EU regulations to change ways retail investors pay for advice

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. 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.

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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 will 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 will not.

As such, according to Ciaran Phelan, chief executive of representative body Brokers Ireland, the “vast majority” of financial brokers will not 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.

Insurance directive

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 yet to be made on whether the two regimes should be harmonised.

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 the retail distribution review (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.

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, typically 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.