Agenda item - Markets in Financial Instruments Directive II (MiFID II)

To provide Committee Members with a presentation on the current status of MiFID II for Members to approve that the Fund follows the procedures in the FCA Handbook, when published, to be recognised as a Professional Investor

(a) That the Committee notes the potential impact on investment strategy of becoming a retail client with effect from 3rd January 2018.

(b) That the Committee agrees to the commencement of applications for elected professional client status with all relevant institutions, as soon as the FCA handbook is approved, in order to ensure it can continue to implement an effective investment strategy.

(c) In electing for professional client status, the committee acknowledges and agrees to forgo the protections available to retail clients.

(d) That the Committee agrees to approve delegated responsibility to the Chief Executive for the purposes of completing the applications and determining the basis of the application as either full or single service.

Mr Harkin gave a brief update on MIFID II and then handed over to Mr Buckland to go through the presentation as training for new members, and to clarify it for existing members. He then proceeded to talk through the details of the slides.

Mr Buckland highlighted the key points including informing them that the implementation of the MIFID II directive has been pushed back to January 2018, and that it will, on paper, increase the protection to local authorities as they will now be classed as “Retail clients” rather than “Professional Clients”. However, the “Retail classification” will mean that local authorities will not be able to access complex investment products anymore. There will be a process to “opt-up” to “Professional Client” status, although the details of the process are yet to be confirmed. Concerns were raised about how the Clwyd Fund could prove the criteria required to opt up to be a professional client, and what the impact would be.

Mr Buckland noted that MIFID II also has implications for pooling as some local authorities within the same pool may be classed as professional clients whereas others will be retail clients. It was noted that Jeff Houston, of the LGA, has raised the issue that the LGPS could not invest in infrastructure as retail clients which is one of the aims of pooling.

Mr Harkin said that there will be more detailed investment training coming up regarding investments but if MIFID II was implemented in the way it was originally proposed, there could be serious impacts on funds which could cause the fire sale of assets e.g. retail clients would not be able to invest in some of the alternative assets (listed as real assets and private markets on page 15 of the slides).

Councillor Bateman asked whether Brexit would have an impact on MIFID II. Mr Harkin said it could have future implications but whilst the UK is still in the European Union, MIFID II will be in place. Councillor Bateman then asked if this was built into UK law; Mr Harkin said that as MIFID II would be coming into effect in January 2018, the UK would still be in the European Union and so would still be impacted regardless.

It is expected that the FCA will respond back on the consultation by end of June and the hope is that the opt-up procedure will be simplified and that the Clwyd Fund will be in a good position to do this.

Mr Latham said that the LGA have been working with fund managers to enable the local authorities to have a standard set of documents, so whilst all LGPS will have to complete them, they will be consistent documents. The recommendation is that Flintshire County Council in its role as administering authority to the Clwyd Pension Fund opts up to professional status and that the Chief Executive be delegated the authority to take forward the application process with fund managers and advisers to “opt up” the Pension Fund.

Councillor Bateman asked whether MIFID II would definitely go ahead. Mr Buckland said he had not heard anything that would make him think otherwise. Mr Latham made a point that this has been pushed back repeatedly but Mr Buckland believes that this is to ensure that everything is done correctly.

Mrs McWilliam asked the question that even though Funds may opt-up, was there still a risk that investment managers still see the Funds as a risk to them and continue to treat Funds as retail clients e.g. walk away as it may not be worth the increased compliance burden. Mr Buckland said yes, there could be some boutique investment managers that may take that view.

RESOLVED

(a) That the Committee notes the potential impact on investment strategy of becoming a retail client with effect from 3rd January 2018.

(b) That the Committee agrees to the commencement of applications for elected professional client status with all relevant institutions, as soon as the FCA handbook is approved, in order to ensure it can continue to implement an effective investment strategy.

(c) In electing for professional client status, the committee acknowledges and agrees to forgo the protections available to retail clients.

(d) That the Committee agrees to approve delegated responsibility to the Chief Executive for the purposes of completing the applications and determining the basis of the application as either full or single service.