MiFID II: Should we have to fix what is not broken?
Barely three years after the entry into force of the Markets in Financial Instruments Directive, the Commission launched a review not only of its ‘financial market regulation’ aspects but also of ‘investor protection’ aspects.
The liberalisation of financial markets and their opening up to competition has led to poorer visibility of financial instrument pricing mechanisms and the development of trading areas lacking transparency. Conversely, the definition and oversight of investment services provided to retail and professional investors alike has led to a marked improvement in assistance provided and knowledge of the client.
The review of this Directive should therefore have focused more on financial market regulation than on investor protection. Nonetheless, the Commission wished to improve the model by seeking in particular to resolve potential conflicts of interest highlighted by CESR on good and poor inducement practices.
As in many sectors, the distribution of financial instruments is partially financed by product providers. Then this distributor provides the product to the investor directly. The distributor therefore provides a service both to the product provider (by seeking investors) and to the investor (by offering access to the product corresponding to his needs and objectives and potentially by providing advice). MiFID I transformed the distribution activity into a solely investor service, obscuring the product ‘placement’ aspect.
As the distributor now exclusively serves the investor, the business model involving remuneration by the producer becomes an obvious source of conflict of interest. How can the distributor, now exclusively a service provider to the client, offer an objective service while being remunerated by product providers?
In response to this question, MiFID I called for transparency on third-party payments. The authorities now condemn this model without truly having assessed the good or bad implementation of MiFID I. An entire ‘investor protection’ section, whose key provisions cover the management, or even suppression, of this conflict of interest, is therefore included in the draft review of the MiFID Directive.
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.