Preparing for MiFID II: consequences and challenges
After intense discussions, the European Parliament adopted the MiFID II directive and regulation on 15 April 2014. By end-2016, all 28 EU member states will be on a level playing field.
The MiFID II package introduces a range of measures which seek to address consequences of MiFID I and issues raised by the financial crisis, such as making financial markets more efficient, resilient and transparent, improving investor protection, as well as addressing commitments made by the G20 in Pittsburgh (2009) on these topics.
This revision will have a significant impact on both business strategy and operational processes implemented by firms.
Today, it’s time for firms to understand the key areas of impact on their business and start to plan for change. Although the challenges for firms to implement change may be significant, firms should also consider the opportunities the reforms offer and focus their activities accordingly
Lessons can be learned from the recent experiences in the UK and Netherlands and by looking at models in the US where similar rules also exist.
It is now time for the industry (credit institutions, investment firms, asset management) to assess first strategic but also operational impacts, by estimating which of their revenue is at risk and how this loss of revenue can be compensated in their value chain.
ESMA is expected to publish a number of Technical Standards that will be necessary to start an effective implementation.
Impacts of MiFID II will vary from one business model to another. The industry may expect the following consequences:
Independent advisors and discretionary asset managers (DAM)
Banning inducements may remove a significant portion of their revenue. This may lead those asset managers to:
- increase advisory/DAM fees transparently charged to clients, as far as the client agrees to pay them
- increase the minimum portfolio size to make advisory/DAM services economically viable, thereby excluding many investors from accessing affordable advice
- promote in-house funds (in the case of DAM), since buying third-party funds would provide limited advantage
- encourage clients to shift to ‘non-independent’ advisory, where inducements are not banned
It is tough times for Independent Financial Advisory (IFAs) who are unable to revise their remuneration model and offset the loss of retrocessions.
Typical distribution models are likely to evolve towards diversification of revenue. Asset platforms could provide other ancillary services that can be charged for separately, such as investment advice (e.g. fund screening and selection, provision of factsheets), transaction management, risk reporting and other types of reporting, and analytical services.
Going beyond a pure model of operating as a logistical hub, platforms will broaden their revenue sources and re-establish their position on the market.
Passively-managed investment products may receive more attention. While they were disregarded by certain advisors because the products did not generate sufficient income to pay retrocessions, such products may now appeal to customers who object to paying advisory fees. New share classes have emerged, as investment managers have had to develop clean share classes that strip out commission and platform fees.
Those firms that go first through awareness and assessment exercises sooner rather than later will find that they are well positioned to plan for the necessary changes to their business model and their operations, create new opportunities to further increase their market position while minimising business disruption and compliance costs.
In fact, while MiFID I was mainly a compliance matter for private banking and many investment firms, MiFID II questions strategy and business models. Times of hefty inducements are definitely gone. Because changing a business model may take months, investment firms need to clearly assess now the impacts given the nature of their activities by asking now the right question and notably:
- Adopt the status of independent advisor or not
- Re-evaluate the fee structure and find innovative solutions
- Increase use of technology as a response to lower fees
- Adapt their product offering
- Assess compliance of the remuneration policy of their staff
What do you need to do now?
Depending where you sit in the MiFID industry and if you are more involved in the financial instruments or execution venue areas, or if you are involved in the distribution of financial products, or even having a significant proprietary activity, the gaps can be multidimensional and a MiFID compliance strategy is necessary.
You need to assess as of now:
- the impact of MiFID II on your distribution model,
- the operational synergies with CRD IV, EMIR and MAD.