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UK regulator softens MiFID II 'opt up' rules for public funds

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The UK regulator has introduced a workaround for the country’s local government pension scheme (LGPS) to avoid European rules that could have forced some funds into a potential fire sale of assets.

The Financial Conduct Authority (FCA) yesterday published a 1,068-page policy document regarding the implementation of the Markets in Financial Instruments Directive (MiFID II). In it, the watchdog added wording to the rules making it easier for LGPS schemes to be “opted up” to professional investor status. 

MiFID II requires all local authorities to be treated as retail clients by their asset managers, which would severely restrict their ability to invest in illiquid asset classes. While it was introduced to protect the treasury management functions of local governments across Europe, it raised concerns within the LGPS that it would hamper efforts to pool assets and boost infrastructure spending.

After lobbying from the LGPS Advisory Board, the Local Government Association (LGA) and the Investment Association, the FCA made changes to the “quantitative” and “qualitative” tests for clients to be classified as professional.

On the quantitative test, the FCA introduced a criterion allowing all LGPS administering authorities to be opted up if they run at least £10m (€11.4m) – even the smallest LGPS funds have more than £200m in assets.

Asset managers must also assess the “expertise, experience, and knowledge” of their clients in order to opt them up to professional status. MiFID II refers to an individual person, but the FCA’s policy statement made it clear that “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”.

The regulator added: “Given different governance arrangements, we cannot be prescriptive, but we would stress the importance of firms exercising judgement and ensuring that they understand the arrangements of the local authority and the clear purpose of this test. It remains a test of the individual, or respectively the individuals who are ultimately making the investment decisions, but governance and advice arrangements supporting those individuals can inform and contribute to the firm’s assessment.”

The implementation phase

The LGPS Advisory Board welcomed the FCA’s decisions as a “significant step in the right direction”.

Despite the concessions to LGPS funds, there remains a significant administration burden for the pension funds and asset managers in the coming months before MiFID II is implemented on 1 January.

“We are less than six months away from these changes coming into force and we need to make sure we are focused.”

Joe Dabrowski, PLSA

Jeff Houston, the LGA’s head of pensions, told IPE the focus of the various parties involved would immediately switch to implementation. The LGPS and LGA have already begun working with the Investment Association and other bodies, including representatives of the private equity and infrastructure sectors, to put together a questionnaire for asset managers to use when opting out LGPS clients.

Houston said that, while the FCA’s change to the quantitative test had essentially made it a “tick box” exercise, asset managers still needed to be satisfied that each local authority client had the necessary collective expertise to be a professional client, and understood the implications of such a move.

Nick Buckland, senior investment consultant in JLT Employee Benefits’ LGPS team, said: “What we are conscious of is there is still a significant amount of administration involved, especially for pension funds with lots of alternatives managers.”

Traditional managers were looking at the assessment framework, Buckland added, but there were “some concerns” about smaller, boutique managers keeping a consistent approach.

Joe Dabrowski, head of investment and governance at the Pensions and Lifetime Savings Association (PLSA), said: “The LGA has done a really good job of explaining the way the LGPS is set up and run, and the FCA has listened. The concessions and adjustments they’ve made will go quite a long way making the problems we had go away.”

The PLSA will feed in to the questionnaire discussions, Dabrowski said. He added: “We are less than six months away from these changes coming into force and we need to make sure we are focused. Six months for pension funds is not very long – time is of the essence.”

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

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