… you are not alone! Many Advisers across the country are feeling ‘miffed’ by the implementation of MiFID 2; an imposed New Year’s resolution for the industry which is intended to improve practices not only for 2018 but for the foreseeable future. With the lack of guidance issued by the regulator and no finalised decisions from investment providers, IFAs have been left in a rather exposed compliance position (at no fault of their own…)
With the industry finally settling down after RDR, 2018 is set to be another challenge for the resilient IFA! Along with MiFID, GDPR, the FCA DB transfer review and the Senior Managers regime are all due to come into force this year.
There are many improvements to compliances processes, admin processes and back office systems as well as other Firm reporting requirements that come along with the new rules. However the changes that the clients will recognise (and what the Advisers may bear the brunt of!) seem to be the most appropriate to tackle. Therefore over the next month I will be covering some of the main what’s, when’s and whys in relation to the key COBS rule changes, for you to be able to question how and if you are in line with the new requirements.
Under MiFID 2, when advising a client in regards to their investments, Advisers must ensure that they following the new handbook rules when it comes to assessing suitability and making a personal recommendation. The following whats, whens and the reasons why may help you consider whether your Firm is adhering to the new rules.
COBS 9A.2.2 : Firms should undertake a suitability assessment not only when making a personal recommendation to buy a financial instrument but for all decisions whether to trade, including making any personal recommendations about whether or not to buy, hold or sell an investment.
This means that all clients must receive an assessment of suitability, namely, in the form of a suitability letter, even if the decision has been to keep an investment in place.
The general new business process and the new Periodic Suitability assessment rules (covered in Part 2 – Feeling MiFID?) will in most cases ensure that the ‘buy’ or ‘hold’ rules are met but what about ‘sell’?
As above, to sell/switch/sell down/withdraw on an investment fund or product an assessment of suitability is required as this is classed as a personal recommendation. Fund switches have always required a letter without discretionary permissions however for client withdrawal requests there is now added work and time pressure on both the Advisers and the back office staff. Have you changed your processes to ensure these are carried out in a timely manner? How and what do you collate as MI?
COBS 9A.2.1: When providing investment advice or portfolio management a firm must:
(1) obtain the necessary information regarding the client’s:
(a) knowledge and experience in the investment field relevant to the specific type of financial instrument or service;
(b) financial situation including his ability to bear losses; and
(c) investment objectives including his risk tolerance,
so as to comply with (2);
(2) recommend investment services and financial instruments, or take the decision to trade, which is suitable for the client and, in particular, in accordance with the client’s risk tolerance and ability to bear losses.
Now as you can see the new rules specifically include the capacity for loss or ‘the ability to bear losses’. There is more onus on the adviser to assess the ability of investment loss when discussing the client’s financial position. Knowledge and experience is also still clearly shown in the rules and as previously it should be part of a personal recommendation.
You should therefore review how you affectively assess your client’s ability to bear losses. Does every Adviser in the Firm follow the same method? Do you have a questionnaire as well as discussions around set capacity for loss description? The same goes for knowledge and experience. Are both of these being recorded in the fact find clearly in the client’s own words and then reiterated in the suitability letter?
(2) When providing investment advice to a retail client, a firm must, before the transaction is concluded, provide the client with a suitability report in a durable medium specifying the advice given and how that advice meets the preferences, objectives and other characteristics of the client.
Without clear FCA guidance of when the ‘transaction is concluded’, the most obvious meaning (and what is being adopted by the rest of the industry) is when the application is signed by the client. This means that ALL suitability reports for recommendations, including top ups and withdrawals MUST be issued BEFORE the application is signed by the client.
Again, due to these changes in rules how is your Firms new or existing processes coping? Have you got appropriate templates and are the paraplanners/administrators coping with the increased letter writing?
As with all changes in rules, these must be adopted by the Firm compliantly and commercially as both are equally important. There are many more questions to be asked to ensure the effectiveness of new and existing procedures therefore I would always recommend an impartial review by an external Compliance Professional.