Navigating MiFID II
Strategic decisions for investment managers
MiFID II will have significant and wide-ranging implications for the operations, conduct and governance of a wide range of financial services firms in Europe. In particular, it raises many important strategic questions for the investment management industry.
The paper seeks to answer the following questions, drawing on discussions with 15 firms and two independent external experts.
- What are the key challenges and implications of MiFID II?
- How can investment managers gain a competitive advantage?
- How much progress have investment managers made in implementation?
- Products: The paper suggests that some firms will launch more “non-complex” products relative to “complex”, mainly as a result of the re-definition of complex products under MiFD II and the stricter sales rules that apply to them.
- Distribution: In a bid to shift the “balance of power” away from distributors and towards investment managers, investment managers are likely to want multiple distribution channels which serve specific client segments, which in turn may drive an increase in direct to client (D2C) offerings and investment in digital services.
- Markets: The way investment managers interact with the market will change. We expect that the number of Systematic Internalisers (SIs) will increase and that there will be a reduction in OTC trading. While there is now a clearer picture of how the transparency regime will be calibrated, it may be some time before the impact of the rules on fixed income liquidity become clear.
- Investment research: The MiFID II rules on investment research, if implemented in their current form, will make the price of research more transparent. This is likely to lead to investment managers increasing their scrutiny of the quality of research and decreasing their research budgets, resulting in more specialised offerings by research providers.
- Transaction reporting: In implementing MiFID II, the investment managers interviewed indicated that they will no longer choose to delegate their reporting to brokers, with most choosing to report in-house. However, as this may not be a cost-effective option for some, there is likely to be demand for a third party reporting solution, but whether an effective solution will emerge is still to be seen.
- Costs and pricing: MiFID II will increase costs and reduce margins, as the increased costs are unlikely to be passed on to investors due to competition between firms and the increased disclosure requirements under MiFID II making charges more transparent for investors.
- Operating model: Many respondents believe MiFID II could make the EU less attractive as a location for investment management activities, particularly with regard to the market structure, transparency and investment research rules.
The paper identifies three main sources of potential competitive advantage under MiFID II:
- Firms should consider where MiFID II disproportionately affects them compared to peers. For example, larger investment managers will be better able to absorb the increased costs of MiFID II. Possible options are market consolidation, or changing product offerings and / or investment strategy.
- MiFID II will give rise to a significant amount of new data. Market-leading firms will seek to use the increased data to their competitive advantage and ensure their data infrastructure is flexible and efficient.
- MiFID II will drive changes in the distribution landscape. Investment managers should be continually looking to innovate, recognising that online, mobile and social media are becoming primary channels for consumers.