Download impact on citizens` long term savings

26 May 2015
Strategy and Competition Division
Financial Conduct Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Submitted via email to: [email protected]
RE: FCA Discussion Paper on Implementing MiFID II conduct of business and
organisational requirements
Dear Sirs,
BlackRock is pleased to have the opportunity to respond to the FCA Discussion Paper
Implementing MiFID II conduct of business and organisational requirements.
BlackRock is a premier provider of asset management, risk management, and advisory services
to institutional, intermediary, and individual clients worldwide. As of 31 March 2015, the assets
BlackRock manages on behalf of its clients totalled £3.22 trillion across equity, fixed income,
cash management, alternative investment and multi-investment and advisory strategies including
the iShares® exchange traded funds.
BlackRock represents the interests of its clients by acting in every case as their agent. It is from
this perspective that we engage on all matters of public policy. BlackRock supports policy
changes and regulatory reform globally where it increases transparency, protects investors,
facilitates responsible growth of capital markets and, based on thorough cost-benefit analysis,
preserves consumer choice.
Key points
Rebating for DIMs
BlackRock supports a ban on rebating for discretionary investment managers (“DIMs”), in order
to create a level playing field of consistent regulatory standards across the market. However, an
exception should be made in respect of multi managers that invest rebates into fund of funds, to
the benefit of the underlying investor.
Remuneration
Given the existing FCA rules and the complexity for groups negotiating the myriad remuneration
obligations, we advocate waiting for certainty on the EU legislative landscape before any crosscutting standards are considered in the UK.
Record keeping
While BlackRock’s policy is generally to not take advantage of the existing exemption from
telephone taping requirements, we support maintaining the exemption. We believe that
maintaining the exemption may help mitigate the considerable cost of the new requirements.
Cost disclosure
We are supportive of increased transparency and helping investors improve their decisionmaking. We believe that investors will benefit most from the provision of comprehensive and
comparable information that allows them to understand the money spent in obtaining the risk
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adjusted performance the fund achieves: i.e. cost versus benefit. We would draw the FCA’s
attention to our detailed comments on this topic earlier this year.
Complex products
We believe both industry and consumers would benefit from a statement from the FCA for a
proportionate application of the appropriateness test for alternative investment funds which have
been designed to be sold to retail investors in the UK, such as NURS, investment trusts and
charitable common investment funds.
Conclusion
We appreciate the opportunity to address and comment on the issues raised by the Discussion
Paper and will continue to work with the FCA on any specific issues.
We would welcome any further discussion on any of the points that we have raised.
Yours faithfully,
Martin Parkes
Government Relations & Public Policy
[email protected]
+44 20 7743 4646
Michaela Leti Messina
Legal & Compliance
[email protected]
+44 20 7743 4254
Responses to questions
Section 2:
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Answers to specific questions
Applying MiFID II rules to insurance-based investment products and pensions
Q1: Do you agree that, in principle, we should look to ensure a consistent regulatory
regime between insurance-based investment and pension products, and MiFID II
investments? If not, please explain why.
We support a level playing field in the treatment of MiFID II investments and substitutable
products such as insurance-based investment and pension products.
Q2: Assuming IDD does not replicate MiFID II in terms of changes to suitability
assessments and client reporting, we plan to apply minor changes where we currently
read-across MiFID II rules to insurance-based investments and pensions. Do you agree
with this approach? If not, please explain why not.
We agree.
Q3: Assuming IDD does not replicate MiFID II in terms of the appropriateness test,
should we look to apply MiFID II’s appropriateness test to sales of insurance-based
investments and pensions?
We support a read across to insurance based investment products so that they are subject to a
similar appropriateness test, to ensure a level playing field and avoid arbitrage between similar
products sold within or without insurance wrappers.
Q4: If we were to apply MiFID II’s appropriateness test to insurance-based investments,
what factors or criteria do you consider make an insurance-based investment and
pension product complex?
No comment.
Q5: Assuming IDD does not replicate MiFID II with regard to product governance and
staff remuneration provisions, to what extent should we look to apply MiFID II’s
obligations to insurance-based investments and pensions? What would be the
implications of doing this, or of not doing it?
As in our answer to question 3 we support a level playing field for all substitutable investment
products.
Q6: What should our approach be to incorporating the new requirements for structured
deposits into our conduct of business rules?
No comment.
Section 4: Receipt of commissions
Q7. Should we develop rules to ban rebating of third party payments altogether by DIM
firms to clients?
We support a ban on rebating for DIM firms, in order to create a level playing field across the
market and apply consistent regulatory standards. However, outside the retail investor
environment we would support an exception for multi managers who invest rebates into fund of
funds structures, as the benefit of the rebate is passed on to the underlying investor through the
investment of the rebate into the fund. In principle this is similar to a unit rebating.
