EU reg­u­la­tions to change ways re­tail in­vestors pay for ad­vice

In­de­pen­dent ad­vis­ers to be­come un­able to take com­mis­sion on sale of cer­tain prod­ucts

The Irish Times - - Business + Your Money - Fiona Reddan Anal­y­sis

New reg­u­la­tions aimed at en­hanc­ing con­sumer pro­tec­tion may cre­ate an un­even play­ing field for fi­nan­cial ad­vice, and will also raise an old de­bate about the ap­pro­pri­ate­ness, or oth­er­wise, of pay­ing for fi­nan­cial ad­vice via a com­mis­sion struc­ture.

It’s one of the largest reg­u­la­tory ini­tia­tives un­der­taken in the Euro­pean Union and is set to re­shape the face of cap­i­tal mar­kets go­ing for­ward. It’s also ap­proach­ing – and fast.

The Mar­kets in Fi­nan­cial In­stru­ments Di­rec­tive II (Mi­fid II) comes into ef­fect on Jan­uary 3rd, and those ad­vis­ers sub­ject to the regime are busy get­ting ready for the change.

“It’s a very sig­nif­i­cant bit of leg­is­la­tion,” says Adam Cle­land, head of wealth ad­vice with Davy, adding that the bro­ker has 40 peo­ple work­ing on the tran­si­tion.

How­ever, one per­haps un­in­tended con­se­quence of the new reg­u­la­tions is that it will change how fi­nan­cial ad­vice is dis­pensed – and paid for – in Ire­land, for one co­hort but not for another.

In­de­pen­dent ad­vis­ers

Un­der Mi­fid II, fi­nan­cial ad­vis­ers look­ing to de­scribe them­selves as “in­de­pen­dent” must ful­fil cer­tain re­quire­ments, such as as­sess­ing a suf­fi­cient num­ber of fi­nan­cial prod­ucts to de­ter­mine what best suits their clients’ in­vest­ment ob­jec­tives.

In ad­di­tion, ad­vis­ers who de­scribe them­selves as “in­de­pen­dent” and who sell Mi­fid prod­ucts, will no longer be able to take com­mis­sion on the sale of those prod­ucts – they’ll have to charge fees for their ad­vice.

Cur­rently, “in­de­pen­dent” fi­nan­cial ad­vis­ers in Ire­land must also per­form a fair anal­y­sis of the mar­ket, but they only have to give the op­tion of charg­ing fees – they can also earn com­mis­sion on a prod­uct sale.

It means that sell­ers of Mi­fid prod­ucts, which typ­i­cally re­late to all prod­ucts sold with­out a life in­sur­ance wrap­per, such as stocks, Ex­change Traded Funds (ETFs) and in­vest­ment funds, will be sub­ject to the new rules. How­ever, those who sell in­sur­ance linked in­vest­ments won’t.

As such, ac­cord­ing to Ciaran Phelan, chief ex­ec­u­tive of rep­re­sen­ta­tive body Bro­kers Ire­land, the “vast ma­jor­ity” of fi­nan­cial bro­kers won’t be im­pacted by the reg­u­la­tions, as they usu­ally sell in­vest­ment prod­ucts with life in­sur­ance wrap­pers, which are gov­erned by in­sur­ance rules, rather than Mi­fid style prod­ucts.

But this means that dif­fer­ent rules will ap­ply depend­ing on the type of prod­uct be­ing sold.

How­ever, change may also be afoot on this front, with the In­sur­ance Dis­tri­bu­tion Di­rec­tive (IDD) to be im­ple­mented by March 2018. Ahead of this the Cen­tral Bank is ex­pected to run a con­sul­ta­tion on this is­sue be­fore the end of the year, with a de­ter­mi­na­tion on whether the two regimes should be har­monised yet to be made.

Cle­land would like to see the di­rec­tive bring about “a level play­ing field” for prod­ucts sold un­der both Mi­fid and the IDD. This could be achieved by im­pos­ing sim­i­lar re­stric­tions on com­mis­sion for in­de­pen­dent ad­vis­ers who sell life-wrapped prod­ucts.

“We need to make sure there’s no in­cen­tive to move to one part of the re­tail uni­verse,” he said, adding that the ex­pe­ri­ence of RDR in the UK, which banned com­mis­sions out­right, “cre­ates clar­ity about the cost of ad­vice”.

“It also makes that ad­vice to be more likely to be in the cus­tomers’ in­ter­est,” he said.

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The Mi­fid II reg­u­la­tions a mean stock­bro­kers will have to charge in­sti­tu­tional clients for their re­search

Con­sid­er­able re­sis­tance

How­ever, such a move is likely to be met with con­sid­er­able re­sis­tance from bro­kers, who ar­gue that a com­mis­sion-based struc­ture al­lows more peo­ple to ac­cess fi­nan­cial ad­vice.

“Con­sumers are quite happy: they un­der­stand ad­vice has to be paid for,” says Phelan, adding that the ex­pe­ri­ence of RDR in the UK “took ad­vice away from the av­er­age woman and man in the street”.

The Mi­fid II reg­u­la­tions also mean stock­bro­kers will have to charge clients – in­sti­tu­tional only – for their re­search, dis­trib­uted in morn­ing notes and re­search re­ports. Such clients cur­rently get this in­for­ma­tion for free, or as part of a pack­age, so the unbundling means bro­kers will have to test the mar­ket by try­ing to get their clients to pay for it.

“We’re putting more em­pha­sis on mak­ing sure our re­search can stand on its own two feet,” Cle­land said.

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