• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

Regulator urged to drop MiFID II portfolio threshold

0
  • by Colin Marrs
  • in Treasury
  • — 12 Jan, 2017
Photo: © European Parliament - Audiovisual Unit

Photo: © European Parliament – Audiovisual Unit

Proposals which could make it impossible for half of local authorities to be classified as professional investors should be dropped, according to local government finance representatives.

Last week, the Financial Conduct Authority (FCA) closed its consultation on new rules implementing the European Union’s Markets in Financial Instruments Directive II (MiFID II).

The proposals would automatically categorise local authorities as retail investors, unless they meet a set of criteria including a financial instrument portfolio of more than £15m.

In its response to the consultation, the Local Government Association said: “The consultation states that the typical portfolio size for a smaller local authority is £10m, yet the analysis carried out by the FCA itself in the consultation concludes that the £15m cut off would exclude about half of all UK local authorities.”

It complained that no evidence-based reason has been given by the FCA for the £15m cap, when the original EU directive was based on a figure of €500,000.

“As is acknowledged in the consultation, a portfolio size of €500,000 would not be a significant bar to UK local authorities,” the LGA said.

The “unnecessary” reclassification of local authorities as retail investors could also hit service provision, the LGA claimed.

“UK local authorities rely on the income they generate from their investments as part of their annual budgeting process,” it said.

“If this income is decreased through lack of access to investment opportunities, shortfalls will have to be met by reductions elsewhere in council budgets — and this is at a time when council budgets are already under severe pressure from major reductions in core funding.”

Michael Quicke, chief executive of investment manager CCLA, said: “We believe that MiFID II was mistaken to categorise all local authorities as retail clients by default.

“This is because we do not believe that local authorities are any less able to manage their affairs than any other similar sized institution.

“As a result, we believe that the FCA should exercise its discretion to, as far as possible, give local authorities the same freedoms and protections as any other similar sized institution. As a consequence, we think that the requirements proposed are unduly restrictive.”

Sean Nolan, director of local government at the Chartered Institute of Public Finance and Accountancy, said the £15m limit may not be a reliable measure of professional conduct” and called for a “principles based approach” that would be “in keeping with the prudential approach taken in both the statutory framework and the CIPFA codes of practice.”

Risk

The FCA threshold proposals could also result in councils becoming exposed to greater financial risk, according to David Green, client advisor at treasury adviser Arlingclose.

He said: “The protections afforded will not extend to exemption from bail-in, governed by the Bank Recovery and Resolution Directive, or to protection under the Financial Services Compensation Scheme, governed by the Deposit Guarantee Schemes Directive.

“It is odd that these three directives are not harmonised with each other. As it stands, the EU is saying that there are local authorities that are too small and too inexperienced to access professional financial markets at the same time as being too large and too knowledgeable to deserve protection from bank failures.”

Quicke also voiced concerns over another hurdle — that professional status would only be granted if a local authority has carried out significant transactions at a frequency of 10 per quarter over the previous four quarters.

“The minimum number of transactions suggested is much higher than  appropriate, given that local authorities generally hold the relevant  assets to maturity or for the long-term, rather than to trade,” he said.

In its response to the consultation, AFME, which represents Europe’s wholesale financial markets, called on the FCA to park the proposals, saying: “AFME members operate their businesses as far as possible on an internationally consistent basis and therefore would prefer local authorities to be treated consistently across Europe, so we would in the first instance suggest that FCA refrains from exercising the power MiFID grants it to make UK-specific rules.”

Sense

Green said there may be some limited benefits of being a retail client, including a requirement on firms to ensure that the financial products they offer are suitable for a local authority, and that they fully understand their implications.

“This should limit some of the practices criticised by MPs, and indeed which are the EU’s main reason for making the changes to MiFID.”

However, implementing the new rules would result in more paperwork for local authorities and the firms servicing their finance needs, he said.

Green called on the FCA to “see sense” and allow as many local authorities as possible the choice of opting-up to be professional clients.

Last week, The Pensions and Lifetime Savings Association (PLSA) claimed in its response that the proposed rules threaten local authority pension funds’ ability to invest in infrastructure.

It said the majority of infrastructure investment firms are structured to explicitly exclude retail investors.

Graham Vidler, director of external affairs at the PLSA, said: “With LGPS funds investing billions in infrastructure right now, and at a time when the government is calling for greater infrastructure investment by pension funds, these proposals are counterintuitive.”

The consultation closed on 4 January, with the FCA expected to publish a  policy statement by the second quarter of the year.

MiFID II is set to come into effect on 3 January 2018.

Get the Room151 Newsletter

Share

You may also like...