Q8. Should we develop rules to ban cash rebating of third party payments by DIM firms
to clients, but allow other types of rebating?
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We would not recommend banning both cash rebates and unit rebates by DIM firms to clients
as this is inconsistent with the current platform rules in the UK which permit unit rebating.
Inconsistency may lead to confusion in the market.
Section 5: Professional client business – client categorisation and treatment of local
public authorities and municipalities
Q9: Do you agree with our approach to re-categorise local authorities undertaking nonMiFID business as retail clients, with the option to opt up to elective professional client
status? Do you agree that that the opt-up criteria for local authorities should follow our
existing approach with respect to non-MiFID business?
Overall we agree, but note that the treatment of local authority pension schemes needs to be
clarified. These investors are regulated as pension funds, typically invest on the basis of third
party advice and other than the fact of their local authority sponsor would be eligible for
treatment as a per se professional client. Given the existing governance controls in place to
ensure informed decision making, we would recommend treating local government pension
schemes as professional clients.
Q10: Do you agree with the approach set out in option A and the possibility of providing
guidance on the qualitative test? If so, please explain what sort of guidance you think
would be useful. Please provide any evidence to support your views.
If Option A is to be adopted we would welcome further clarification on how Net Turnover is
measured for a public sector client.
Q11: Do you agree with the approach set out in option B? Please provide your
comments and any evidence to support your views.
If Option B is to be adopted would welcome further clarification on whether the portfolio of
£20m is measured as that with the specific manager, or at the client level / total client portfolio.
Q12: Do you agree with the approach set out in option C? Please provide your
comments and any evidence to support your views.
If Option C is adopted raising the opt-up threshold to that of a large undertaking may be a high
bar for some local authorities who may have less than 250 average number of employees. It
does, however, provide a more practical solution for firms than that of dealing frequency used
for elective professional clients.
Q13: Do you consider that MiFID II’s standard of independent advice is different, in
practice, to the UK’s RDR standard? If so, please explain why.
The MiFID definition of independent advice is a key driver as to whether an advisory firm can
retain commissions. As RDR goes much further than MiFID II in this respect we recommend
maintaining the UK’s definition of independent advice unless there incidental changes are
required by MiFID.
Q14: How should we implement MiFID II’s requirement to develop an independence
standard for advice on shares, bonds and derivatives?
No comment.
Q15: Should we continue to include insurance-based investments and pensions within
our definition of ‘retail investment product’?
Yes, as mentioned above we support the existence of a level playing field and the inclusion of
insurance-based investments and pensions within our definition of ‘retail investment product’.
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Q16: Should we include structured deposits within our definition of ‘retail investment
product’?
Yes.
Section 7: Applying MiFID II’s remuneration requirements for sales staff and advisers to
non-MiFID firms
Q17: Do you think we should explore applying MiFID II’s remuneration standards for
sales staff and advisors across to non-MiFID II business?
The remuneration rules are already complex, and future EU changes (both legislative and
guidance) will introduce further complexity. Any extensions in scope would introduce
unnecessary complexity, especially for groups which include firms subject to a number of
existing provisions on remuneration.
High level obligations in the current FCA Remuneration Codes are applicable on a firm-wide
basis, whilst the existing systems and controls requirements would necessitate group-wide
application.
FCA rules already contain an obligation (in SYSC 10) to identify and prevent conflicts of
interest. This would de facto capture any conflicts which could arise through remuneration
structures.
Given the existing FCA rules and the complexity for groups of having to negotiate the myriad of
remuneration obligations, we advocate the need to await certainty on the future EU legislative
landscape before any cross-cutting standards could be considered across the UK financial
services industry. This will avoid further unwarranted complexity, and ensure future application
is appropriate and addresses any sector where additional requirements are considered
necessary.
Section 8: Recording of telephone conversations and electronic
communications
Q18. Do you agree that Article 3 firms should be subject to a regime that is identical to
the regime for non-Article 3 firms? What impact would this have for these firms?
No comment.
Q19. What other approaches to recording do you suggest we could take that would meet
the objectives of the MiFID II requirement?
No comment.
Q20: Do you agree that the two recording exemptions for discretionary investment
managers should be removed?
In addition to the comments made by the Investment Association we have the following
comments.
While BlackRock is currently exempt from some of the record keeping requirements under the
existing exemptions, we do already record calls and retain relevant data, as is common practice
among many DIMs. However, we are in favour of maintaining the exemption under the MiFID II
regime, which gives an asset manager a choice to record its telephone lines and, if they are
recorded, to decide how long to retain records.
