Select Committee on Treasury Written Evidence


Memorandum submitted by the Association of Independent Financial Advisers (AIFA)

EXECUTIVE SUMMARY

  The consultation process has yielded positive results and some of the concerns of UK firms have been taken into account but the process has also shown up areas of national interest which have proven to be non-negotiable. Overall, we believe that due to the lack of an impact assessment and CBA, MiFID runs the danger of imposing vast amounts of new regulation whilst mainly achieving benefits for larger firms and a relatively small group of sophisticated investors. We have highlighted client money rules, suitability requirements and the disclosure regime as areas that conflict with existing UK legislation and believe that they provide examples of how MiFID is likely to have a negative impact on consumers and competitiveness.

We have concerns about the EU Commission determining whether a Directive should be implemented as a Directive or a Regulation without consulting the industry or conducting a proper cost benefit analysis of the potential outcome.

Finally, we would like to emphasise our support for the open and constructive co-operation between FSA, HMT and industry, which has helped to resolve a series of difficult issues. However, we still feel that overall the implementation timeframe set by the Commission is unrealistic, bearing in mind that other member states have yet to evidence their attempts to comply with the set deadlines.

DETAILED SUBMISSION

1.  AIFA is the trade association that represents UK regulated independent financial advisers (IFAs). Membership of AIFA is voluntary and on a corporate basis. AIFA currently represents around 70% of IFA firms in the UK. It should be noted that the majority of IFA firms are very small businesses, often falling under umbrella organisations, such as networks.

2.  IFA firms are the leading distribution channel for retail financial products in the UK. They generate over 60% of business in monetary value and are the major sector advising and arranging investments, private pensions, mortgages and protection policies in the UK. As such, IFA businesses represent a dominant force in the maintenance of a competitive and dynamic retail financial services market.

3.  The position of UK IFA firms is a unique one because their business model is not widely replicated in other EU member states where the financial products are more commonly sold through banks and insurance companies. We believe that the UK model has many advantages for consumers because it enables them to gain impartial advice before buying a financial product and also stimulates competition amongst product providers, who have to compete on price, service and functionality.

4.  The Treasury proposes to exempt IFA firms from the requirements of MiFID provided they do not hold client money or elect to operate cross-border. This is a welcome and proportionate response. This does, however, create a situation where exempted firms would be in direct competition with MiFID firms when advising on certain investments. Our concern is that in order to create a standard approach, the FSA might feel it is appropriate to apply the same ie MiFID conduct of business rules to both MiFID and non-MiFID firms. Whilst this would be appropriate in areas where consumers risk being disadvantaged or confused by differing standards, our fear is that there could be a much wider knock-on effect in aligning rules as business areas overlap. If IFA firms become subject to the greater part of MiFID rule changes, it will dilute the benefit of the exemption and have a disproportionate impact as IFA firms are, on average, much smaller than MiFID firms, with most of our members falling within the EU criteria for small firms.

5.  We have concerns about the EU Commission determining whether a Directive should be implemented as a Directive or a Regulation without consulting the industry or conducting a proper cost benefit analysis of the potential outcome. We recognise the validity of the Commission's argument in favour of implementing Directives as Regulations but feel that the UK financial services market is distinctly different from the continental model and that maximum harmonisation will not allow FSA the discretion or flexibility to regulate, taking account of the particularities of the UK market. This is especially true with regard to the retail investment advice market which in the UK offers consumers a wider choice of advisory services and retail products than in most of continental Europe.

  6.  In our view the implementation of Directives as a Regulation can also have the opposite of the desired effect by inscribing national particularities into the text of the Directive and therefore rolling them out across Europe instead of allowing member states to take account of their national markets' requirements when implementing the Directive.

  7.  Our responses to the questions focus on the conduct of business requirements in MiFID as our members are most likely to be affected by changes in this area.

QUESTIONS

8.  Whether the proposals adequately reflected prior input into the legislative process and the extent to which there were any significant "surprises" in the proposals, or whether any new requirements were included without sufficient prior consultation.

  9.  In our experience, input from the industry was taken into account and has led to major improvements of the original draft.

  10.  UK firms have benefited from the intensive dialogue with both Treasury and FSA that ensured that UK industry representatives were fully updated about the negotiation process by setting up several industry groups and meetings which allowed an open exchange of views and provided a forum where solutions for potential problems could be discussed.

  11.  The extent to which the proposals now provide sufficient information for a full cost benefit analysis to be undertaken at this stage and the desirability of undertaking such analysis.

  12.  We believe that a full cost benefit should be undertaken especially with regard to the effects on small businesses. So far, it has been difficult to carry out a meaningful CBA due to the ongoing negotiations and changes to the Level 2 implementing measures. However, any CBA undertaken needs to take account of the different business models of the firms caught by MiFID. A preliminary CBA carried out by FSA failed to do so and only yielded partially usable results. IFA firms were included in the CBA but it was based on alien terminology and processes which did not relate to non-scope firms.

