Like so many European buy-side and sell-side firms – and by extension many investors globally - in the coming months asset managers across the region will need to navigate an array of changes and challenges brought about by the advent of MiFID II/MiFIR in 2017.
Individual managers have different business models and organisational structures, so the impacts of these changes will vary from firm to firm. These can be organised into a number of themes:
• Organisation and management. Including considerations of governance and the role of the management bodies, information security, product approvals, recording of telephone conversations and electronic communications.
• Enhanced investor protection. These requirements ensure products are designed to meet client needs and that their suitability is regularly reviewed and communicated to investors. The rules around providing clear information to investors with specific considerations around costs/cost of advice include an effective ban on commissions and non-monetary benefits except where it can be clearly be shown to benefit the investor. This is similar to RDR in the UK and the ban on commissions in certain other markets in Europe.
• Market infrastructure. This covers the regulation of trading venues and data reporting services. As with MiFID I, this will probably impact trading costs, the number of trading venues and the liquidity at these venues. There are also new provisions to promote the SME market across Europe.
• Market transparency. Obligations on trading venues and investment firms to report trades with data requirements materially increased over existing reporting requirements (market data from trading venues will be made available free after 15 minutes).
• Competent authorities. Changes to the roles and responsibilities of competent regulatory authorities in each EU market and consideration of the impact on entities outside the EU providing investment services into the EU.
The next 18 months will be very busy. While financial institutions are well practised in dealing with regulatory change, MiFID II is arguably one of the most challenging regulations to deal with, given its breadth and complexity – and, importantly, its interplay with other regulations. Its implementation also runs parallel to regulatory changes such as Ucits V, Common Reporting Standard, Solvency II reporting and for UK-based firms the Senior Manager Regime. Beyond the impact requirements, there are transitional issues to work through, such as the transition to a commission-free market for investment products.
The impacts of MiFID II will play out over a number of years, with firms focused initially on compliance and later around adaption.
Who benefits? Interestingly, the term ‘benefits’ has not come up very often in discussions around MiFID II. The current focus is on impact assessments, planning, budgeting and mobilising projects. There should be clear benefits for investors – more transparency around costs, clearer documentation and a greater assurance that products are aligned to their needs. Regulators will also benefit from access to more information. While it may be hard to identify short-term benefits that mitigate the costs for asset managers, some may be able to tap longer term opportunities, for example if markets do develop as hoped in respect of SME investments.
Paul North is Head of Product Management, EMEA at BNY Mellon
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute investment advice, or any other business, tax or legal advice, and should not be relied upon as such.
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