With MiFID II bringing lots of regulatory changes, it’s really important that advisory firms are prepared for the changes, as well as ensuring they have systems and procedures that are in place, are suitably aware of the new regulations. But what are some of the main changes and how do these impact advisory firms?
1.Recording telephone conversations with clients
MiFID II provisions require ‘recording of conversations and communications with all clients where these relate to or intend to lead to the conclusion of a transaction, even where the transaction is not concluded.’
MiFID II creates work for all advisers and cannot be ignored.
What it means for advisers
These requirements will introduce significant process changes for advisers. An example could be, where advisers use personal mobile phone numbers for work.
The new regulations on complaints handling simply builds on those that already existed, and firms now have a requirement to establish a policy for dealing with complaints. A policy must now provide clear, precise and up-to-date information about a firm’s complaints handling process. Organisations are also required to establish a complaints management function, which enables any complaints to be further investigated.
3.Rules on inducements
Under the new regulations, an organisation which is providing investment advice on an independent basis, or providing portfolio management, will not be permitted to retain any fees, commissions or any non-monetary benefits from a third party. Certain minor non-monetary benefits will be permitted, but these will be subject to meeting specific criteria and must be clearly disclosed to the client.
What it means for advisers
The MiFID II rules on inducements originally applied only to independent advisers, but the FCA has extended them to restricted advisers as well to remain in line with the Retail Distribution Review.
4.Communications record keeping
To be compliant with Articles 6 and 69, firms will be required to keep records of all electronic communications between an adviser and client or prospect. This includes social media, email and text messages from any device. They must ensure that they maintain adequate records of disclosures of potential conflicts of interest. The records should be easily obtainable and available to clients for up to five years. For regulators, this window is extended to seven years.
5.Code of conduct and conflicts of interest monitoring
New provisions under the MiFID II now requires firms to take all appropriate steps in identifying, managing and preventing conflicts of interest. New regulations mean that firms are now expected to be much more active during their monitoring, and senior management members are also expected to have more oversight to ensure that policies surrounding conflicts of interest are being applied.
6.The appropriateness test
With the entrance of MiFID II, we will now see the ban of execution-only sales of complex financial instruments to retail customers.
All customers wanting to buy ‘complex financial instruments’ without advice will have to pass an ‘appropriateness test’ to see if they have the necessary knowledge and experience of investing. This had led to some debate, as interpretations of what an appropriateness test is vary. However, the FCA has said customers are not allowed to self-certify, for example, by answering ‘yes’ to the question ‘do you have the knowledge and experience necessary to make a decision about buying this product?’
On top of this, under articles 13 and 24, firms must ensure that their digital marketing content clear and not misleading. To achieve this, it is strongly recommended that firms adopt technology that prevents advisers from sharing online content with their clients unless it has first been vetted and approved by the firm’s compliance and supervision departments.