Select Committee on Treasury Written Evidence

Memorandum submitted by Which?



  Thank you for the opportunity to submit comments to the Committee's inquiry on the Markets in Financial Instruments Directive (MiFID).

  2.   Much of the MiFID relates to the operation of wholesale and institutional markets which, while obviously important to retail consumers, are outside Which?'s remit. Therefore, we have restricted our comments to measures contained in MiFID which relate specifically to retail market operations.

  3.   We have some general comments to make on the EU policymaking process which are highlighted in the progress made on MiFID; some general comments on MiFID; plus specific comments on individual measures contained in MiFID.


  4.   We would like to take this opportunity to reiterate general comments we have made in previous submissions to TSC about the EU policymaking process which has been highlighted by the progress of MiFID. From what we can gather, the legislative process relating to MiFID appears to have been quite difficult. We think this is down to in part the design of the directive which contains measures which relate to wholesale/institutional markets and retail markets within a single directive. The dynamics of wholesale/institutional and retail markets and the financial sophistication of the relevant market participants in those markets are very different.

  5.   We have been trying to persuade EU policymakers that if the policymaking process is to be efficient, and achieve its objectives of promoting an effective integrated market and proportionate consumer protection for different market participants then it would be better to use a "supply-chain" model which deconstructs the financial services supply chain into the different main stages ie wholesale, institutional and retail. Our view is that this provides a more effective way of examining markets and developing legislative proposals which can address the particular dynamics of markets in a more coherent and consistent fashion.


  6.   We are pleased to say that some of our earlier concerns relating to the provision of past performance data and definitions of generic and investment advice have been somewhat assuaged.


  7.   The requirements relating to the use of past performance are now in line with those set out by the FSA. There was concern that previous versions of drafts would have allowed firms too much leeway to choose time periods which showed performance in a positive light. In addition, there are stipulations which mean that the past performance information should not the most prominent feature in a communication and contain prominent warning that past performance is not a reliable indicator of future results.

  8.   However, there are concerns about the use of information on future performance. The stipulation in article 27 para 5(b) is that information must be "based on reasonable assumptions supported by objective data". This could be open to interpretation after all it is difficult to define what constitutes "objective" data. This is one area where we would argue that an impartial body such as a financial regulator should be required to set central assumptions for the future performance of different asset classes.

  9.   A more general criticism of article 27 is that it does not stipulate the inclusion of a benchmark in performance comparisons. It is important in terms of competition between providers and allowing consumers to make informed choices that any claims about individual fund performance be compared against a peer group of similar funds. We would suggest that this benchmark data should consist of a "risk-free" fund eg cash deposits plus a relevant sector average. These benchmarks should be stipulated by a regulator.


  10.   Previously, there had been concerns that the definition of investment advice being proposed could have inadvertently captured organisations such as Citizens Advice Bureaux who may sometimes be involved in providing "generic" advice. This would have severely hindered any efforts to create a National Financial Advice Network in the UK. However, as it now reads (see article 52 of the Implementing Directive) organisations providing only generic advice would not fall under the authorisation requirements of MiFID.

  11.   But there remains another area of concern. As firms who provide only generic advice do not have to be licensed, there is clearly room for unlicensed firms purporting to offer "generic" advice to operate outside the regulatory regime.

  12.   MiFID allows for this type of firm providing generic advice to be subject to authorisation requirements under national legislation. So this is an area where we would hope the FSA would ensure there was sufficient additional protection on top of the requirements set out in MiFID. We would suggest that a distinction could be drawn between not-for-profit organisations such as CAB and private sector organisations that earn a fee for providing "generic" advice.

  13.  Other areas of concern:

    Recital 44/ Article 33—information disclosure.

  14.   Recital 44 is very flexible with regards to the timing of when important information should be disclosed and the format of the information.

  15.   It is important for information to have impact that it be disclosed at the earliest stage in the sales process, that it is presented in a standardised and consistent format and that intermediaries/ advisers are required to draw consumers' attention to the key elements of that information.

  16.   There is a risk that the drafting of these requirements could undermine the approach to disclosure we currently have in the UK. This could have damaging effects in relation to issues such as disclosure of adviser status following depolarisation.


Compliance reports

  17.   MiFID requires firms to produce formal frequent reports on compliance activities for senior management to fulfil requirements of the compliance function (Article 9(2) Implementing Directive)—an annual report is the bare minimum. This could be improved on by requiring firms to publish compliance reports. This would be an aid to transparency, would introduce a measure of governance and accountability to the industry and go some way to levelling the playing field between the rights of access to information afforded to shareholders and the rights afforded to consumers in the UK. We take the view that the conflicts of interest in the UK retail financial markets and the potential for detriment are such that it warrants the FSA introducing supplementary rules over and above those in the directive.

Inducements and conflicts of interest

  18.   Article 26 of MiFID stipulates certain conditions about the use of inducements such as fees or commission. For example, it requires that these inducements be disclosed in a comprehensive and understandable manner to the client and that the payment of the fee or commission must enhance the quality of the service to the client and not impair compliance with the firm's duty to act in the best interests of the client.

  19.   The Committee will be aware of Which?'s concerns about the distorting effects of commission and other volume related remuneration strategies. It is our view that the reliance on commission and strategies which link the level of sales-force remuneration to volume of sales rather than quality of sales introduces a major conflict of interest and therefore is one of the root causes of the detriment in retail financial services.

  20.   Therefore, we have a number of comments about Article 26. Firstly, it is not clear whether this will apply to remuneration such as bonuses paid to in-house sales staff which are as potentially risky as commission paid to third party intermediaries. This would need to be clarified by FSA in UK regulation.

  21.   Secondly, the implementation of MiFID provides an opportunity for the FSA to directly address the distorting effects of commission and aggressive remuneration strategies. As the Committee will be aware, we have been arguing for an explicit rule to be introduced which prohibits commission or other remuneration being linked solely to volume of sales. We have proposed that fees and remuneration should be linked to a "scorecard" which assesses the quality of sales not just volume. This in our view must be the most effective way of ensuring that payment of fees enhances quality of service and does not impair compliance with duty to act in the best interest of client.

April 2006

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