New Financial Rules (MiFID II and PRIIPS) and a Mop-Up of the Financial Markets
Firstly, we wish you and your family a healthy, happy and successful 2018. We very much trust you had a lovely time over the Christmas and New Year and are ready to tackle the year ahead.
As you are aware, financial matters can be (overly) complex, so we are doing our very best to explain and de-jargon the terms (where we can) so that you, the consumer of financial products, are fully informed of the changes to regulation and the financial landscape generally.
(Please feel free to contact us in order that we may add further clarity to any points you may wish to explore. This applies to any aspect of financial services, should you require advice, help or support).
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Financial Markets
The financial markets have been operating in a ‘Goldilocks’ environment where the economic conditions have been ‘just right’. 2017 experienced a typically low volatility but slowly uncertainty is building up again in relation to asset values, given such a strong performance from risk assets over the last year or so. The sentiment was stronger than expected during 2017 driving investment markets forward, against a backdrop of concerns in relation to ‘Bubbles likely to burst’ and economic quantitative tightening (interest rate rises and central banking bond-buying reduction or termination).
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Investment Psychology and Financial Behaviour
Positive sentiment prevailed, confusingly where the risk of withdrawal of the various central bank stimulus, interest increases and even the nuclear threat from the North Koreans have been largely disregarded by markets and investors.
Financial behaviour and the expectancy of potential investment market ‘outcomes’ should always be considered on an ongoing basis but, as stated in previous communication, given the unexpected performance of ‘risk’ asset classes in 2017, investors would be wise and prudent to re-evaluate their risk views, objectives and capacity to suffer a reduction in asset values, given current valuations. Hopefully, many investors have taken the time to reflect on their needs during the Christmas and New Year holiday period.
Setting objectives and considering one’s needs at the start of the year, communicating this to us, especially if a change is likely or required will assist in keeping investment strategies on track.
{Please again note we cannot make changes to your investment risk strategy without engaging with you on the suitability of the investment structure to meet your needs, goals and time horizons). If you have a change in your views or personal circumstances, please get in touch so we can provide you with suitable advice.
Any instruction to change risk views must be provided to us in a recordable format.
Having the strength and conviction to remain invested when investment markets fall is an essential element of investing. If an investor is not prepared for investment market corrections, when they hold assets that are subjected to risk, the strategy may not be suitable to meet with the risk profile – which is why we carry out reviews on an ongoing basis and urge our clients to inform us of changes to their needs, goals, and tolerance.
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The importance of liquidity
Following the global financial crisis, quantitative easing has enabled the economic environment to recover and stabilise. The production of ‘liquidity’ enabled a steady recovery of the macro picture, with 2017 seeing stock market fluctuations reducing – this may be part of the consequence of central banking policy since the dark times of the global financial crisis.
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A bipolar financial environment
The current liquidity-driven environment does not remove risk and an expectant return to the ‘ups and downs’ (volatility) of the markets.
A global shock, such as geopolitical unsettlement is likely to produce investment market and economic concern, so a balance of assets to meet an investor’s needs is as essential as ever.
The balance of risk should remain the focus as a bump in the journey is due, following prolonged strong investment results from equities and other asset classes.
UK Stock Markets closed 2017 at a record high – A rear view review
- Both the FTSE 100 and FTSE 250 reached new record index highs at the close of trading for the year.
- US Stock Markets hit new peaks over the year, helped in part by President Donald Trump’s sweeping tax reforms.
- The FTSE 100 finished up 7.6% at 7687.77 compared with the last day of trading in 2016. Meanwhile, the FTSE 250 ended up 14.7% at 20726.26 compared with the end of 2016. (Again, I must stress that making comparisons with ‘risk model’ mandates and an index is not appropriate – an index is fully invested in risk assets, and would be expected to be a 9 or 10 on a scale of 1 to 10; 1 being safe 10 being 100% equity invested. The risk reviews we undertake help us to measure and quantify the overall risk an investor wishes to take).
- Brent crude fell as low as $45 per barrel in June but has recovered to around $66 per barrel.
- The US markets have performed even stronger – the tech-focused NASDAQ increased by 28%. The S&P 500 rose by around 19% and the Dow Jones Industrial Average gained about 25% over the year, closing at 24719.
- The North American markets are causing concern in relation to asset prices, given such strong performance, although many fund groups and analysts are increasing weightings to the US, due to the tax reform outcome.
- Asia – MSCIAC Pacific (ex-Japan) was up 40% in US Dollar terms.
- Emerging Markets – MSCI Emerging Market benchmark increased by 37%
- MSCI Europe indices gained 25%
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UK Markets
Housebuilders were amongst the best performing sector in the FTSE 100 in 2017 – Persimmon’s share price increased by 57%.
Centrica suffered a 40% reduction, with BT group WPP not far behind, as companies reduced investment in marketing and the sector faces a challenge to gather income.
Weaker Sterling has supported the main UK market, although this story becomes a little weaker, when the performance of the FTSE 250 is considered, as income from overseas is less prevalent.
The battle with the balance of asset classes continues… personally, I feel that investors who are ‘anchored’ to high ‘risk asset’ returns are ‘likely’ to suffer from bumps in the road in due course, which is why cash, bonds, property and equities should be held within all investment programmes. We are looking at quality, ‘contract based’ structured products to add to the diversification of clients’ assets in relation to the advice we provide, so an underpin of protection is further considered while a return can be targeted; based upon the needs of the investor and the risk an investor is prepared to take.
