Regulator working on change to MiFID rules for local authorities

The Financial Conduct Authority (FCA) is understood to be working on changes to new rules classifying Local Government Pension Scheme (LGPS) funds as retail investors following lobbying from local government.

In January, the FCA closed its consultation on rules implementing the European Union’s Markets in Financial Instruments Directive II (MiFID II).

The rules would classify councils and their pension funds as retail investors by default, and councils have expressed fears over their ability to opt-up to professional status.

Jeff Houston, head of pensions at the Local Government Association, met with FCA representatives to discuss the issue at the beginning of February.

Following the meeting, he told Room151: “Everyone is trying to achieve the same thing – to make it easy for local authorities operating LGPS funds to opt up.

“The FCA are now thinking about what flexibilities they have under the directive.”

Houston said that the FCA has accepted the argument that councils should be treated differently to private investment firms under the “qualitative test” which is proposed under the new arrangements.

Under the test, the FCA would require investment managers to ensure that any 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”.

The FCA Handbook currently says that “the qualitative test should be performed in relation to the person authorised to carry out transactions on its behalf”.

But Houston said that decisions on investments in local authorities involve officers, financial advisers and councillors.
He said: “The FCA has now accepted that the assessment needs to be against the authority’s decision-making collective.”

A statement from the FCA to Room151 said: “The consultation period closed in early January and we’re aiming to publish our response within the next few months. Until then, however, we’re not able to confirm anything further.”

It is unknown whether the changes being considered by the FCA would also apply to council’s treasury management functions, which have to be assessed separately from pension fund functions.

The LGA, in its response to the consultation, criticised a proposed quantitative test, which would prevent councils with less than £15m in investments from opting up.

It 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.”