26 June 2017


We previously reported on the prospect of non-UCITS retail schemes (NURS) being designated as automatically "complex" under MiFID II and the implications for distribution models where such funds are currently being sold on an execution-only or non-advised basis.

The relevant provisions are in Article 25 of MiFID II which states that it will not be necessary for distributors to carry out an appropriateness assessment where, in addition to certain other criteria, the transaction relates to a prescribed set of financial instruments (the ‘per se non-complex’ instruments) or ‘other non-complex’ instruments (being those that satisfy all the criteria set out in Article 57 of the MiFID II Delegated Regulation (PDF).

The first specified ‘per se non-complex’ instrument is: “shares admitted to trading on a regulated market or on an equivalent third-country market or on a MTF, where those are shares in companies, and excluding shares in non-UCITS collective investment undertakings and shares that embed a derivative”.

What’s new?

This month ESMA updated its MiFID II Investor Protection Q&A (PDF) and the eagle-eyed among you will have noticed a new question asking whether non-UCITS collective investment undertakings that are explicitly excluded under Article 25 of MiFID II should nevertheless be assessed against the Article 57 criteria for other non-complex instruments.

As part of its answer ESMA has seemingly clarified that non-UCITS collective investment undertakings should be deemed to be per se complex products and therefore cannot be assessed against the Article 57 criteria. This is in contrast with the most recent published position of the FCA in its third MiFID II consultation paper (PDF), where it confirmed that: “Our view of the MiFID II provisions on complex and non complex financial instruments is that, as in MiFID, Non UCITS Retail Schemes (NURS) and investment trusts are neither automatically non complex nor automatically complex. They need to be assessed against the criteria in the MiFID II delegated regulation. When firms apply these criteria, they should adopt a cautious approach if there is any doubt as to whether a financial instrument is non complex.”

So how could this affect our distribution model?

The FCA’s policy statement in respect of CP16/29 is due to be published during June 2017.

If the FCA confirms its previous view (that NURS are neither automatically non complex nor automatically complex) then it will still be possible to distribute NURS on an execution-only or non-advised basis without carrying out an appropriateness assessment provided the fund meets the Article 57 criteria.

However, if the FCA changes its stance and deems NURS to be automatically complex (in line with ESMA’s apparent position), firms will need to revisit existing models that involve the distribution of NURS funds to retail investors on an execution-only or non-advised basis (i.e. without the provision of a personal recommendation by an adviser or exercise of discretion by an investment manager). Where this is the case the distributor will need to carry out an appropriateness assessment that will involve asking the investor to provide information regarding the investor’s knowledge and expertise and warning the client if such information is not provided or the firm considers, based on the information provided, that the fund is not appropriate.

There remains a question as to whether online distributors would actually have the appetite or ability to comply with such requirements as the FCA has made it clear that simply collecting information is insufficient in itself and distributors will be required to make an assessment (based on such information) of the investor's knowledge and experience before a 'complex' product can be sold. This would also need to extend to warning the investor where the distributor considers (based on the information received) that the fund is not appropriate for the investor or that it is not in a position to determine appropriateness, where the investor has not provided sufficient information – and then making a judgement as to whether to go ahead if asked to do so by the investor notwithstanding the warning. The distributor would also need to retain related records for a period of at least five years.

What should firms do?

  • Keep an eye out for the final MiFID II policy statement from the FCA, due at the end of June.
  • If the FCA changes its stance and states that NURS funds should be deemed as per se complex investments it will be necessary to revisit existing distribution channels (and engage with distributors) to assess whether these will still be viable. Where NURS funds are distributed on an advised or discretionary managed basis (involving personal recommendations or the exercise of discretion) the impact should be fairly minimal. However, it is likely there will be a significant impact for non-advised (or execution-only) distribution models and firms will want to consider their options (including, potentially, the possibility of converting their existing NURS funds to UCITS where appropriate).
  • If the FCA’s stance does not change then firms will need to assess the (non-advised) distribution of their NURS funds against the Article 57 criteria for other non-complex instruments - which introduces two new criteria as against the existing standards. Firms should also take note of FCA’s stated view that firms should adopt a cautious approach if there is any doubt as to whether a financial instrument is non complex.” Distributors may expect the product manufacturer to assess whether a NURS is complex or non-complex. Manufacturers will therefore need to determine the most appropriate way to communicate their assessment to distributors, especially where the product is sold through multiple channels.
  • Firms distributing MiFID instruments on an execution-only or non-advised basis should ensure their processes for assessing appropriateness comply with new COBS 10A rules and are “fit for purpose” in terms of the type of customer, the type of product (including assessing appropriateness of a package of products as a whole), how the assessment questions are framed, the distribution channel, etc and their record keeping processes.

How can Burges Salmon help?

Our investment funds team has vast experience in dealing with a wide range of fund-related matters. If you would like to discuss any of the points raised in this feature or any funds-related matters please contact Tom Dunn or Anna Davis.

Key contact

Tom Dunn

Tom Dunn Partner

  • Head of Regulated Funds and Financial Services
  • Regulated Funds
  • Financial Services

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