Regulation round-up

Fraser Donaldson – Insight Analyst (Investments)

It's encouraging to note from the July edition of the FCA's regulation round-up that the regulator sees that adviser firms overall are giving customers suitable advice, BUT they do note that further work is needed to improve standards. A few of the developments you should be aware of are highlighted in this article.

The focus on the customer

In this round-up, the FCA had also noted that some firms delivered advice with little or no structure, meaning advisers typically failed to ensure they had sufficient understanding of customers’ needs and circumstances on which to base their recommendations. Overall though, the tone of the round-up was ‘keep it up, more to do’, and the FCA will continue to work with the industry to improve standards.

The guidance given

Defaqto sees three regulatory outputs as key to the evolution of regulation in the discretionary service industry:

• Thematic Review 14/12 from the FCA
• Thematic Review 14/9 from the FCA
• MiFID II

The first two from our own regulator review and help clarify existing regulation and how it is being implemented. MiFID II is European regulation that is being developed now, with final rules being in place by June 2016 and to be implemented January 2017.

Each of these is fairly wide-ranging and deals with a multitude of issues.

In terms of data provision and whole of market due diligence, the key themes that are covered by all papers can be summarised as: good disclosure and transparency. This will affect the way that all discretionary services are marketed and the information that needs to be published in order to be able to achieve fair comparison of propositions.

The need to comply

Defaqto is fully embracing the changes that are coming and working with the industry to achieve common standards of disclosure in key areas.

In particular, we're looking to implement common standards across:

• Performance
• Cost

The regulators are keen on robust, in-depth due diligence on third-party investment partners but this can often be difficult in the discretionary field as it's not always possible to compare like with like. For instance, we've seen performance published gross of charges by some, whereas the majority quote net of charges. In addition, whether net or gross, they don't always use the same set of charges!

Not unrelated to this is the issue of cost. All discretionary funds quote a headline service fee. As with an annual management charge, this is not the whole story. Defaqto is now looking at charges to be as inclusive as possible, using the OCF (measuring the ongoing cost of a fund investment) as the methodology to follow. In this way, we will be able to get as close to true performance and costs as possible.

The road ahead

The thematic reviews mentioned above are largely concerned with collective funds but the FCA will soon turn its attention to discretionary services, whether they are classified as PRIPs or not. MiFID II is likely to impose standards on disclosure which will become compulsory by January 2017.

At Defaqto, we believe that transparency is one of the most important elements of due diligence and discretionary firms that embrace this should be given credit. This is likely to be reflected in our 2016/17 Star Ratings. Watch this space!

We will also be looking in more detail at the potential implications of MiFID II in future newsletters as we get closer to the June 2016 deadline.