Five years on from the Brexit referendum: is legislative change coming to financial advice?
This article first appeared in the Financial Reporter magazine on the 28th June 2021
On 23rd June 2016, the UK voted to leave the European Union. While even five years later the debate on the pros and cons of Brexit continues across the UK, for most advisers little has changed in their day-to-day jobs or the running of their firms as a result of the referendum. Is that about to change.
So much has changed in the five years since the Brexit vote, but in terms of direct impact on the financial advice profession, so far the referendum has barely left a mark. Many advisers expected as much. In the run-up to the Brexit referendum, intelliflo ran a survey asking advisers what impact they thought a leave vote would have on their business. Over a third (37%) said it would have no impact, one in five (22%) thought it would be positive and one in six (17%) negative. A quarter (24%) were unsure (1).
However, as time moved on, advisers became more concerned about the potential effect of Brexit. In December 2019, with the UK preparing to leave the EU and enter a transition period, another intelliflo adviser poll placed regulation and Brexit, as the top two challenges firms expected to face during 2020 (2).
It’s not surprising that regulation topped the list of challenges. At our 2019 Change the Game conference, advisers told us the second Markets in Financial Instruments Directive (MiFID II), was causing them a major headache due to its multiple mandatory requirements (3). Our report last year with the lang cat, Better. Stronger. Faster. How do we rebuild centralised investment propositions from here?, found that MIFID II continued to create an administrative burden for firms, adding considerable extra effort to the ongoing maintenance of Centralised Investment Propositions (4).
The report highlighted that processes that might have been working well pre-MiFID, suddenly became much harder. The regulatory requirement to obtain client approval every time the portfolio needs to be changed or rebalanced creates an inevitable overhead, particularly for firms running bulk model portfolios. One adviser commented: “[The problem of] delayed responses means that we are running a range of models. [It] also potentially impacts upon client outcomes.”
The cost and charges disclosure was equally unpopular among advisers, with over 40% of firms spending at least “a lot” of time on the task. While we know that technology can automate much of this work to reduce administration and resource costs, that’s not the only issue. The paper emphasised that many advisers don’t feel that this information is valued by clients, with a typical comment being: "FCA mandate paperwork that in reality most clients will not read.”
So is Brexit an opportunity to get rid of, or at least amend, some of the more burdensome and least valued rules advisers deal with? That’s certainly the hope of PIMFA, the Personal Investment Management & Financial Advice Association. In its Future of Advice paper, it calls on the FCA to seize Brexit as a chance to improve financial services regulation (5):
The UK’s departure from the EU provides a significant opportunity for the Regulator to review the architecture of the Handbook, consider the scope of regulation and how to make it work better for consumers.
Similarly, The Investing and Saving Alliance (TISA) has advocated regulatory change post-Brexit, arguing that RDR and MiFID II have worsened the advice gap. It is championing extending financial guidance to reduce the legislative burden on advisers while encouraging greater engagement with people’s personal finances (6).
And there is hope that these appeals are being heard. The Taskforce for Innovation, Growth and Regulatory Reform, a group of MPs led by Iain Duncan Smith set up to review how the UK can reshape its approach to regulation, has reported its recommendations to the Prime Minister, calling Brexit a “one-off opportunity to set out a bold new UK regulatory framework.” Looking at our sector, its report says “Financial services are a key UK strength, but the tangled web of EU-derived regulation needs a thorough overhaul if we are to build on that strength” (7).
However, speaking at TheCityUK’s annual conference in June, Katharine Braddick, the Treasury's director general for financial services, rejected the idea of a ‘bonfire of regulation’ – mainly because the UK was heavily involved in drafting much of the EU’s financial services legislation. But she is reported by Financial News as suggesting there will be divergence from some EU rules, explaining (8)
There is no point in diverging for the sake of it, for ideology. You diverge because there is a material economic benefit.Katharine Braddick
The FCA is currently consulting the research and best execution reporting requirements of MiFID II as part of its work considering reforms to capital markets and the UK’s regulatory regime. It has also said that it intends to consult on 10% drop notifications, having suspended this rule until the end of 2021.9 These consultations may open the door to further change that more directly reduces the compliance burden on advisers.
Five years on from the Brexit referendum, it feels like positive change might be coming to financial advice legislation. How long we have to wait for implementation though, is anyone’s guess.