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Magazine Issues » September 2014

DISTRIBUTION: International rescue

Statue of libertyEuropean market harmonisation is at the heart of Mifid II, but to work well for asset managers it must harmonise with global regulations. Unfortun ately, it may not do, finds Stefanie Eschenbacher.

Concerns are mounting that European asset managers will be at a disadvantage if the Markets in Financial Instruments Directive (Mifid) II is implemented in its currently proposed form.

Mifid II has been met with strong resistance from asset managers across Europe.

Intended to make markets more efficient, more resilient and transparent, as well as improve investor protection, there are now concerns that it threatens harmonisation of financial market regulation among the G20 member countries.

Arguably the most controversial part of Mifid II is the proposed regulation on how investment research will be paid for; under the current draft proposal, asset managers will no longer be able to use dealing commissions to pay for this research and will instead have to pay for it from their own resources. 

The consultation period closed on August 1 and the European Securities and Markets Authority (Esma) published some of the 584 responses it received, some of which were strongly worded. 

Lucy Bostick, financial services consultant at advisory firm Grant Thornton, says there are concerns Mifid II will put asset managers in Europe at a disadvantage.

“The industry is certainly moving towards G20 harmonisation of financial market regulation,” says Bostick. 

“The question is, does the European Commission believe it is able to set the agenda on this particular issue? Those operating in the US or Asia say …. other jurisdictions may never adopt a similar model.” 

Bostick says there has been a pushback from asset managers all over Europe, but in particular from those in Germany, Austria and Scandinavia. 

Peter Lenardos, analyst at RBC Capital Markets, says the general view among asset managers in Europe is that having to pay separately for investment research will in fact hamper
price discovery. 

Lenardos says he shares the view of asset managers that argue that this regulation would disproportionately impact small- and mid-cap stocks. 

“Regulation, in particular Mifid II and the unbundling of commission, is something that comes up in every presentation I go to,” he says. 

“It seems that most, if not all, of the asset managers I talk to are against the unbundling of dealing commission,” he adds. Bostick says there are concerns that regulation will go so far down the route of transparency that the consequences are counter to the objective of providing competition and a range of products to retail consumers.

“There is a case to be made that bundling of research inside products arguably does lack visibility – transparency and conflict of interest pull in different directions,” she says.

Distribution boxBostick draws a parallel with the Retail Distribution Review (RDR) in the UK and how this cut off a whole group of investors. 

The RDR essentially unbundled the commissions paid to independent financial advisers, replacing them with a charge. 

This resulted in withdrawal of free advice to the least wealthy consumers, and Bostick says there is a risk that this will be felt more widely in Europe if the current Mifid II proposals get the green light. 

Bostick says: “Will investors who are currently purchasing research inside their bundled products chose to pay for it separately? Possibly yes, but if they do not chose to pay for this separately, they are not going to access advice or research at all.” 

A key thrust of Mifid II, of course, is consumer protection.

Richard Phillipson, principal at consultancy Investit, says it may well be that the beneficiaries of the current regime can fight Mifid II off. Phillipson adds: “The industry is in a much better position to lobby for its own protection than millions of individuals who are not even aware of the issues.” 

However,  Phillipson says “if consumer protection wins over producer protection”, then the Mifid II approach may gradually get adopted globally.

“German cars sell in China over local brands, partly because of trusted engineering,” he says. 

“Ucits is also sold well globally, partly because the were well-trusted,” he adds.

Phillipson predicts it will soon transpire how attractive a “no hidden costs of research”-message is.

“We are aware of several firms that have discussed missing out on the difficulty of complying with the regulations on spending client commission by the simple device of spending the firm’s own money,” he says. 

Some asset managers may see Mifid II as an opportunity to market something new and move to an environment of transparency, which is what the European Commission aims to achieve – encouraging consumers that they should pay for advice.

But Bostick says it could result in less research in the market and if there is less competition in the research space, and that the research that will be available could be less sophisticated. 

Anthony Kirby, executive director, regulatory reform and risk management, at consultancy EY, says when looking at regulation, there are commonalities of what is happening in Europe, Asia and  the US. 

Kirby says it is not so much about putting those in Europe at disadvantage, it is that markets are functioning in a different way. 

In the US, the market is relatively unbundled with lots of independent providers of investment research. 

“[Europe] has a much more consolidated model,” he adds. 

“Research is conducted by a few big firms, and therefore the regulators are keen to ensure that there is no conflict of interest emerging between provision of research and then subsequent deal flow on the back of that research,” he concludes.

Kirby says markets worldwide are functioning in different ways and therefore they need different types of regulation.

How Mifid II will turn out will at least in part depend on what Esma, which declined to comment, will do with the feedback it has received on its recent consultation. 

Bostick says Esma might be as sympathetic as they can be to the industry’s views, but the commission may still decide that it will push through with the initial recommendations, regardless of how much resistance there is from the asset management industry. 

The next consultation will be on a higher level – on the wording of the regulation – and Bostick says it is questionable how much the industry can do at this stage.

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