MiFID II: Changing the distribution landscape
Who would have predicted Sir Callum McCarthy’s Gleneagles speech in 2006 would have led to the most radical shake up of retail distribution in the UK, and eight years later largely motivate and inform MiFID II from a retail distribution perspective?
It was one of those ‘I was there’ moments - an epiphany for many - as he made a compelling argument against the inevitable conflicts of commission-led product supply with client suitability. It was of course particularly relevant in the UK, where the Independent Financial Adviser (IFA) channel accounted for a significantly higher proportion of sales than most other European markets, but the principles have now been recognised and enshrined at EU level.
MiFID II covers a huge range of topics beyond distribution. It has been referred to as the ‘paella Directive’ as it took a long time to prepare, has a bit of everything in it and involved too many chef - but ultimately it should taste good.
It requires a thorough read to identify the articles that will influence the way retail savings and investment products are delivered to European investors. In particular, if you read nothing else in MiFID II, read Article 24. Hidden away amongst dark pools, commodity derivatives and high frequency trading, the so-called ‘Jack Bauer’ clause has the potential to create the same degree of disruption to the European distribution landscape as the character from the TV series with the same numerical reference.
MiFID II is open to member state interpretation, and we are already seeing variations on the theme. The UK’s Retail Distribution Review (RDR) provides an extreme example, featuring a complete ban on inducements and very prescriptive competency qualifications intended to professionalise advice.
Another challenge for MiFID II was coping with a wide variety of distribution models across Europe, a situation that it struggles to reflect. It adopts the simplistic view that manufacturers make and distributors sell, and fails to recognise the concept of distribution as a service facilitating access, such as with B2B platforms. In Spain, the concept of distribution is separate from investment advice, while in Italy distribution services are classified as ’placement’ in an agency capacity to the manufacturers. MiFID II also strays into territory covered by existing Directives, e.g. UCITS and AIFMD.
Performance issue 15 - September 2014
Performance is a triannual digest, dedicated to investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.