MiFID II is looming and preparations are underway. Room151 asked two experts to share their efforts to get ready for the big day.
Forms and portals
GO Shared Services was formed back in 2012 as a support service for finance and HR for four authorities: the councils of Cheltenham Borough, Cotswold, Forest of Dean and West Oxfordshire Districts. The treasury team are very much focused on the fundamental changes that MiFID II will bring to local authorities. From the 3rd January 2018, the regulated financial services will treat all four of the local authorities as “retail” clients unless we choose to opt up to “professional” status, an option available on the proviso we can prove that we meet certain criteria to the financial institutions.
So the big question is what have we been doing to prepare for this?
The first decision made in the summer was to be part of the CIPFA/PS Link Support MiFID II portal with the understanding that we would save on administration time by not having to complete dozens of status assessment forms for each authority. This however is reliant upon the financial institutions in question also opting to use the portal. As such, the portal has now been loaded for each authority with all the financial institutions that we believe will need opting to professional status and now await the next stage.
In addition we have also briefed the relevant members of each authority with the treasury process of opting up to “professional” status. This is supported with a rationale of why we are doing this in the first place, specifically so that we can carry on investing in bonds, certificates of deposit, and pooled funds (including money market funds) from the 3rd January 2018. Members informed to date have accepted this and are fully aware of the ongoing process.
Currently we have received a small number of requests direct, mainly from treasury advisors and brokers requiring us to complete their forms. All forms have asked the three quantitative test questions; that each portfolio size must exceed £10m (including cash deposits), that we have completed at least ten transactions over a quarter period, and whether the person authorised to carry out the transactions have at least one year’s experience. For the four authorities concerned this will be fairly straightforward to cover (I hope) and we are optimistic for a smooth transition.
Finally, as well as using the CIPFA/PS Link Support we are also looking at putting a link on each of council’s website with all the documents and information attached so that any financial institution with relationships with us can freely see the data.
All in all there is plenty of work still to be done and the deadline is looming too quickly.
Andrew Sherbourne is senior accounting technician at GO Shared Services.
Experience so far suggests the priorities are planning, training, and evidence
MiFID II will take effect early next year. This wide-ranging legislation is directed primarily at financial service providers, traders in financial instruments and other “investment intermediaries”. It is designed to improve governance in terms of:
- How the sector trades with different client types
- Reporting requirements
- Remuneration and fee structures
- Conflicts of interest, independence issues and complaints.
For local government and their pension schemes, the key issue is client categorisation. From 3 January 2018, irrespective of size or structure all will be classed as retail clients but given the option of applying for professional client status through “opting-up”.
Why does this matter? Simply put, retail categorisation will significantly reduce the range of investment options available to local authorities because the products are considered too complex for such clients to make an informed judgement about. The London CIV, for example, has already advised pension schemes that it will be unable to do business with retail clients going forward.
In a world where council budgets and pension fund membership are shrinking, investment returns have assumed increased importance so most councils feel they have little alternative but to “opt up”. This involves making separate applications to each individual financial institution we do business with—in total over 60 organisations for our tri-borough team. Assessment is then based on both qualitative and quantitative tests as shown below:
Key steps are:
- Completing questionnaires, checklists and proformas
- Providing supporting evidence and responding to queries
- Formally waiving the protections and compensation that we will lose after opting-up is achieved.
Like other local authorities we are now well into the process. Compiling information to support applications takes time, particularly given the lack of standardisation of forms from the treasury sector. In contrast the pensions sector is drawing heavily on the standard documentation promoted by the Scheme Advisory Board (see here).
Specific considerations that we have needed to address have included:
- Clarity about whose experience and knowledge is being assessed; individual officers or the team as a whole?
- Role of elected members and the local pensions board
- Remit of fund managers and independent advisers.
On a more generic level, three key issues have emerged:
As well as an overall project plan you need a system in place to track and manage each individual application. Be proactive, firms have huge numbers of applications to deal with and if you aren’t chasing up outstanding correspondence or dealing promptly with queries you could end up at the back of the queue.
Secondly, training is a key issue. Ongoing training programmes for pension boards is a requirement of the Pension Regulator’s Code of Practice, but does not automatically extend to other elected members or staff not studying for professional exams. Even if training has been offered, is there is a record of who attended, when it was and what it covered?
Thirdly, evidence needs to be provided to support opt-in applications. Minutes of meetings, copies of governance protocols and exam certificates can be photocopied easily enough, but day-to day-transaction authorisations and monitoring/review procedures are not always in practice evidenced as well as we might like.
Finally, MiFiD II is not just a matter for officers. Members can play their part too by approving project plans and reviewing progress to date, attending any training offered and approving policy or governance documents.
Peter Worth is interim tri-borough director of pensions and treasury at Westminster City Council.
