Political and regulatory news
Issue 5 - 12 Dec 2011
EU to change share dealing rules
The European Commission has revised its position on execution-only share dealing.
As previously reported in Political and Regulatory News (see previous article) the European Commission has proposed changes to the way in which retail investors can buy and sell shares. Encouragingly, some of the worst fears raised by its earlier discussion of this agenda are now unlikely to arise.
When the Commission initially sought views on possible reforms there were suggestions that it might ban unadvised dealing (so-called ‘execution only’ transactions). This suggestion received a robust and critical response from the AIC and others in the UK market – including retail investors. Any suggestion that investors would have to take financial advice and would not be allowed to rely on their own research and resources to decide whether or not they wanted to buy or sell shares was strongly rejected. The Commission has recognised that advice should not be required and its proposals do not take this route.
The reforms now on the table will oblige execution-only service providers to assess whether or not certain shares incorporate characteristics which make them ‘complex’. Where they do the broker (or other service provider) will potentially have to warn a purchaser of that stock that they are dealing in a complex product. Whether or not such a warning is necessary will depend on the experience of the consumer. This creates another obligation for the broker to make an assessment of the purchaser’s experience. This changes the current position for most investment companies as the current rules mean that where their shares trade on a regulated market (such as the London Stock Exchange) they are automatically deemed to be non-complex. This means that a warning never has to be provided. The new approach is expected to mean that these companies will have to be assessed and, if they are considered ‘complex’ in accordance with the established criteria, a warning may have to be given to some investors.
It is unlikely that the criteria used to determine ‘complexity’ will mean that any investment company is complex – so no risk warnings will have to be provided. The systems issues which non-advised dealing services will have to address to accommodate these changes are not expected to raise any unique issues for investment companies.
The rule changes mean that new systems will have to be implemented to sell investment company shares, but the AIC has been reassured that this is not significantly problematic. In the first instance, investment company shares are not the only securities which will be affected by the changes. For example, similar reforms are also being applied to transactions in UCITS funds. Also, we have been reassured that the new rules will not ban any investor from making a purchase of an investment company share.
Overall the Commission’s intentions do not create fundamental problems although they do reflect a worrying trend for intervention in markets where no consumer problems have emerged. Non-advised share dealing operates effectively and has provided significant consumer benefits through efficient processing of transactions and low dealing prices. We would be concerned if this service were to be disrupted with little regulatory justification. The AIC will continue to engage with this on-going agenda to guard against such problems arising.
Next article: AIC proposes new-style annual reports
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