The likely cost of both the installation and retention of recording solutions are significant. We list
out below a number of points for consideration to comply with the requirements for additional
recording and technological build though as we are still in the process of scoping the exact
requirements we cannot be specific as to actual costs at this stage:
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A significant increase to existing retention period may be required for voice recording, as well
as upgrades to the technology to capture the substantial volume of data needed to meet the
requirements. The increase in retention period, technology requirements, greater population,
and volumes of data captured will cause the initial and ongoing expense to be significant.
The increased volume of data that will be retained under the voice recording requirement
combined with current technological limitations is counter to the FCAs goal of “quicker and easier
dispute resolution [8.9]”. This is because retrieving all relevant communications, particularly
voice, from such a large data set will take a significant amount of time, and may not be achieved
with reasonable certainty for the following reasons:
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Unlike email, Instant Message and other text based forms of electronic communications,
the technology does not presently exist to quickly and efficiently search, identify and
retrieve relevant voice communications.
At present voice recording systems track minimal metadata (date, time, call duration, phone
numbers) most of which has limited utility when trying to identify and reassemble all of the
relevant communications (which may take place over an extended period of time
depending on how relevancy is determined) related to specific transactions.
Significant expense and time will be spent to identify even a portion of the relevant
communications.
Q21. Do you agree that discretionary investment managers should be required to comply
with Article 16(7) of MiFID II?
We support comments made by the Investment Association in their response.
Section 9: Cost and charges disclosure
Q22: Are there any technical challenges firms are likely to face in meeting these
disclosure requirements that you feel we might be able to help address? If so, what
solutions do you suggest to overcome these challenges?
We are supportive of increased transparency and helping investors improve their decisionmaking. We believe that that the key purpose of recent regulatory changes is to empower
investors by providing them with comprehensive and comparable information which allows
them to understand the money spent in obtaining the risk adjusted performance the fund
achieves: i.e. cost versus benefit. This should then allow investors to identify the most suitable
asset allocation and product choice for their investment needs.
We have set out more detailed points for consideration on cost and charges disclosure in our
response to the recent Department of Work and Pensions and Financial Conduct Authority joint
Call for Evidence on UK pension fund cost disclosure. These comments can be accessed at:
http://www.blackrock.com/corporate/en-gb/literature/publication/transaction-costs-disclosureimproving-transaprency-workplace-pensions-dwp-fca-050615.pdf and are also intended to
apply to the process of MiFID cost disclosure.
Q23: Should we investigate developing a standardised format for disclosing costs and
charges for both point-of-sale and post-sale disclosures?
We believe that meaningful comparability of costs will not be possible without the development
of a standard format for disclosing costs.
The process of delivering meaningful transaction costs data to investors will also rely on the
collection of large sets of standardised trading history which allow the development of reliable
and consistent models. This is likely to be an iterative process as the industry collectively
develops consistent quantitative methods which can provide reliable guide points to assist in
the prediction of risk and return. We recommend focus on those costs which are relatively
stable and predictable, e.g. commissions and, to a lesser extent, spreads as opposed to other
elements which can be highly volatile and thereby statistically less representative.
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Section 10: MiFID II’s revised inducement standards
Q 24: Do you agree that we should maintain domestic consistency and look to apply
MiFID II’s inducement standards for independent advice also to restricted advice?
We agree that the FCA should maintain domestic consistency and also apply the MiFID II
inducements standards for independent advice to restricted advice. Certain clients, such as
private banks, offer both independent and restricted services and/or discretionary and restricted
advice services. In these cases it is likely to be impractical to hold separate events for different
individuals/teams within the same client based on their categorisation. It would also likely be
impractical to apply and implement through control frameworks two different regulatory
standards.
Section 11: Complex and non-complex products and application of the
appropriateness test
While the FCA has not requested feedback on any specific points raised in this chapter, we
believe both industry and consumers would benefit from a statement from the FCA for a
proportionate application of the appropriateness test for alternative investment funds which are
have been designed to be sold to retail investors in the UK – in particular NURS, investment
trust and common investment funds for charities. While NURS products have been developed
for the mainstream retail market, the investment trusts represent one of the oldest retail
investment vehicles in the world and today is a cornerstone of the UK retail investment
market. We believe there are good reasons to avoid applying a one size fits all approach to all
instruments classified as complex MiFID II particularly as these funds have been subject to
extensive product regulation and retail disclosure standards in the UK for many years, as well
as enhanced disclosure under PRIIPs from the end of December 2016. We believe it is
important to address this issue to minimise potential concerns from investors as to why funds
specifically designed for the retail market have been reclassified as “complex”.
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