LGA response to the Financial Conduct Authority’s (FCA) policy statement, setting out final rules for their implementation of the Markets in Financial Instruments Directive II (MiFID II).
We welcome the publication of the Financial Conduct Authority’s (FCA) policy statement, setting out final rules for their implementation of the Markets in Financial Instruments Directive II (MiFID II). In particular, we welcome the recognition of the unique nature of decision making within authorities in the conducting of treasury and pension fund investment management activities. This is good news for local government and follows extensive lobbying from councils and the LGA.
The LGA was never convinced of the benefits of a move to retail client status and we expressed our concerns to the FCA about the potential costs, loss of value and restrictions to investment that could follow. We do recognise that a more straightforward process for ‘opting up’ to elected professional status is a significant step in the right direction.
Following the FCA’s announcement we welcome the improvements to the opt up process detailed below, which have been drawn up in response to concerns highlighted by the LGA and councils:
- The recognition by FCA that a public sector client can be assessed as a ‘collective’.
‘..firms may take a collective view of the expertise, experience and knowledge of committee members, taking into account any assistance from authority officers and external advisers where it contributes to the expertise, experience and knowledge of those making the decisions’ [page 67]
- The reduction in amount required to meet the first quantitative criteria from £15 million to £10 million.
‘We have changed the portfolio size threshold to £10m. This follows further data and case studies provided by local authorities, Department for Communities and Local Government (DCLG) new data, and wider CP responses’ [page 71]
- The clarification that experienced Treasury managers should meet the third quantitative criteria.
‘We do not interpret the term ‘financial sector’ in a limited way for the purposes of COBS 3.5.3BR(2)(b)(ii), and firms may reasonably assess that a professional treasury manager has worked in the financial sector for at least one year, if their role provides knowledge of the provision of services envisaged.’ [page 70]
- The addition of a fourth quantitative criteria which acknowledges the legislative status of the client under LGPS regulation.
‘Therefore, our rules will add a fourth criterion that the client is subject to the LGPS Regulation for their pension administration business. Local authorities must continue to meet the size requirement, as well as one of the two previous criteria or the new fourth criterion’ [page 68]
The LGA will continue to work with the Local Government Pension Scheme (LGPS) Advisory Board, the Chartered Institute of Public Finance and Accountancy (CIPFA) and financial service representative bodies in order to develop standardised opt up processes for both pensions and treasury management, and information templates to help ensure that all authorities can be assessed prior to the January change of status.
How MiFID II impacts on local authorities
The implementation of MiFID II (Markets in Financial Instruments Directive) reclassifies local and public authorities as retail investors from 3 January 2018.
Such a reclassification would severely limit both the financial instruments and providers available to authorities for both pensions and treasury management purposes which could be both costly and reduce the potential for returns.
Authorities may elect for a return to professional status. However, we did not believe the opt up tests proposed in the FCA consultation properly reflected the constitutions and decision making processes of authorities and could lead to confusion amongst providers.