  13.  In our opinion, any future CBA has to be tailored according to the various business models so that it can properly measure the effect that MiFID will have, and in particular on exempted firms.

  14.  The identification of any elements of the proposals which conflict with existing UK regulation and an indication of the costs and benefits of changing these elements to reflect the rules under MiFID.

  15.  Client money rules:

    The MiFID rules relating to client money could have an adverse effect on the current trend away from commission to fees as a form of payment for financial advice. The majority of our members offer their clients the option to pay for their services by fee or commission. Many operate a system whereby a fee is agreed and any commission generated from products recommended is used to meet, or is offset against, the fee. Situations occur where the commission exceeds the fee and the firm holds the excess on account for future work. Another fee model is where the client pays a fixed amount on a regular basis, eg monthly or annually, to meet the cost of ongoing services. The FSA currently allow this without the firm falling under the full weight of the "client money" regime which requires significantly higher prudential requirements. We are very supportive of these arrangements as it helps to smooth the cost of financial advice and encourages a move to fee-based services.

    The client money rules in MiFID allow FSA no discretion and firms operating fee-based models where, at any point in time, the "client account" is in credit, will fall directly under full MiFID rules and the client money regime. This could threaten firms who would otherwise be exempt and may well reconsider their business model to avoid being caught by the Directive. A reversal of this nature would be detrimental to consumers as it reduces the choice in which they pay for services and could reverse the current trend away from commission based services. Most consumers are still hesitant about paying a straight fee and the current commission off-setting system has proved a more acceptable way of progressing towards fees.

  16.  We are currently working with FSA to try and define fee structures that work for firms and consumers and do not fall foul of the MiFID client money rules.

  17.  Suitability requirements:

    MiFID goes beyond current UK suitability requirements by asking firms to take account of a client's previous experience when giving investment advice, including their level of education. Our concerns are twofold. First, is that some of the criteria used in the MiFID suitability test are subjective and will be difficult to ascertain. A high level of education and qualifications does not necessarily mean that a customer understands investments or the associated risks. Second, we question the practicality and rationale of requiring different suitability criteria for other investments, such as life and pensions business. The outcome could be that FSA feels the need to raise the bar across all investment advice, whether the products fall within scope of MiFID or not. This will potentially increase costs and risk advisers making incorrect assumptions about a person's financial capability, when assessing suitability.

  18.  The identification of areas in which the UK could benefit from rules additional to those included in the Commission's draft proposals and areas in which such "super-equivalence" should be avoided.

  19.  Disclosure regime:

    The current UK disclosure regime is more prescriptive than that required by MiFID, which makes it super-equivalent. Article 4 of the Directive to implement the Level2 requirements states that member states can only go beyond the MiFID requirements in exceptional circumstances. Generally, we do not support super-equivalence but we believe in this particular case it can be justified in the interest of consumer protection.

  20.  Our particular concern is that any reduction or removal of the current disclosure documents, including the Fees and Commission Statement (commonly known as the menu), will lead to an anti-competitive marketplace, where MiFID firms will no longer have to give consumers detailed information on how they are remunerated for their services and non-MiFID firms will still have to comply with the current, much stricter disclosure rules. It will leave consumers unable to compare the costs of the services offered and make an informed decision.

  21.  There are concerns that the current regime is not functioning correctly and that the menu in particular, is not meeting its objectives. Whilst we consider the version in use to be overly complex, we do believe that it is giving value to consumers. This document has only been in place since June 2005 and it needs to be given more time before a final judgment is made. In our view, the menu is important in maintaining comparable disclosure across all distribution channels.

  22.  Whether the UK financial services sector is prepared for the domestic implementation of MiFID and the extent to which the proposed MiFID implementation timetable is realistic for UK firms.

  23.  We have worked closely with Treasury and FSA over the last 12 months and will continue to do so to prepare our members for the implementation of MiFID and the resulting changes to COB rules. Our greatest concern is the limited timeframe between the final publication of the Level 2 measures which is expected in June/July this year and the planned UK transposition in January 2007. This leaves very little time for the FSA consultation process. However, we acknowledge that both FSA and Treasury are carrying out a substantial pre-consultation exercise to facilitate the timely implementation of the Directive.

  24.  The UK is currently one of a very small minority of member states who are aiming to meet the commission's timetable. This could lead to the creation of an un-level playing field with major uncertainty for UK firms who are making use of the passporting rights. Our fears are compounded by the recent experience with the implementation of the Insurance Mediation Directive (IMD) where 14 months after the official implementation date several member states have still not implemented the Directive.

March 2006





 
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