A classic example would be a product with a guarantee might not be able to fulfil its promise if its manufacturer or the counterparty goes bust.
Lastly, there will be an expectation that advice firms (distributors in Mifid II language) feed back to providers on how they have used products with their customers.
Suitability
The complex and non-complex products issue has stirred a bit of a hornet’s nest in some parts of the market.
It is proposed that shares and gilts and Ucits-compliant collectives are classed as non-complex products, meaning they do not have to be advised upon to be distributed.
Most multi-manager funds and some multi-asset funds are known as Nurs – non-Ucits retail schemes.
Under the directive they will be classed as complex and will have to be ‘advised upon’ to be distributed.
In other words a smaller company share can be more easily promoted than a well-diversified, ring-fenced Nurs with a compensation scheme attached. It may be that some Nurs change their structure into UCITS compliance to overcome this.
Client communications
At the heart of the information provided is the need for the consumer to understand what has been presented to them.
The exiting chief executive of the Financial Conduct Authority, Martin Wheatley, has often used the example of smartphone software updates where most consumers are thought not read the terms and conditions and continue to press ‘Agree’.
The length and the complexity prevents people from wanting to understand. (Firms will not be allowed to hide behind T&Cs in the event of a ‘failure’.)
It may well be that different forms of communication are used, eg more bullet points rather than tabular text, a more plain English approach is utilised or used or just more pictures in the form of infographics.
With regard to phone records, we do know that firms will have to maintain phone records and keep them for five years. If firms do not record calls, then they will have to.
Explicit costs and charges are an important part of the legislation. The funds world has gone some way to the goal of stating total cost of ownerships by getting rid of AMC, TERs and implementing OCFS, or OCF for Ucits funds (and some Nurs).
A harmonisation or industry-wide use of the OCF across all retail products and services would be welcome and promote transparency.
Would it make life easier for advisers and their clients if life, pension, collectives, investment trust and discretionary services were all calculated on the same basis?
Work is already underway within some discretionary managers to provide clients with clear reporting, showing them the effects all charges and fees have on potential returns – both at outset and on an ongoing basis.
