Linchpin IFM Ltd response to FCA consultation 16/29 on the subject of MIFID2

Linchpin IFM Ltd response to FCA consultation 16/29 on the subject of MIFID2

Created by William Bourne, Director of Linchpin IFM (“Linchpin”). Linchpin provides independent advisory services to institutions on investments and governance. William personally acts as Chair of the Local Pension Boards for LPFA and Lancashire Pension Funds, and as independent advisor to two other LGPS funds.

Date: 21st December 2016 Contact details: 07876 350650



Please note that we have not responded to all questions, but only those where we have a clear view which we hope will add value to your consultation process.


Question 1

We understand the principle of ensuring that retail investors are suitably protected. We are concerned that the extension of MIFID conduct rules to non MIFID business will have a significant adverse impact in some cases unless careful thought is given to the requirements for opting up to professional or qualified status. One example is local authority pension funds, who will be forced to use higher cost retail products unless they are able to opt up. This directly contradicts the aims of the Government’s pooling project, where one of the four stated criteria is lower costs.


Question 2

No comment


Question 3

In principle, we are supportive, with the important caveat that there would be an adverse impact if local authorities in their capacity as administrators of local pension funds were unable to opt up. A suggestion is made in our answer to Question 17.


Question 4

We do not think this should be extended to professional clients. Regulation has a habit of creating distortions, and markets work best when these do not exist. There therefore has to be a good reason for extending MIFID2. We understand the reasons for giving non-professional investors protection, but we believe the principle of ‘caveat emptor’ or ‘buyer beware’ should operate where both parties are or consider themselves to be professional.


Questions 5 – 15

No comment


Question 16

Yes, we believe that £15mn is broadly appropriate.


Question 17

We understand the intentions behind the extension of the scope to non MIFID scope proposals, but we have substantial concerns about the practical implications on LGPS pension funds in particular, and whether it is necessary. We appreciate that your paragraph 4.24 attempts to separate these larger and more sophisticated entities from local council or parish treasury functions, but we do not believe that the proposed criteria will achieve your aim.


Under the Government’s proposals to pool the asset management, all local authorities in England and Wales are pooling their pension assets into (currently) eight pools. These will be FCA authorised, and the administering authorities will, at least according to the published criteria for pooling, no longer have any discretion over the implementation of investment strategy for 95% of the pension portfolios. Each LGPS pension fund will by April 2018 be handing over the majority of its assets to be managed by a single FCA authorised entity (ie one of the eight pools). At a general level, after pooling has taken place, we therefore cannot see that local authority pension funds will need any further protection. We are seriously concerned that there will be adverse impacts from i) restricting the universe of investments ii)forcing LGPS funds to invest in higher cost retail products. We therefore believe this particular proposal is counter-productive.


Secondly, we believe that your proposed qualitative criteria (paragraph 4.13) will as they stand not be easy for LGPS pension funds to meet. The proposed quantitative test (b) will be inapplicable for them post pooling, when their only discretionary decisions will be at the asset allocation level (for example, a decision to shift from bonds to equities). At worst, it could cause them to increase their level of trading simply in order to meet this criterion. That would be completely out of line with best investment practice.


LGPS administering authorities will therefore be thrown back on quantitative test (c). Given that by definition members of most Section 101 Committees who have the delegated responsibility for the funds are local councillors, they are unlikely jointly to meet this criterion either.


We would therefore suggest that test (c) is amended to read:

"The client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged, or formally receives independent advice from a person or firm who can demonstrate a similar or greater level of knowledge and experience."


This has the advantage of being in line with the recently published guidance on LGPS investment strategy statements, which focuses on the need for administering authorities to take advice.


Questions 18-66

No comment