As a journalist covering financial advice, I like to think I have a solid understanding of what advisers do and don’t like. In fact, here’s a brief list.
Likes: Building a business. Advising clients. Financial education. Launching podcasts. And, increasingly it seems, driving Teslas.
Dislikes: Scam artists. Mifid II. Fund manager moves. Mifid II. Unfair regulatory levies. A certain FTSE-100 advice firm regularly covered in The Sunday Times. And have I mentioned Mifid II…?
The Markets in Financial Instruments Directive is arguably the most controversial and despised non-fish-based piece of regulation to come out of the EU. Advisers have often complained about the red tape Mifid II brings and in 2019, 31 per cent of advisers in a 1,000-strong CoreData survey said the regulation was of greater worry than Brexit.
So, when the FCA announced earlier this week it was launching a consultation into potentially modifying the rules I was all ears.
Time for changes
In a nutshell, our regulator is essentially proposing conduct and organisational changes to two main areas of the regulation: research and best execution.
With regards to research, the FCA wants to change existing inducement rules and essentially broaden the list of entities exempt from Mifid regulation.
This would include research on SMEs with a market cap below £200m, and fixed income, currency and commodities analysis.
The regulator is also proposing creating an exemption for research provided by independent providers, where they are not engaged in execution services (and not linked to an investment firm offering this).
At the same time, two sets of reporting obligations under Mifid II could be going. These are the obligation for execution venues to publish reports on a variety of quality metrics, and the requirement for investment firms executing orders to generate annual reports. These annual reports currently have to detail the top five venues used to executing client orders, with a summary of execution outcomes achieved.
The consultation has been issued and will close on 23 June 2021, which will ironically be five years from the day the British public voted on the EU referendum. I should mention I only know that as it’s my birthday…
As regulation goes, this is a milestone in the UK’s new post-EU future. The regulation has already been hampered with criticisms and non-compliance, so it is hoped consultation paper 21/9, can help reduce compliance costs without compromising investor protection.
And on the surface, this could help. The FCA is talking about new exemptions and stripping out reporting requirements. I’m no regulation expert, but I know less regulatory requirements = lower compliance costs.
For example, in the 63-page consultation, a cost benefit analysis is included which contains some pretty attractive figures. A large firm on the sell-side has told the FCA that Mifid II unbundling was currently costing it $1.25m (£900,000) a year for FICC research. This kind of figure would instantly go.
Reduced reporting also sounds refreshing, but I do question if this is an opportunity missed.
Regulation for the good of the industry
At the start of the year, Pimfa declared that Brexit – whether you like or not – could present an opportunity for regulation to be tailored to advisers.
The trade body has since lobbied the government about this and pointed out Mifid II is an example of EU regulations not always fitting UK regulations well.
For instance, the 10 per cent drop rule was suspended for several months. On paper, this rule was destined to be a great move towards transparency and investor protection. But in practice? A costly faff, to put it in layman’s terms.
Now don’t get me wrong, I welcome the fact the FCA is taking concerns on board and opening a dialogue with the industry. This is a tricky task ahead of them, and I applaud them taking the initiative.
But if we are going to tinker with our EU regulations why not take things a step further and fully review them?
The FCA was, of course, one of the main architects of Mifid II but this work was diluted by the fact it was a joint collaboration with the rest of the bloc. Now, in 2021 it makes little sense to continue with any compromises. Unfortunately, in the format Mifid II was born, it has had several negative impacts.
For one, the advice gap has been widened. More advisers simply cannot, or don’t want to, deal with the costs anymore and are selling up. At the same time, advice has become more expensive as the regulation has eaten into margins everywhere.
This is by no means an argument for widescale deregulation. Rather, I hope the FCA receives so much feedback during this consultation paper it begins to think in a more open-minded way about where else it can change Mifid II. Regulatory upheaval may bring its own short-term headaches, but there is a real opportunity here for the UK to establish its own regulations that work for a very unique advice sector.
Think of it this way. If you buy a house and you think the front room is too small, do you simply change the dark and claustrophobic wallpaper the past owner picked? Or do you pick up a sledgehammer and knock through to create the layout you’ve always wanted?
It’s our house now. So maybe it’s time to put our stamp on it.