The European Commission (EC) released in October 2011 its proposal to amend and extend the Markets in Financial Instrument Directive (MiFID), referred to as MIFID II. After intense discussions between the Commission, Council and Parliament (the “Trialogue”), the revised Directive was adopted by the European Parliament on 15 April 2014.
While primary objectives of the initial directive (MiFID I) were to increase the competition, improve investor protection and EU passporting, 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 on these topics.
|Extended scope of products and activities||
Products and activities
Additional financial instruments will be brought into the scope of MiFID II, such as:
Insurance-based Investment products
Insurance-based Investment products will remain regulated under the current version of IMD (Insurance Mediation Directive) that will be updated after new parliament is in place.
Nevertheless, MiFID II introduces specific rules on conflict of interest on Insurance-based Investment products and give the possibility to EU Member States to introduce inducement restrictions on those products.
|Prohibited payment and retention of inducements (MiFID article 24)||
Out of the whole MiFID package, a single article has sent shockwaves throughout the industry: article 24, which prohibits the common practice of retrocessions (inducements) for discretionary asset management and ‘independent’ advice.
Article 24 creates significant difference between MiFID I and MiFID II: while the first generated compliance costs, the second puts significant revenue at risk. In other words, MiFID I was mainly a compliance matter for the financial industry, but MiFID II poses challenges on revenue and therefore on organisations strategy and business model.
By end-2016, all 28 EU member states will be on a level playing field, unless certain countries go for more stringent rules (gold plating). In the meantime, national regulators throughout Europe have already taken tough measures to either ban trailer fees or strictly limit them. A number of countries, including the United Kingdom, Italy, Netherlands and Germany, already have requirements that go beyond MiFID II.
|Enhanced investor protection||
A series of measures will reinforce investor protection, including the following:
|Creation of a new execution venue - the OTF||
|Stricter governance requirements and more accountability on Senior Management||
|Product intervention & strengthened supervision with stricter sanctions||
|Harmonised regime for third country firms||
|Extended market transparency and transaction reporting • Transparency requirements will be extended to additional instruments, such as bonds and derivatives.||
The following key milestones are expected in the next coming months:
Though MIFID II will not be transposed and applied before end 2016, impacts will be significant especially with the ban of inducements. Certain countries in Europe (e.g. UK, IT, NL or DE) have already implemented similar inducement measures in their national legislation. Other EU countries either followed or will follow this trend. 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:
Banning inducements may remove a significant portion of their revenue. This may lead those asset managers to:
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:
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:
Deloitte experts in regulatory matters offer assistance on specific areas such as regulatory awareness, impact assessment for your organisation, definition of tailored solution for efficient implementation production and in particular in management of the MiFID II regulatory developments.
We trust this information is of assistance and remain at your disposal for any further questions.