Advisers could be caught in MiFID II 'appropriateness' testing

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Advisers could be forced to collect and share client information on non-advised business with providers under new rules mooted by the Financial Conduct Authority (FCA).

European legislation on 'complex' investment products such as derivatives demands product providers carry out 'appropriateness tests' to determine whether the customer is in the position to make an informed decision about the product.

The rules, under MiFID II, look set to widen to include complex insurance-based investments and pension products.

In its latest discussion paper the FCA said it is "likely" all investment products apart from plain vanilla shares and bonds and non-structured UCITS funds will be considered complex following the implementation of the directive in January 2017.

There will be more requirements on product providers and advisers to talk to each other on a non-advised basis

This would mean under the Europe-wide rules, MiFID II, a host of products can only be sold to consumers either through an advised sale or following an 'appropriateness test'.
 

Matt Connell, government and industry affairs principal at Zurich, said, if widened to pension products, more advisers could be caught up in assisting providers in their appropriateness testing.

The tests will examine the client's experience with and understanding of the type of product but not whether it is suitable for their particular circumstances.

Connell suggested advisers who offer non-advised services alongside their fully advised offering could be asked to help providers with some of the information gathering.

They could also play a bigger role for clients who 'fail' the tests and chose to go back to their adviser, he said. 

"The idea is if you have a [pension] wrapper that includes guaranteed returns it is a bit like a derivative. Products that are more expensive but with less volatility might be less risky for consumers but the question is do consumers understand them.

"It's bringing the whole channel closer together. There will be more requirements on product providers and advisers to talk to each other on a non-advised basis.

"Consumers will enter conversations with providers over appropriateness not with the adviser but then may have to go back to the adviser if the provider says 'no'," Connell said.

He added: "Advisers should think about how they collect information and send it to providers. They may have to capture information for which they do not yet have the right systems in place."

The regulator based the proposal to widen the definition on new risks brought about by the government's pension reforms, which allowed people to access their pension pots from 6 April.

"Pensions liberalisation could give rise to new risks of inappropriate sales of insurance-based investments to consumers, as well as MiFID II investments," the FCA said.

The FCA is accepting comments on its proposal until 26 May.

Further Reading:

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Fall in protection complaints to FCA

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