikely to sorted by any rule change. So, firms will just need to take the rules as they are and work with them as best they can. ATEB will be happy to offer further guidance if required.

Our best quick and dirty plain English version goes a bit like this …

If you are independent you must … 

  1. Not restrict solutions to those from a provider you are linked with (that is the tied and vertical integration bit as was there before);
  2. Not be swayed by inducements – thus even stricter rules on non-monetary benefits but mainly this refers to the adviser charging rules which remain in place;
  3. Consider a sufficiently diverse range of instruments, structured deposits and RIPs but that does not mean all;
  4. Be in a position to advise on all the things within your scope (see below);
  5. Be able to recognise when you do not have a suitable solution within your product scope and refer the client elsewhere.
  6. Make clear to clients what the nature of your independence is.

Other than the broadening of range of instruments mentioned in 3 above, this is all pretty recognisable from current rules – not a surprise when you remember that a lot of MiFID II has been informed by UK regulation that we already know – and love? 

Also recognisable is the ability to be ‘focused independent’ but it seems to have become much looser. Pre-MiFID II, firms could be, for example, “independent for ethical products” or “independent for mortgages” but that was about as far as it went.

Under MiFID II, it would appear that firms can be independent on a product type basis much narrower than what has been the practice up to now. So, a firm could be, for example, “independent for pensions”. That is not impossible to envisage but the “independent for shares” example just seems to us to be a bit bizarre. Nonetheless, bizarre or not, that is what is now possible, so firms will need to consider whether they are independent in broad general sense as at present or whether they will choose to be independent for a narrower focus of products. If going for the broadest range, there are likely to be training and competence implications as indicated in our previous article.

Action Required By You

  • read the Consultation Paper and relevant rules;
  • do an urgent review of your status as an independent firm;
  • undertake any changes required to disclosure documents, before 3 January 2018;
  • plan and implement any required training / knowledge assessments;
  • Contact your usual ATEB consultant for further guidance, or contact ATEB here.
SUIT - Beautiful Reports
CREATE BEAUTIFUL
SUITABILITY
REPORTS
SUIT - Complete Control
TAKE BACK
CONTROL OF YOUR
SUITABILITY REPORT
PRODUCTION
SUIT - Comp confidence
SUITABILITY
REPORTS
WITH FULL
COMPLIANCE
CONFIDENCE
COMP - Hands on
HANDS-ON COMPLIANCE
Helping you to implement solutions
COMP - File checking
FILE CHECKING
All business cases checked, including DB transfers
COMP -166
Section 166 and
Regulatory Reviews
Extensive S166 experience
COMP -healthchecks
Audits and
Health Checks
Need a regulatory check-up?
COMP -166
E-COMPLIANCE
A lighter touch support service
COMP -166
FCA Applications
We have completed hundreds
of Part IV applications
previous arrow
next arrow

About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

Contact Us

Brought to you by

Explore more articles in this category

Other articles that you might be interested in