10 February 2012

Joint letter on conduct of business rules for MiFID Review final

Investment advice

The Associations believe that investors should be able to have access to the best possible advice. Under existing provisions, European banks are already subject to the obligation to obtain from their clients all relevant information in order to make a suitable recommendation to them. The quality of the advice provided to a client is not dependent on whether or not the adviser accepts or receives fees, commissions or any other monetary benefits. Rather, the Associations believe that the quality of the advice is related, on the one hand, to the bank obtaining all the necessary information from the client to be able to meet the “suitability” test and, on the other hand, to the quality of the analysis of the information underpinning the advice provided.

For those reasons, the Associations oppose the use of terms that inherently imply a value judgement. “Dependent” or “not independent” advice, for example, is likely to be perceived as being - by definition - of a lower quality or not fair. The Associations support, therefore, clear, neutral and less discriminatory wording to distinguish the different kinds of services. Furthermore, the Associations support the introduction of more disclosure around the characteristics of the advice provided. This is also an idea put forward by the European Commission. Circumstances such as the range and diversity of instruments, issuers and/or product providers upon which the firm’s analysis is prepared and the possible reception of fees, commissions or any monetary benefits paid or provided should be of mandatory disclosure to clients.

Portfolio management

A complete ban on monetary benefits will affect the means of financing the portfolio management service. This will have two main impacts:

• On clients: Clients will no longer be able to choose between either a higher-priced and inducement-free portfolio management or a cheaper portfolio management that is partially funded by third party inducements. A better alternative is to emphasise the disclosure on the perception of any benefits. The Associations strongly believe that a transparent disclosure of inducements will help guide the client in making an informed decision.
• On distribution processes: The abolition of inducements could impair the sale of products across different platforms, thus favouring the advent of a distribution process with a “locked-up architecture”. The Associations believe that the purpose of MiFID should not be to legislate against a particular type of distribution platform.

The Associations wish to highlight the good work done by the Committee of European Securities Regulators (CESR) in clarifying the types of bank behaviour that European securities regulators encourage (good practices) and discourage (poor practices) in this context. Where appropriate, the Associations recommend this work be wired into hard law in the MiFID II framework, possibly in Level 2 regulation.

Execution-only business

The Commission wants to limit the set of financial instruments that can be sold on an execution-only basis. According to the Commission, products that embed a derivative or incorporate a structure that is “difficult to understand” should not be sold without the bank ensuring first that the product is appropriate for the client. This approach would give rise to two main concerns:

• Each client has a different level of financial education. A product embedding a derivative or incorporating a structure may be comprehensible for some clients but not for others. The extension of the complex product category would penalise the experienced kind of investors that can properly evaluate by themselves their risk profile and apply the adequate strategy without having to undergo an appropriateness test.
• Complexity in a product’s design may in fact be a means to ensure its safety. Products are often made complex so as to reduce the risks for investors (i.e. capital guaranteed products). Complexity may be necessary to enhance investor’s confidence in the performance of the offered product. Structured UCITS and notes are a case in point.

Full response

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