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Investment Markets and Financial Regulation

Investment sentiment has remained strong (to this point) at the start of the year, following a year with low volatility.  Investors have embraced and taken everything in their stride, from interest rate rises (normalisation moves) to Brexit, and European political change, along with ‘sabre rattling’ of Trump and North Korea.

Healthy economic driven data has been widespread, which is expected to be maintained, which has driven valuations upwards.

The US Tax reform has given a further ‘injection’ of strong sentiment to the sector but it is imperative to be mindful of the performance of the sectors of assets, as with all ‘markets’ the price is affected by matching buyers with sellers.

If an investor as ‘time’ to sustain an increase in the ‘ups and downs’ of the various sectors of the markets – especially the areas regarded as more ‘risky’ remaining with the asset allocation may be the best solution, if an investor has a shorter time horizon and a reduced capacity for suffering loss a change of asset allocation may be needed.



Annual Suitability Reporting


The UK Financial Services sector is full of acronyms, having just got over the installation of MiFID II, PRIIPs and KIDs, we move to IDD and GDPR and on to investment market highs.

The change and complexity with financial regulation over the last 5 years has been huge, unrecognisable to the sector prior to the RDR – Retail Distribution Review.

The beneficiaries in many ways of the increase to regulation have been professional advisers, as barriers to entry rise but consumers must understand that they suffer the cost of increased regulation, as it is their money that pays for the funding of the Regulator, via fees and charges across the chain, be it via their Bank, insurance/investment product or adviser.


Matthew Hudson – CEO of Asset Management Consultancy wrote in Investment Week (28/11/17) that he felt that the changes were more than 10 years too late.  It was to rectify the issues of the credit crisis.  Hudson expresses the regulation will actually be detrimental as ‘the losers will be end users or punters – who will be hit with extra totally unnecessary costs coming their way’.  Hudson’s views are ‘The main point of the whole legislation is essentially built around creating more boxes to tick, more forms to sign’.


Lindsell Train also made the comment that ‘Regulatory burden means hiring extra staff for ‘no benefit and considerable extra cost’.  The comments made are certainly based upon the fact, with increased regulation and change comes cost and more box ticking and forms.  That being said, the regulations drive a process of governance and oversight to effectively drive consumers understanding of the products they purchase to much greater depth, effectively regulating outcomes.


The process effectively ensures that the risk and cost of the products are know prior to purchase, although of course if a consumer could fully understand the detail of the make up of an investment solution they would need the services of ‘advice’ on suitability less.  At a high level, nevertheless, the full details of the product and the engagement is more transparent than ever before.


Annual Suitability Updates


Regulation often grows ‘arms and legs’ but one of the intentions was to drive advisers to produce an ‘annual suitability’ overview – which is designed and thought out to further protect investors. The need for ongoing reviews is essential.  The regulation now embeds this need. Individual circumstances change – sometimes requiring change to a 5-year (or longer) plan, so making sure that the solution remains suitable (annually) is seen as a point of protection for consumers.

Investment markets rarely benefit from the low levels of volatility that 2017 provided so if markets suffer when the change to a plan is required, damage can arise as the need to sell at a reduction to the valuation could be painful.

An example at the other end of the spectrum is where investors are holding cash and hold cash for too long – where they need growth, such as a Pension income, of course, I have pointed out the implications to matters such as this for affected clients, but the Annual Suitability review requirement will now formalize the position.

The annual ‘suitability overview’ becomes a regulatory requirement but it is essential that if your needs or circumstances change we are informed asap so the impact can be discussed, and a new solution implemented.

We will be making contact with all clients in order to embed review dates over the coming months although, of course, we are having to plan the dates across our client base.  If you have a need to make any changes or want to discuss any aspect of your financial circumstances, please get in touch so we can act accordingly.


MiFID – a parting gift from the Euro Zone


A parting gift from Europe, the second installation of the Marketing in Financial Instruments Directive – MiFID II – came into effect on 3rd January 2018, as you know. The new package of regulation had been anxiously anticipated, especially in the final quarter of 2017, with a storm of conflicting information raging around the topic. Despite this, precious little ink has been spent explaining how structured products might be affected. Therefore, in this article we aim to provide a straightforward understanding of how MiFID II’s various aspects affect structured products, their providers and those who invest in them, as well as how the different parties have responded to these. We’ll begin with LEIs.




The Legal Entity Identifier was outlined in MiFIR (the direct, inflexible regulation section of MiFID II) as a means of pinpointing parties to transactions, globally; a twenty-digit alphanumeric code, each LEI is unique to its specific organisation. The concept is largely seen as a response to the tumult of 2008-9, which was exacerbated by an intricate web of transactions – the parties of which were so numerous and indiscernible that no one knew who owed what to whom – even now it is not fully untangled.


For natural persons in the United Kingdom, their ‘LEI’ is their National Insurance number, but for legal persons, such as corporations, an LEI must be assigned by the London Stock Exchange. The initial registration fee stands at £115 + VAT; thereafter there is an ongoing annual fee of £70 + VAT, per annum. The Global Legal Entity Identifier Foundation website is the online catalogue of all LEIs which enables easy access to information regarding any entity registered in any jurisdiction.


The good news is that, despite the fanfare, most investors will not notice MiFID II making much of a difference to them in respect of LEIs. Structured product providers already required investors to input their NI numbers on application forms long before January 2018. Our chief concern was whether, despite the packaged nature of structured products, Trust and Corporate clients will require their own LEIs to invest, and the answer we have come to is: yes.


Under its Obligation to Report Transactions, MiFID II requires that ‘investment firms shall use a legal entity identifier established to identify clients that are legal persons’ (MiFIR Article 26.6); an update issued by the FCA in December 2016 seemed to make clear that Trusts investing in certain securities would require their own LEIs. Not all securities require LEIs to invest in them, but according to the Regulation ‘financial instruments where the underlying is an index, or a basket composed of financial instruments traded on a trading venue’ (which covers most UK structured products) are covered.   Trusts and Corporates will require an LEI in order to invest so it is important to communicate this position as quickly as possible so there is a clear understanding. As it has taken several months for professionals to establish, it seems prudent for intermediaries to ensure that relevant clients are aware of this new requirement, particularly if the agent would be expected to arrange it.


It is comforting to note that there will not be an insistence on a Trust or Corporate having an LEI to receive maturity proceeds, but this could conceivably lead to the Structured Product sector running the risk of losing maturities, given that pure collectives can be held without an LEI.


At the eleventh hour, on 20th December 2017, the European Securities and Markets Authority published a statement allowing an additional six-month period of grace allowing firms to finalise their LEI arrangements. However, there is no guarantee that because the regulator will not yet be issuing reprimands for those who are failing to fulfil the new obligations, product providers will not require LEIs of relevant clients much sooner.


There have been so many implications to the detail of the expanded regulations, it is unlikely that the retail consumer can take in the impact.

If you’d like to browse our latest investment plans, you can see our Structured Products here. Alternatively, if you’re an existing client who would like to discuss any of the above, you can contact us here