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New financial regulation rules MiFID II and the PRIIPs implementation
MiFID II commences on 3 January 2018. An upgrade of the European Union’s – ‘Markets in Financial Instruments (MiFID) Directive, which was originally introduced to establish a single market for investment services and activities.
MiFID II impacts product distribution across all European countries, whatever the products’ origin is. Essentially, the regulations have been further evolved to enhance investor protection, increasing transparency across EU financial markets, increasing competition across EU financial markets and to improve transparency on costs of funds and trading.
We have been working behind the scenes to ensure we are ready for the new regulations and are pleased to confirm that all of our documentation reflects the updated regulations.
What MiFID II means in practice to you, our consumer;
- Investment reporting will be provided by the platform or DFM provider on a quarterly basis, rather than 6 months. We would urge you to register for electronic reporting if you have not already done so so that tree felling is kept to a minimum and you can receive all reporting history in an easy to understand format electronically. If you require help with online access and reporting please contact us so we can help.
- Target Market – defining the consumer group that the provider/manufacturer engages with is a focus. This protocol endeavours to ensure that complex and often very ‘risky’ products are not targeted at general non-complex retain consumers of financial products. Managing consumer understanding of financial products must be a goal, increasing consumer knowledge and education, so that the overall position of risk to meet an investor’s goals can be improved.
As a business, we have been doing our best to provide information and education to our clients for many years, so we are way ahead of the objective in this regard. (We trust you agree; please let us know if you feel our communication could be improved).
Product and Governance oversight in relation to consumer engagement is an increased consumer protection protocol objective. We have engaged with many product manufacturers to gather clarity and due diligence in relation to their ‘Target Market’. We are specifically focusing on our non-advised Structured Product and Structured Deposit solutions via our website.
The rules will effectively increase the ‘box ticking’ management process so that moving ‘outside’ of a process of investment could create an ‘unsuitable investment outcome’.
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Discretionary Fund Managers 10% depreciation notification
Discretionary Fund Management clients are to be notified if their portfolio drops by 10% or more within a reporting period. This does not apply to our business; we are advisory in relation to our engagement with our clients and consumers.
Investment markets over market cycles fall by more than 10%, sometimes by much more, which are often termed ‘crashes’.
This is not a time to panic, the objective of the investment must be remembered, of course, reconsidered but rarely, if ever, is it best to sell following a large correction – which is a fall of 20% or a crash. If an investor is not prepared to suffer investment market volatility, simply put, they should not be invested in risk assets. This is why we keep identifying the need for ongoing reviews to meet your needs and objectives.
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Recording a ‘Conclusion’
Initially, the regulation required all client contact to be recorded, be it via telephone or other forms of contact. A ‘conclusion’, which is a decision to conclude a transaction or service, must now be recorded. We do this within our file notes or during meetings so we will continue as we currently do in this regard.
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PRIIPs
New Packaged Retail and Insurance-based Investment Products Regulation (PRIPPs) regulations were implemented on 1st January 2018.
(As a reminder, the UK is obligated to enforce EU regulations for as long as we remain a member of the EU. Following the UK leaving the EU, the FCA – the UK Financial Regulator expects this regulation to form part of the body of EU legislation that will be converted into the UK law, so no change is expected upon leaving the EU.
PRIIPs is an umbrella term which covers a number of financial products that are sold/distributed to retail consumers of financial products.
The regulations introduce a new, EU wide standardised disclosure document, the Key Information Document (KID) which will be similar to the UCITS KIID (Key Investor Information Document). It is intended that retail investors will be able to compare key features, risks, rewards and costs of in-scope products and make informed decisions, increasing further the transparency of the product to be consumed.
The regulations introduced cover:
- Content, presentation, calculation of the information in the KID
- Review, revision and republication of the KID
- Timing of delivery of the KID – The Key Information Document is to be provided to investors in good time before a consumer is bound by the contract relating to the PRIIP, thus allowing the retail investor time to read and consider the KID and make comparisons so an informed decision can be concluded.
Consumers of Structured Products and Structured Deposit Products will be required to confirm that they have read and understood the Key Information Document prior to the application to the ‘Contract’ being processed on a NON-ADVISED basis via our website if a consumer engages without advice. As a Distributor, Best Price FS (BPFS) is required to confirm that the consumer has received, read and understood the KID, so the risk of the ‘contract’ is clear to the purchaser of the plan.
The changes have not been widely communicated in the mainstream media to this point, but we feel it is good practice to inform our clients and potential consumers of the regulatory changes, so they are fully informed of developments. Heavy reading it may be for some, but regulation and consumer protection is ‘the’ major focus of EU wide regulators, as financial crime increases, along with increasing consumer confidence and product understanding.
The Rules of Engagement should enable consumers to understand if they are the focus of a financial crime or scam at worst or be more informed about risk and suitability of a financial product to meet one’s needs, in the main.
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Conclusion
MiFID II and the PRIIPs regulation has created a huge amount of work for the sector, which is expected to improve customer protection and outcomes, where the products can be understood in a more straightforward way by the audience targeted.
If you’d like to get in touch with us about any of the information mentioned above, you can do so here. Alternatively, if you’d like to take a look at our Structured Product Plans for 2018, just click here!