How MiFID II impacts on the LGPS

The implementation of MiFID II (Markets in Financial Instruments Directive) reclassifies local and public authorities as retail investors from 3rd January 2018.

Such a reclassification would severely limit both the financial instruments and providers available to authorities for pensions purposes which could be both costly and reduce the potential for returns.

Authorities may elect for a return to professional status. However the Board did not believe the opt up tests proposed in the 2016 FCA consultation properly reflected the constitutions and decision making processes of authorities and could lead to confusion amongst providers.

Opting up to professional status

The Board is currently working with the LGA, the Investment Association and other industry bodies to develop a straightforward and consistent opt up process to enable all LGPS funds to be assessed prior to the 3rd January deadline.

LGPS administering authorities should be considering if they will require a committee minute to enable officers to complete the opt up process in a timely manner. The committee should be made aware of the retail protections they will be forgoing, a summary of which can be downloaded here

Further information will be placed on this page once it is available.

Implementation – Policy Statement II

On 3rd July the FCA published their final policy statement and amendments to the Handbook with regard to the implementation of MiFID II.

Links to documents

Summary of changes to opt up criteria and process (see the highlights document for context)

  1. 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
  2. Governance and advice arrangements supporting those individuals can inform and contribute to the firm’s assessment
  3. Adherence to CIPFA Codes or undertaking other relevant training or qualifications may assist in demonstrating knowledge and expertise as part of the qualitative test
  4. 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
  5. Compliance with the LGPS Regulations, including taking proper advice, will contribute to the assessment of knowledge and expertise of the local authority client when making decisions
  6. Retain the 10 transactions on average per quarter test as one of the four available criteria for enabling a local authority body to opt up
  7. 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
  8. Changed the portfolio size threshold to £10m
  9. Proposed transitional arrangements that would allow investment firms to re-assess the categorisation of local authority clients between the 3 July 2017 implementation deadline and 3 January 2018 are being taken forward