As the industry awaits the detailed MiFID II rules on consumer protection – introducing new product governance requirements – firms have already kicked off their own implementation projects to be ready and compliant when the rules become applicable on January 3, 2017.
But will compliance and delivery of the best possible products in the cheapest possible way be achievable without genuine co-operation between those manufacturing investment funds, and those distributing and selling them?
IMPACT ON DISTRIBUTORS OF FUNDS
In the future, retail products that are not Ucits will be qualified as complex, regardless of their actual composition. This change triggers the need for distributors to know which products are ‘complex’ before making them available, and assess appropriateness for retail clients wanting to buy them without advice. This may mean that selling products deemed complex becomes more difficult and less attractive, unless a simple and streamlined process can be established to assess appropriateness – possibly resulting in the creation of systems with straightforward built-in tests.
Distributors will also have to adequately disclose product and service costs of all instruments to their customers at the point of sale, including prospective transaction costs arising within the portfolio underlying the investment product. Whilst fund charges are currently detailed in the Key Investor Information Documents for Ucits funds, these do not cover transaction costs within the portfolio and before the new disclosure requirements from the Packaged Retail and Insurance-based Investment Products Regulation kick in for Ucits funds in late 2019, information on transaction costs will not be publicly available. Therefore the distributors will have to seek this information from the fund manager to be able to provide investors with the single all-inclusive cost figure.
IMPACT ON FUND MANAGERS
At the same time, the investment fund managers who are helping investors achieve their financial ambitions will be obliged to exercise active oversight over the supply chain. So above and beyond the obligations for distributors testing appropriateness or suitability for the end clients, fund managers will also have to ensure that products designed for a specific target market are actually sold into that market. Such detailed control and oversight has never been required by EU law before and is a new challenge for fund managers who, generally speaking, do not have access to all the information about the end clients. This means that intermediaries will have to feed back specific information about the customers to the fund manager.
While meeting all these legal requirements is a challenge in the domestic market, this becomes an even greater test when products are distributed cross-border – particularly where in practice, distribution models vary so significantly across EU jurisdictions. The MiFID rules do not offer any solutions, so it is down to those involved in product manufacturing and selling to collaborate much more closely; fund managers and distributors have started creating lists of what they will need to know from each other and are considering what they are willing to give to counterparties in what format. But these views do not match yet.
In order to avoid diminishing the return for retail investors, the data exchange procedures must not be too costly. Therefore, it is key to establish cross-industry collaboration with smooth processes so that end investors can truly benefit from enhanced investor protection rules.
Florian van Megen is Senior adviser, regulatory affairs, investment funds and tax, The Investment Association
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