16 May 2012

IFA Online: Watch your back, Europe's regulators are set to strike [RDR]

Francesca Bell, consultant at Bovill, looks at why the Retail Distribution Review is not the only piece of legislation having an impact on the UK retail financial services market. Will it be MiFID II or RDR that prevails?

Following publication of the European Commission’s proposed text for the recast Markets in Financial Instruments Directive (MiFID II) in October 2011, it has become apparent that there are a number of areas where the FSA’s Retail Distribution Review (RDR) requirements and the draft MiFID II provisions may not be compatible. Of particular note are potential discrepancies as regards the scope and characteristics of independent advice and the circumstances in which firms acting for clients can accept payments from third parties in relation to such business. As well as extending the coverage of independent advice beyond the parameters set by the RDR, MiFID II also requires firms to meet different standards when providing independent advice.

As regards scope, while the RDR limits the concept of independent advice to “retail investment products”, MiFID II indicates that independent advice will be relevant to all “financial instruments” including, for example, transferable securities and money market instruments.

As regards the criteria applied to firms offering independent advice, the RDR requires a firm to provide advice that is not only “unbiased and unrestricted” but that is also “based on a comprehensive and fair analysis of the relevant market”. The FSA has made it clear that a firm will generally have to advise on all types of retail investment products to be independent. MiFID II, on the other hand, appears less restrictive, requiring firms giving independent advice to assess “a sufficiently large number of financial instruments available on the market” and to ensure that such instruments are “diversified with regard to their type and issuers”.

The MiFID II proposals are still some way from completion. Indeed, recently published material outlining the European Parliament’s likely reaction to the Commission’s October 2011 proposals indicates that the concept of independent advice may be removed from MiFID II altogether, and that a combination of enhanced inducement and transparency requirements may instead be relied upon to safeguard consumers’ interests.

It is also worth remembering that other European initiatives in the pipeline are likely to affect how independent advice and third party payments are regulated – the revised Insurance Mediation Directive and legislation on Packaged Retail Investment Products are both due to be published in the coming months.

So far, the FSA has indicated that it intends to take a “cross sectoral” approach to implementing these measures and has referred, in its 2012/13 business plan, to working with the Treasury to implement MiFID II in such a way that it “delivers effective and proportionate measures, without undermining the RDR”. Whether this will be sufficient to safeguard the RDR in its current form, however, must be open to debate.

Much will depend upon the UK’s continuing ability to “goldplate” national requirements under Article 4 of the MiFID Implementing Directive. While there were early indications of the Commission’s desire to do away with Article 4 altogether, or at least to significantly restrict national authorities’ discretion to regulate beyond MiFID standards, no final decision has been made on this issue. However, with neither the MiFID II nor MiFIR draft texts containing any provision equivalent to Article 4, there must be a possibility that the RDR will eventually be required to align with European requirements.

Will it be MiFID II or RDR that prevails? If the latter, then the impact on the UK retail market could be significant, with UK firms once again being subject to more onerous regulation than their European competitors.

Full article

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