Trustees need to be aware that investment managers will soon be re-categorising their clients and this could affect the level of protection trustees are afforded under the Financial Services Authority (FSA) rules.
Investment firms throughout Europe will become subject to the Markets in Financial Instruments Directive (MiFID) from 1 November 2007. This requires them to categorise each client as an eligible counterparty, a professional client or a retail client. A client's categorisation dictates the number of rules the investment firm is required to comply with in acting on the client's behalf and, therefore, the degree of protection the client will receive.
Aren´t we already categorised?
Investment firms in the UK are already required to classify their clients but the European categories are not exactly aligned to the FSA current definitions and UK firms will therefore need to re-categorise many of their clients before 1 November 2007.
The trustees of most large pension schemes are currently classified as "intermediate customers", although a few may be "private customers". Under the new regime, pension schemes and their managers will usually be "professional clients" for investment management and advisory services and "eligible counterparties" for dealing and agency services, in each case regardless of the size of the pension fund.
What do we need to do?
Depending on the details, investment firms may not be required to notify existing clients of their new categorisations. Trustees may, however, find that they are inundated with such documentation relatively soon. In either case, trustees should be aware that they may request re-categorisation as a type of client that benefits from a higher degree of protection from the category to which they have been assigned, but it is their responsibility (rather than the investment firm's) to do so. They should also be aware, however, that the FSA has advised investment firms that they are not required to provide services to all categories of client, so trustees may also find it difficult in practice to negotiate treatment as retail clients. This ability to seek greater protection also applies for any new investment services contracts a client enters into from 1 November 2007.
So what are the differences?
Arguably, the greatest difference is that between professional client and eligible counterparty status because very few of the rules which govern the way in which firms deal with other types of clients apply with respect to eligible counterparties. For example, an investment firm will not have to provide best execution to an eligible counterparty. While the rules applicable to firms dealing with retail and professional clients are not so different, firms will have more discretion about what information they provide to professional clients.
Is there a wider impact?
MiFID has a significant impact on the rules which European investment firms are required to comply with and the FSA rules are being amended substantially to accommodate it. Two of the changes trustees may be particularly aware of are the fact that firms are no longer able to allow professional clients to opt out of receiving best execution or having their cash held in accordance with the client money rules. Investment firms will therefore be obliged to provide these protections for retail and professional clients from 1 November 2007. Many of the changes in the rules will cause firms to amend their investment management agreements and terms of business, to seek consents to new policies.