  • Room151 panel backs unitary councils and devolution 8 Feb, 2021
  • Extra finance promised by the government receives a broad welcome 12 Jan, 2021
  • Mark Horsfield: Responding to the new risk landscape Mark Horsfield: Responding to the new risk landscape 16 Dec, 2014
  • Forest of Dean quits £50m retail deal Forest of Dean quits £50m retail deal 7 Nov, 2019

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 13 hours ago

    ESG presents LGPS with investment innovation opportunities: Sponsored interview: Dawn Turner of Quinbrook talks about the opportunities in environmental, social and governance issues for LGPS. LGPS has the opportunity to innovate in its investment… dlvr.it/RtyK3Y pic.twitter.com/swAksOAXYQ

    Room151 13 hours ago

    The opportunity in the UK renewables and grid support market as UK looks to ‘build back better’: Sponsored article: Mark Burrows and Rosalind Smith-Maxwell examine infrastructure opportunities emerging from efforts to meet the UK’s net zero target.… dlvr.it/RtyJyz pic.twitter.com/BQCYQZQpi2

    Room151 16 hours ago

    McCloud consultation ends with “greater security” for LGPS members: The government’s consultation on LGPS, Catherine McFadyen argues, closes with a decision which avoids forcing members to make choices that could be “financially disadvantageous”. But… dlvr.it/RtxhL6

    Room151 2 days ago

    Could 2021 be less eventful for LGPS, please?: Barry McKay looks at McCloud, the 95k exit cap, employer risk and investments to see what to expect for LGPS in the coming year. On one hand, 2020 was in[...] dlvr.it/RtslFd pic.twitter.com/H4debuPmGG

    Room151 2 days ago

    Fixed income investing can help target both financial and sustainability targets: Sponsored article: Adam Whiteley offers a guide to the ESG benefits of investing in fixed income. Investing responsibly in fixed income can be crucial for local government… dlvr.it/Rtsl9h pic.twitter.com/khJL1xNfGh

    Room151 3 days ago

    Going beyond the standard metrics for climate change: Sponsored article: With climate change an investment imperative and an imminent reporting requirement, Ritesh Bamania argues UK pension schemes should look beyond today’s standard metrics. With… dlvr.it/RtnpLS pic.twitter.com/6ABaFHyS9I

    Room151 4 days ago

    LGPS webinar: Governance the key to TCFD implementation: LGPS funds have been warned that governance is it at the here of Whitehall plans to impose a new climate reporting regime on pension funds. In January the Department for[...] dlvr.it/RtjwNq pic.twitter.com/YMiMdmRyzU

    Room151 4 days ago

    LGPS webinar: Central bank management of bond purchasing could affect all asset classes: When the government debt caused by the pandemic is eventually tackled there may be a huge impact on assets of all classes, according to a leading investment expert… dlvr.it/RtjwJx pic.twitter.com/7v8K5vMYHo

    Room151 4 days ago

    #LGPS readers...what to do about #bonds? room151.co.uk/blogs/lgps-web… @BrunelPP 's new CIO, David Vickers tackles a problematic area #centralbanks #assetallocation #fixedincome pic.twitter.com/yUJr0azbKv

    Room151 4 days ago

    LGPS Challenges: Balancing Realpolitik and responsible investment: Elizabeth M. Carey warns of the perils of an ESG echo chamber as countries outside the West continue to invest in fossil fuels. Anyone working with the LGPS probably feels[...] dlvr.it/RtjMpq pic.twitter.com/MykIYxuYri

    Room151 1 week ago

    How can local government ‘build back better’?: Beverley Gower-Jones looks at the options for driving small business entrepreneurship in clean technologies. Innovation is essential for local authorities to save money and reduce emissions, it is the… dlvr.it/RtT3nS pic.twitter.com/bSMB6OG70t

    Room151 1 week ago

    Helen Randall: Spelthorne report places spotlight on ‘controls’: Fresh criticism of Spelthorne Council raises the question of what “good” controls look like when negotiating a property deal. Spelthorne Council’s continuing debacle over property… dlvr.it/RtSPhy pic.twitter.com/9uCOJgBcH6

    Room151 1 week ago

    Step-out strategies: Hitting the sweet spot between liquidity and ultra-short duration: Sponsored article: Jemma Clee describes how an ultra-short duration strategy can help local authorities enhance returns. Despite the expectation of a low, and… dlvr.it/RtSPZb pic.twitter.com/pdXPpv5lcN

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story News round-up: Surrey Heath spend £100m on property, public contracts crackdown, Havering JV, pothole bill surges
  • Next story 2017: Priorities and concerns for the year ahead

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.