MIFID II: what impact on European asset managers?

Drapeau sur carte d'EuropeMIFID II comes into effect on January 3, 2018. The countdown thus officially began for asset managers in Europe. Facing the obligations that asset managers will have to comply with, they may run out time to put in place workflows, processes and solutions to meet their new regulatory constraints.

Why MIFID II ?

In 2007, the first MIFID Directive was voted by Brussels. The goal of this new regulation was to open European markets to competition breaking major monopolies in the end of a minority of companies. Unfortunately, this Directive did not really convince European asset managers. Transparency never shown up and no consistent and lasting improvement rose up on the asset management market.

As a result of this failure, the European Commission recently reviewed its position trying to improve the regulation.

In April 2015, discussions finally ended up and MIFID II was voted in a hurry by Brussels. As a precaution, this new regulation was submitted to the European Securities and Markets Authority (ESMA) in charge of creating technical standards. In order not to reproduce past mistakes, the European regulator opened a huge consultation giving the floor to all stakeholders. Indeed, private banks and asset management companies have until the first of august to share their point of view on the topic and give their recommendations.

Will the revision of MIFID convince European asset managers? Through this article, KeeSystem is highlighting 5 major pillars that should directly be impacted by MIFID II.

 

WHAT CHANGES CONCURRENTLY WITH MIFID II FOR FORTUNE MANAGERS IN EUROPE?

Transparency

Transparency has always been considered as the mantra of the European Commission. Concretely, Brussels would like to transform the equity market requiring a high level of transparency on several emissions that still have to be defined. ESMA recommends retaining liquidity as the main criterion to define these emissions while many stakeholders do not really agree with this position. Debate is still underway.

High frequency Trading

This point is the second priority underlined by MIFID II. Two possibilities exist and discussions are still ongoing to decide which one will be finally chosen. On the first hand, some stakeholders are asking for enlarging tick sizes (the lowest gap between two consecutive quoted prices) while on the other hand, some voices are rising up for the implementation of deterrent pricing conditions in order to avoid abusive cancellation of orders.

Action Research compensation

Paid by asset management companies but generally passed on to the final client via management commissions, the compensation of Action Research is today a problem. In fact, ESMA is not really favorable to this practice and would like to transfer this cost – currently indirectly supported by the client – to asset management companies. It is quite a surprise as this specific point was not mentioned in the initial text of the new Directive.

Consulting compensation

Just as the Action Research compensation, the consulting compensation is also being studied by the European regulator. Indeed, ESMA recommends an integral review of the independent financial planner’s business model. The regulator would like to abolish the retrocession of commissions on private equity funds as long as consulting is independent (i.e. when the advisor is not bounded to any financial product). On their side, wealth managers stand up against this proposal as they estimate that independency is just enough to earn fixed fees, often lower than commissions.

Recording of all communications between the advisor and the client

This last point is the most sensitive and controversial as the recording of all communications between an asset manager and its client is perceived as an intrusion by many stakeholders. However, ESMA do not share this opinion and would like to implement an automatic traceability of all written and verbal communications between the two parties via phone recordings and paper reporting. “Additional compliance tasks” grunt European asset managers, already submitted to several constraining regulations such as Bale III and Solvency II. An additional waste of time for asset managers that won’t be allocated to their core activity

 

DO YOU HAVE THE TECHNOLOGICAL SOLUTION YOU NEED TO MEET THE MIFID II CHALLENGE?

The daily application of the compliance obligations defined by MIFID II requires the use of a regulation technology (regtech) solution allowing the automation of a large part of the controls and the production of reporting required. KeeSystem supports you with a compliance management solution meeting the requirements defined by MIFID II.

We team is at your service.

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