What does MiFid II really mean for Long-Only Asset Management?
Standfirst: MiFID II is coming and if asset managers think they’ll get by with relatively little change, they could be in for a rude awakening.
MiFID II – Europe’s answer to the financial crisis – is on the way in January 2018 and it’s got plenty of people in the financial services industry rattled especially asset managers. So as the deadline looms ever larger what will it mean and is there anything managers can do now to prepare themselves?
The biggest thing which has got financial services worried, unsurprisingly, is the impact on their wallets. Consultancy Firm Opimas believes it will cost the financial services sector €2.5bn to comply with the legislation. The bulk of that will be borne by the banks – who this is primarily aimed at – but the biggest adjustment could come for asset managers, many of whom will be encountering these regulations for the first time.
A big change is the change to the rules surrounding charges for research which may have a substantial impact on how asset managers work with their clients. Under the new rules, managers will have to either pay for research out of their own pockets or come to an arrangement with clients in which research costs are covered.
The aim is to ensure asset managers only do the exact amount of research that they need to and nothing more, but the most likely impact will be that managers will reduce the research they do which in turn could affect fund performance.
Recording and reporting
Managers will need to comply with more onerous reporting and recording rules. As things stand, they must report transactions in financial instruments admitted to trading on EU regulated managers and any tradable assets such as derivatives. The reporting rules are expanding under MIFID II and will widen the range to include financial instruments traded on all EU trading venues not just EU regulated markets.
Managers will also have to subject to more burdensome recording requirements which will include any telephone conversations which are likely to lead to a portfolio transaction.
In addition to all this there will be more stringent product governance which will place greater requirements on managers to identify target markets, carry out regular rules and ensure they are compatible.
Marketing and communications
If you hope this is just a problem for the legal and compliance teams, then think again. Part of MiFID II is the drive towards transparency in communications. Marketing teams will have to disclose comprehensive and complicated details about risk and return, product awareness and charges to customers. Doing so is far from straightforward. Ticking all the required boxes will involve a huge amount of information and while a bulky report might satisfy the regulators it may not be the best way to deal with clients and their expectations. Avoiding jargon and communicating with clients in an open and transparent way will not only keep the regulators happy but will also manage your relationship with your clients more effectively.
MiFID II is one of Europe’s most ambitious and, certainly, contentious pieces of legislation and it will have an enormous impact. As its implementation approaches companies will have to take action to ensure they are not only set up for compliance, but can also maintain relationships with their clients.