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'Antediluvian' wealth models: 13 Mifid II birthday messages

On the one-year anniversary of Mifid II, we summarise what the experts make of the legislation.

One-year anniversary 

The implementation of Mifid II legislation exactly one year ago has had a monumental impact on the way financial service firms operate. 

But how successful have the stringent rules been in addressing the wide range of issues regulators sought to address? 

With Mifid II still very much in its infancy, 13 experts look back over the legislation's first year, highlighting the good and the bad.  

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One-year anniversary 

The implementation of Mifid II legislation exactly one year ago has had a monumental impact on the way financial service firms operate. 

But how successful have the stringent rules been in addressing the wide range of issues regulators sought to address? 

With Mifid II still very much in its infancy, 13 experts look back over the legislation's first year, highlighting the good and the bad.  

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Charlotte Ransom, CEO and founder, Netwealth 

Antediluvian wealth models  

'For too long clients of wealth managers have experienced returns eaten away by excessive fees and below par performance. The cosy, uncompetitive world of wealth management hinders people’s ability to accumulate assets because of its antediluvian business model and equally archaic approach to client service.

'Mifid II’s requirements for improved fee disclosure, due from January 3, should be a transformational moment as traditional wealth managers are forced to provide the eye-watering truth of their all-in-fees.

'For the roughly five million people in Britain with between £100,000 and £5 million to invest, this will be the game changer as they plan for their own and their family’s futures.

'With the help of Mifid II, 2019 will be the year where clients will know what they are being charged and can act accordingly.'

 

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Chris Turnbull, co-founder, Electronic Research Interchange (ERIC)

FCA inaction 

'With the Mifid II regulation now reaching its first birthday, it is interesting to look back at a year that many thought would bring substantial change for the asset management industry.

'With regards to the unbundling of research, asset managers were expected to become more transparent and reveal both their research costs and how they are paying for them. But many pre-Mifid II behaviours, such as deciding on the value of research after consuming it, have not changed.

'It is easy to see this as a disappointment and ultimately a signal of Mifid II's struggles, but things are starting to move in the right direction. In hindsight it may have been naïve to expect quick-fire change from an industry that has operated in a certain way for decades. A mitigating factor has been that the FCA has not been active enough in enforcing penalties and facilitating the transition.'

 

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Andrew Watson, head of regulatory change, JHC 

New fee gripes 

'A year on from Mifid II, our clients seem to be settling into their new obligations, with aspects such as transaction reporting running smoothly – a massive achievement. However, the issue of costs and charges disclosure is causing concern among wealth managers, as this January will be the first time they are obligated to report.

'For many years, wealth managers have been transparent about the fees they apply. However, they will now need to provide a personalised disclosure to the end investor, including the costs and charges applied within investment products.

'This will inevitably result in questions from retail customers who have never had oversight of these charges and might be unhappy to see 'new' fees. For the first time investors will see charges expressed as a percentage of their portfolio and may increasingly look for wealth managers to justify high costs and charges during times of lower performance.

'Savvy wealth managers can use this as an opportunity to engage with their clients and explain the value of the investment portfolios they offer. Additionally, having the right technology will be key for helping them to give their clients a transparent and personalised view of their costs and charges.'

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Michael Horan, head of trading, BNY Mellon Pershing

Unintended fixed income consquences 

'Forced transparency of the fixed income market has actually made transparency worse because the requirements around trade reporting are too ambitious. Having to report in 15 minutes for liquid bonds and 48 hours for illiquid bonds is too short a window and means risk positions are shown to the market too early, forcing banks to widen their spread and avoid committing as much as previously.

'What we feared would happen, has happened, primarily because of the intense nature of the regulation. We knew that Mifid II was going to be a challenge for bonds as it was forcing transparency and electronification in a market already experiencing liquidity issues.

'It is not as evolved or developed as the equity market, so the unintended consequence of Mifid II has come home to roost: it was always going to be too much too soon.'

 

 

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Alex Dorfmann, senior product manager, SIX 

Quick-fix approaches still prevail 

'One year on from the advent of Mifid II, firms are gradually getting to grips with the challenging processes involved. But with the next potential stumbling block of ex-post costs and charges reporting requirements and the implementation of the European Feedback Template (EFT) coming into play for the first time this January, there’s scarcely time for firms to draw breath.

'Perhaps due to the sheer volume of regulatory changes, a quick-fix approach still prevails in the industry.

'Firms need to take a step back and prioritise putting processes in place to begin shifting towards a more consistent, harmonised approach to compliance.

'As the trend of digital transformation grows, getting the right technology in place is a big part of this, as is mindset. Firms need to start looking at regulatory requirements more holistically rather than addressing them in silo.'

 

 

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Daniel Carpenter, head of regulation, Meritsoft

Brexit blow 

'It is hard to believe that it is nearly one year since Mifid II came into force. If adjusting to the new landscape wasn’t enough, banks and brokers have faced fresh challenges in the form of Brexit with the deadlock in negotiations risking new operational headaches. Just as firms have set up their web of contracts for research payments, the possibility of a hard-Brexit risks throwing them back to square one.

'With a Brexit up in the air, European based brokers may need to review their research contracts/agreements, not to mention fee structures, tax implications, budgets and invoicing activities. All this leads to a mountain of contractual paperwork and implementation of new processes and procedures.

'However, getting to grips with post-Brexit bureaucracy is only part of a much wider problem for European Research houses.

'If the UK is not aligned 100% to the same rules and tax rates come March 29 2019, it is going to be much harder to work out and process accurate research invoicing and spend.'

