Q1 – What does the regulatory landscape look like in Europe?
With all the significant regulatory changes taking place around the world, the picture is more complicated in Europe for advisers with expat clients because every market is different.
The well-documented wave of new directives and regulations - the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulations due to come into force with effect from 31 December 2016, closely followed by MiFID II and the new Insurance Distribution Directive (IDD) - now delayed and due to come into force in 2018, will bring further regulatory requirements and obligations for those financial services firms carrying on business in the EU and EEA.
However, each country has to decide whether to adhere to that minimum requirement level or take a harsher view, such as the UK and Netherland’s banning of commission and Belgium’s royal decree which outlawed the use of unauthorised collective investment schemes.
The objective of these regulations and directives is to ultimately deliver a better outcome for customers, which we, at Old Mutual International, are fully supportive of.
Q2 – What are the key challenges?
One of the key challenges impacting the financial services industry at the current time is the PRIIPs regulations. PRIIPs will require key information documents to be created by each product manufacturer and provided to prospective retail investors ahead of them investing in fund or insurance-based investment products.
The regulatory requirements as drafted at the time of writing this article are ambiguous and lack clarity. If those regulations are implemented in their current form, I would envisage a raft of new guided architecture products coming into the market.
This is in line with the way the market needs to go. PRIIPs has the customer’s interests at heart and its aim is to protect retail investors in particular. The FSAs Conduct of Business review in the Isle of Man, which also affects our business, is moving in a similar direction, requiring product manufacturers to effectively differentiate between retail and so-called sophisticated investors, and what investments – retail or non-retail, might be appropriate for the respective class of investors.
We absolutely welcome those changes, but at the same time, as an insurance company active in many global markets, need to position our business in the most appropriate way to support our client propositions.
Q3 – What does it mean for advisers?
As it stands, many advisers will need to adapt as they are likely to be using funds that would not be perceived by the regulatory authorities to be retail type funds. We are committed to supporting the advisers with the challenges they face - while we are not technically responsible for the investments that are held within open architecture wrappers, we welcome all initiatives that mean better customer outcomes and protection. By introducing more control through regulation, those funds are less likely to run into problems. If you’re looking at retail investors, that’s absolutely essential. At the moment, there may be situations where retail investors are having funds recommended to them, but which may not fit into that retail definition.
Q4 – Do you think there are enough products and product providers in Europe, particularly for those international clients?
It is disappointing that there aren’t more companies focused on the European market because I personally, and we as a business, see it as an exciting area particularly in the expat markets such as Spain.
For an IFA, it is relatively easy to passport out of the home state area into another area, making sure though that the product adheres to any local regulatory requirements.
The Common Reporting Standards that are coming into force across the main jurisdictions will make locally compliant insurance products that may have a deferral or inheritance tax benefit for customers even more important.
Q5 – What about charges disclosure and increased transparency in those markets?
PRIIPS together with other EU legislation and regulations will address commission and charges disclosure - all will have to be clearly demonstrated.
I would anticipate that Europe will go through similar changes to what has happened in the UK with the Retail Distribution Review (RDR). Following the ban on commission in the UK in favour of a fee-based approach, and more transparency for clients allowing them to see what they are being charged, advisers had to adapt and consider the services and added value they offer. We want to support advisers to adapt their business model and make the transition. We want to help, for example, with business planning, client segmentation and with articulating their value proposition.
Q6 – Is there a prospect that across all of Europe commission will be banned in the same way as the UK and the Netherlands?
In my opinion, it’s unlikely that it will be banned under IDD.
We must bear in mind some of our advisers have two licenses. They will have a direct investment licence which will sit under the MiFID rules. So if they are advising directly on stocks or directly on funds they would need a MiFID licence in the EU.
If they are advising on insurance products, they need a licence under IDD. Those two licence types are almost inextricably linked however the plan was certainly to ban commission on the MiFID type advice but not necessarily on the Insurance Distribution type of advice.
Q7 – How is Old Mutual International responding, in terms of the way you are supporting and working with advisers?
We recently started a programme called ‘Future Fit’, which was introduced with the launch of a White Paper. We are engaging much more with advisers to develop their business models and raise the bar in lots of ways.
Advisers based in Europe will be going through a huge amount of change. They’re going to have to look at their businesses and assess what they need to do to ensure their business, and the wider international adviser industry is compliant, and make it sustainable.
A lot of our advisers will be quite a long way down this path already, others will just be starting - so what we want to show advisers is our commitment to their business and help them on the journey to a more sustainable business, at whatever stage they are.