MiFID II: a greater step away from the RDR?

Key recommendations by the Rapporteur on the investor protection elements of the proposed MiFID II Directive, contain some potentially significant concessions for firms.  However, the recommendations are at odds with the UK's Retail Distribution Review (RDR) rules.  If the Rapporteur's position prevails, this is likely to fashion an even greater unlevel playing field across the EU.  It remains to be seen whether the recommendations will follow through into the final report, or indeed how influential the report will ultimately be.  However, it is unlikely to allay existing concerns about the competitiveness of UK firms operating in Europe. 

The key recommendations in the draft report are:

Inducements

• Inducements should not be banned for independent advisers or portfolio managers. 

• However (1) advisers should disclose whether advice has been given in conjunction with third party inducements; and (2) portfolio managers should disclose the "expected scale" of inducements to clients prior to sale.  

The recommendation to sweep aside the proposed ban on inducements, in favour of greater transparency, is likely to be welcomed by firms operating in non-UK EU Member States.  Particularly for portfolio managers, given that the European Commission had estimated one-off costs of the ban for this constituency to be €131 million, and €3.7 million yearly.  The recommendation however directly cuts across RDR, which prohibits commissions to independent and restricted advisers.  So advisers could be "induced" in continental Europe, but not the UK.   

Service scope

• Advisers should not have to specify whether advice is "independent". 

• So there would be no test for advisers to meet when seeking to advise on an independent basis. 

• However, where advice is given on a fee paying basis, the adviser should inform the client whether the instruments will be limited to those issued by the firm or entities with close links. 

It is interesting that the Rapporteur's justification here is that restricting the use of the word "independent" may mean that other forms of (non-independent) advice have negative connotations.  This echoes long standing concerns voiced by the UK industry in response to the RDR's requirement for non-independent advisers to label themselves as "restricted".  The recommendation means that EU advisers could hold themselves out as independent, even if technically they are not, whereas UK advisers will have to jump over a high hurdle to prove that they are. 

Client reports

• Advisers / portfolio managers should request information about risk tolerance from clients. 

This would not represent a significant change for UK authorised firms – COBS already requires such information.

• The requirement to specify how advice meets the personal characteristics of client should only apply to retail clients. 

This is also consistent with the existing COBS rules and should be a welcome dilution to the existing MiFID II proposal (which would apply to professional clients and eligible counterparties).

Product design

• Investment firms should, when designing a new product, specify a target group within the retail or professional client category and ensure that the product is designed to meet those customers’ needs and marketed to clients within the target group.  

It is not clear exactly how far product providers would have to go to fulfil this obligation.  It may be problematic in the context of disintemediated distribution chains, which creates uncertainty about the extent of product providers TCF responsibilities in practice.