European Union mandarins are increasingly dictating how the UK financial services industry should be run. The latest missive from Brussels, ...

European Union mandarins are increasingly dictating how the UK financial services industry should be run. The latest missive from Brussels, MiFID – the markets in financial instruments directive - is designed to allow companies from across the EU to operate in other countries with far less difficulty than they have to date. This is undoubtedly a laudable aim, but the implementation of the rules are likely to have an impact on the way advisors treat their customers in the UK, with perhaps just a small proportion of advisors choosing to use MiFID to expand their marketing opportunities. The biggest change for most advisors will be the way that MiFID insists they characterise their clients. For example, from next year investors will need to be classified as “professional clients” to be sold more complex investments, such as hedge funds, derivatives and unregulated property investments. To qualify for this status, clients will have to have at least €500,000 (£338,000) to invest, carry out at least 40 trades a year, and/or have worked in the financial services industry for at least one year. However, the UK’s financial regulator, the Financial Services Authority is planning to allow advisors, fund managers and banks to “grandfather” their clients to give them access to these investments to try to avoid unnecessary red tape in dealing with the new rules. The new rules, in place from November next year, take the current client classifications to a new level. At present, clients are classified as private clients, intermediate clients, or market counterparties. Yet MiFID’s definitions will become retail, professional, or eligible counterparties. Ash Saluja, partner at law firm CMC Cameron McKenna, told WealthBriefing: “Wealthy individuals should prepare for an onslaught of marketing by the financial services industry ahead of MiFID. “Once MiFID comes into force, it will be much more difficult for firms to place these wealthy individuals in the mid-tier bracket of professional clients, and therefore riskier products will be off limits.” This means that, essentially, investors may find it more difficult to access funds such as hedge funds unless they are highly sophisticated retail investors, tantamount to professional investors. Robin Gordon-Walker of the FSA, said: “We are trying to implement MiFID in the way that it makes least changes. It does not really change that people will always be able to invest. Advisors are not being asked to reject investors. We are trying not to make it make much of a change, but we have got to make some adaptations. “What the EU is trying to do is create a single market, where you have similar rules in every country. But it is a dubious proposition as to whether having the same rules across the EU will make people go abroad to give advice.” The difficulty for advisors is that, while the FSA is confident that it could make little difference, any new rules are potentially problematic for those trying to sell funds to clients. Brian Dennehy of independent financial advisor Dennehy Weller & Co in Chislehurst, Kent, said: “As I understand it we are still going to have to categorise clients on hedge funds and more complex products, and you will have to make sure people have a certain level of both competence and capital. “Obviously, there are going to need to be some definitions about what is a more complicated product. For example, some types of protected funds could be considered complicated, where the upside is “x per cent” of the index rise over a certain period. “I would not deal with you at all if you came to me and asked me for a hedge fund. However, if you were an advisor in, say, Guernsey, these rules may make it easier to deal with clients based in the UK.” MiFID could prove more problematic for the FSA, as it has a stated aim of moving away from a prescriptive approach to regulation towards a principles-based approach. But with MiFID, the rules are fairly rigid, and while the FSA plans to implement MiFID with the least amount of disruption to the status quo, it is not an easy task. Stephen Bland, retail intermediaries sector leader and director of small firms at the FSA, told WealthBriefing: “We see many positive implications in moving away from a largely prescriptive approach to one that is more focused on the 'what' and not the 'how'. “We believe firms who seriously commit to a set of outcome-based principles are in the best position to judge the detail of how to deliver those outcomes in the marketplace. For example, firms can best figure out how they deliver fair treatment to their customers in a way which is aligned to their commercial objectives in terms of customer service and retention. “We want to see a step change in the way firms operate and by doing so, to really embrace the spirit of regulation rather than the letter of the law. We still see too many firms with a 'tick box' mentality to compliance, something for which we, the regulator, have also faced criticism.” Mr Bland added that firms are often engrossed “in the detail of the rule, without truly understanding what the rule is trying to achieve,” which is an intractable problem. However, he added: “In some areas we will continue to rely on detailed rules. For instance, some will be necessary to address problems such as how to ensure that consumers continue to receive clear, simple and understandable information from firms about products and services which is easily comparable with that from other firms. Familiarity of format has proven to help consumer understanding and has been instrumental in helping consumers shop around. “Detailed rules will also remain because we have to implement EU directives such as MiFID which are heavily prescriptive rather than principles-based. And there may also be some areas where we need to keep detailed rules because of the key nature of specific requirements to mitigate risks, particularly where we have seen failures in the market that have caused real consumer detriment. “But nevertheless we do intend to cut back significantly on our use of detailed rules, not least because relying more on the principles is more future-proof – for us and for the industry – than using rules often written after a particular problem has emerged.” How much of an impact, good or bad, the new MiFID rules have will only be determined once they are in place. For now, advisors and regulators will have to try and make the best of any potential banana skins Brussels may throw in their path.