 

 

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Duncan Higgins, head of Electronic Products, ITG

Better trading habits 

'When it comes to a change in trading habits, the regulations have undoubtedly been successful. We have seen a huge increase in trading on lit markets, particularly with capped stocks, where the activity went from 58% to 77%.

'It has also been positive to see an increased variety of trading methods – as traders have increasingly turned to block trading and new Periodic Auction venues.

'The research unbundling requirements also appear to be working as intended, with a reduction in average commission rates on trades potentially leading to greater returns for the end investor.

'Looking into 2019, the next major challenge the industry is facing is, undoubtedly, Brexit. How that plays out for financial markets will inevitably be front of mind for firms between now and March.

'Hopefully, this doesn’t mean that the market is so distracted that it abandons the good work started under Mifid II to improve execution products.'

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Bobby Johal, managing consultant, ACA Compliance Group

Fee question marks remain 

'After the regulators declined to provide a pro forma for the disclosure of costs and charges, the industry dutifully took up the task. Various industry groups coordinated efforts on a number of initiatives, including the European Fund and Asset Management Association and its European Mifid Template (EMT).

'The EMT has been adopted and adapted by various industry sectors in an effort to create standardisation.

'However, initial question marks remain as to their ultimate usefulness given the scope for interpretation (of their requirements), which renders problematic comparison/aggregation.

'Nonetheless, adoption (of standardised templates) has been largely driven by asset owners and distribution platforms and so the use of them is seen as commercial imperative as much as a regulatory one. This is likely to create that consensus of practice necessary for the data to be useful.'

 

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Linda Gibson, director of regulatory change and compliance risk, BNY Mellon Pershing

Inflexion point 

'Mifid II still looms large in a new year that will be dominated by the FCA’s post-implementation reviews of transaction reporting and best execution.

'In preparation, now is the time for wealth managers to determine how additional data fields required for transaction reporting are being populated, and through a recall of sample reports, test whether the data reported matches trading patterns. If it doesn’t, then it’s possible that best execution reporting may also need review.

'Meanwhile, the known unknown for Mifid II in 2019 will be the industry’s requirement to disclose the actual costs of and charges for the services and advice they have provided to clients. We still don’t have a template for the ex-post cost and charges disclosures due in Q1 and the focus for firms should be on evidencing and explaining how a decision has been reached in compiling these statements.

'In managing such complex reporting requirements, wealth managers and advisers are privy to an unprecedented volume of data. Once the dust has settled, 2019 will be an inflexion point. It will show that one of Mifid II’s opportunities is treating enhanced reporting obligations not as a regulatory burden, but a chance to enhance firms’ management information systems.'

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Gianluca Corradi, head of UK banking, Simon-Kucher 

Price war 

'Large investment banks are currently pricing their research low in order to push smaller research providers out of the market. They expect a consolidation of the industry and want as much market share as possible now in order to be one of the eventual winners.

'Currently this price war is good news for buy-side funds and asset managers, especially as they are themselves experiencing strong price pressure from their own customers particularly through a shift towards lower margin passive funds. This, too, is translating into hard negotiations with investment banks over the cost of their research

'How much would a portfolio manager pay for speaking to an analyst with the right information at the right time? The value is immense, and this information is potentially worth billions of pounds. Therefore, despite the pressures, I don’t believe the research industry will commoditise anytime soon.'

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Juan Diego Martin, COO, Fonetic

Communication conundrum 

'One year on from Mifid II and we’re still faced with unanswered questions. This is particularly the case when it comes to communications monitoring in financial institutions. In fact, some of the rules have still not been implemented by some asset managers and small banks, who are still not monitoring their communications in accordance with the regulations.

'This is in part due to a lack of clarity from regulators. For example, in countries like Spain and France, it’s still unclear how the extensive communications monitoring rules will apply in the retail space. Rather than implement a costly system now, institutions are holding out to see whether the same regulations will apply across all of their business lines.

'In countries such as the UK, which is further advanced with compliance procedures, it’s a different story. Now the regulation has bedded in, we’re seeing an increase in very specific requests from organisations such as the FCA when it comes to monitoring trader communications. Random voice sampling no longer cuts the mustard.

'In order to demonstrate that they’re doing all they can to prevent market abuse, firms must now be able to show they have systems in place which automatically monitor all trader communications, from email to WhatsApp and phone calls.'

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Volker Lainer, VP of product management, GoldenSource

Significant long term opportunity 

'As the candle blows out on Mifid II’s inaugural year, it is clear banks, brokers and asset managers can ill afford to sit and ponder what to do next. With new regulatory headaches pending, financial institutions face the daunting prospect of collating and reporting on even more detail.

'With this in mind, it is surely high time for market participants to view regulation not as a need to do, but as a long-term opportunity to reduce total cost of ownership.

'Ultimately, those that adopt this approach won’t just keep bottom line costs down, they will be able to use intel gleaned from the data to create new financial instruments to boost trading revenues.'

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Maarten Heukshorst, chief relationship officer, BNY Mellon Pershing 

The RDR time lag?  

'One year on from the implementation of Mifid II and it is hard to measure its impact on the advisory market. Similarly, the intended consequences of the retail distribution review were not immediate – it has taken the industry five years to reform itself.

'We expect the full impact of Mifid II will not be felt for at least another year, when investors will have year-on-year comparative data of costs and charges. It’s only then that consumers will get full transparency of the value chain of who is looking after their money.

'While there is currently not a standardised approach for the reporting of costs and charges, such regulatory developments are focusing the minds of firms when it comes to the cost of doing business.

'We are likely to see a divergence in the market, with firms either joining the race to the bottom when it comes to fees or opting for the value for money camp.' 

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