The fundamental purposes of the European Union are to promote greater social, political and economic harmony among the nations of Western Europe.
EU supporters reason that nations whose economies are interdependent are less likely to engage in conflict. These goals are pursued through the unification of European markets under a single currency, the euro, and through sets of legal standards to which all prospective and member nations, are held.
However, being part of the EU can cause conflicts, and that is before taking into consideration proposed timetables for post-election referendums. In our own financial services market there are clear conflicts with UK regulation and the emergence of MiFID II rules from Europe. In May, the FCA published a discussion paper on its approach to the MiFID II rules.
One of the key areas for discussion and potential conflict is the proposed requirement for firms to record all telephone and electronic communications relating to clients, which may even extend to face-to-face conversations.
In addition, records have to be kept for five years, with indications this could be stretched to seven years. These recordings are to be available to clients on request, although there are indications from the regulator that it might consider removing previous exemptions for certain firms, which include financial advisers.
MiFID II was aimed at the likes of stockbrokers – the threat to include financial advisers was not what was originally intended. It appears there will be a requirement to record all calls because advisers do not know in advance whether a call is going to be related to a client order or not.
Historically, firms defending complaints often have insufficient documentation of proof as to what occurred. Therefore, while recording calls could mean incurring higher upfront acquisition costs, it could reduce costs in the long-term by helping firms defend complaints and reduce liabilities.
Audio recordings are probably the only authentic validation of what has occurred during a conversation between the adviser and his client. The current suitability rules should already give advisory firms an appropriate track on which to base their recording accuracy and the necessary device used.
The other key issue in the FCA paper sets out its thoughts on the status of independence for the advice label. The post-RDR implementation review clearly demonstrates that consumers are confused about independent and restricted advice. MiFID II introduces a Europe-wide definition of independence for the first time.
The requirement for independent firms is that they make recommendations based on a sufficient range of providers’ products, rather than whole of market, as with the current FCA definition. This could actually lead to the definition being stricter, as it covers a broader range of products.
The regulations also propose to cover execution-only business, introducing stronger protections for consumers. It proposes requiring firms to carry out an appropriateness test for any complex product which is sold without advice. The conundrum here is what classifies as a complex product – we will not know until January 2016.
