Investors saving millions from MiFID II unbundling rules
The FCA has shared its findings from a multi-firm review into research unbundling reforms. The regulator claims that new rules, brought in under MiFID II, have improved accountability and saved millions for investors.
As a result of the reforms, from 3rd January 2018 asset managers had to pay for research separately, rather than ‘bundling’ it into fees for other services. Firms had a choice to transparently charge this research to clients or pay for it themselves.
This review from the FCA has found that most asset managers have chosen to pay for research themselves. MiFID II has also made firms improve their approach to research and execution costs, with greater accountability and scrutiny.
These improvements saved investors £70 million in the first six months of 2018 compared to 2017 across a sample of firms, the FCA says. It suggests that, based on previous analysis, savings from these reforms could reach nearly £1 billion over five years.
In a summary of the findings, the regulator found that:
- Firms’ research budgets have reduced by 20%–30%
- Asset managers are still getting the research they need, despite the fall in research spend
- Research coverage of small and medium enterprises (SMEs) in the UK has not reduced so far
- It’s still seeing wide price ranges for research, suggesting pricing is still developing.
The FCA will look at this area again to assess firms’ ongoing compliance in 12 to 24 months.
FCA considering rule change over unit-linked funds
The FCA has reviewed the governance practices of firms covering the value to investors provided by unit-linked funds. In doing so the regulator is considering a change to its rules.
This review is part of the FCA’s wider work on reviewing non-workplace pensions, the governance of unit-linked mirror funds, and the effectiveness and scope of Independent Governance Committees (IGCs).
The regulator has taken an interest in this area because unit-linked funds offer similar features to authorised funds. Unit-linked funds are also, according to the FCA, the dominant fund structure through which people save for their defined contribution pensions. So the regulator was looking for similarities between the governance of unit-linked funds and authorised funds.
The regulator made several findings:
- Firms need to rethink the value for money of these funds and their fees. Some funds had fees and charges that meant they led to outcomes similar to those of much lower risk products.
- Firms could not explain the reasons for disparities in fees and charges, which varied widely from fund to similar fund.
- There were limited efforts to pass savings from economies of scale on to unit holders, where firms were not contractually obliged to do so.
- Firms complied with regulatory initiatives but didn’t apply those approaches further to benefit other customers.
- Though asset management accounted for a very small part of the total charges, firms could not demonstrate how other charged features offered good value for money.
- Though firms compared their prices to competitors, they did not do so to price competitively. Instead, they used the findings to justify their own pricing structures.
- Institutional investors, advised by investment consultants, received more competitive prices than retail investors. They were more able to lower the firms’ fees and charges and were more active in monitoring firms’ ongoing performance.
- Independent Governance Committees and Governance Advisory Arrangements had positive quick wins in areas involving expensive workplace pensions with poor investor outcomes. But otherwise these independent governance bodies expressed frustration that they could not have further impact.
The FCA plans to assess the findings for this review along with other work in this area and will decide what, if anything, needs to change. As yet there is no defined timescale for this decision.
New proposals to tackle issues in the credit derivatives market
There are new proposals, the FCA has said, designed to tackle ongoing issues in the credit derivatives market. This update follows the joint statement made in June by the heads of the FCA and the US Commodity Futures Trading Commission (CFTC).
The original statement shared concerns about ‘opportunistic strategies’, and the negative impact they have on the integrity of both the credit derivatives market and wider markets. The strategies include what are known as ‘manufactured credit events’ or ‘narrowly tailored credit events’.
Now the International Swaps and Derivatives Association (ISDA) wants action to target certain issues related to narrowly tailored credit events. ISDA has proposed a protocol containing two amendments to the 2014 ISDA Credit Derivatives Definitions.
The FCA urged firms to consider how the proposed protocol, and the opportunistic strategies themselves, may impact their business. The regulator also told firms to think about the risks of trading with other parties who do not adhere to the proposed ISDA protocol.
The regulator also said it looked forward to further industry progress to improve issues in the market that are not address by the ISDA proposal.
Driving up standards in financial advice
In a speech at the Money Marketing Interactive Conference in Harrogate, FCA Director of Life Insurance and Financial Advice Supervision Debbie Gupta spoke on the quality of financial advice.
Gupta reiterated the FCA’s focus on the suitability of advice, products and services that clients receive. She charged the industry, and not just the regulator, with the responsibility to protect consumers from harm.
She shared the regulator’s four areas of improvement:
- Focusing on improving standards, especially in areas where advice and services are known to fall short
- Targeting the firms that cause the most harm
- Giving customers support to know what they can expect from their advisers
- Helping advisers by sharing learnings from the FCA.
The speech articulated that the key to getting suitability right is having a thorough understanding of your client. Gupta urged advisers to spend time and energy on relevant fact-finding and detailed recording and notetaking.
A section of Gupta’s speech that caught the attention of the industry was her suggestion that advisers consider recording client transactions. Though not a requirement, investing in recording technology is encouraged, she said. Recording is the best way for firms to defend themselves if a case is brought, as well as providing the most accurate – and therefore useful – portrayal of the client and their needs.
New Executive Director of Risk and Compliance Oversight appointed
Sheree Howard, currently Interim Director of Risk and Compliance Oversight (R&CO), has been appointed as Executive Director, replacing Barbara Frohn who left the FCA earlier this year.
Howard has been with the FCA since December 2017, following more than 25 years in the insurance and banking sectors. She has been a Fellow of the Institute of Actuaries since 1994.