MiFID II: The Good, The Bad And The Promising
A quick refresher for those of you coming back from 10 years on a desert island with no wifi.
7 years in its creation, delivered a year late, and comprising over 1.4 million paragraphs, MiFID II began its rollout on January 3rd. Cue a host of reforms that are transforming almost every aspect of the financial services landscape.
Of course, we all know this. The impact of these heavyweight changes is being felt across the industry. What’s unexpected is that whilst firms have until the end of 2018 to comply with the complex framework, the short term costs — both an immediate ‘cost of compliance’ to the bottom line and a brake on performance — have been somewhat greater than expected.
At Arkera, we believe that progressive oversight is a cornerstone on which to build a sustainable future for all involved in finance and technology, but that overzealous regulation will fail the end customer. I know of a few senior decision-makers who are already arguing that sweeping changes enacted by MiFID II go too far, giving rise to a trading environment that’s making it near-impossible for banks to transact effectively in markets on behalf of their clients.
One thing that most people in our community know, but choose not to utter in Bloomberg talking heads, is that excessive red tape slows progress. But, as we’ve seen to our cost in recent times, one thing more damaging than excessive red tape is no red tape at all. So whilst we continue to approach MiFID II with some caution, we’re willing to give it time to bed in, knowing that the long term benefits of its correct implementation will likely outweigh any short term teething problems.
MiFID II means well
Following the crisis a decade ago, we all agreed that trust in our industry needed careful restoration. MiFID II offered a solution, aspiring to make all participants in European markets safer, with trading more transparent, efficient and, as a result, cheaper for investors. It aimed to align all parts of the trading process with the end client.
Crucially, data and record keeping support this aim. In an effort to make all market participants more responsible, trading has been largely moved onto electronic platforms, where transaction histories can be easily recorded and, if needed at some point in the future, investigated. This move means that the buy-side will always get ‘best available’, and this can now be proven.
Industry-wide adoption of technology — which has existed for years but just hasn’t been correctly integrated — is resulting in far more transparency. In principle, this is a very good thing.
However, the challenge lies in the correct implementation of these principles. Despite best intentions, MiFID II is a heavy, blunt instrument. We don’t want to find regulators hammering in picture hooks with a sledgehammer and damaging the structure of our industry as a result.
Initial panic in Q1 has mostly subsided, thanks to the EU’s decision to extend its implementation deadline. But the impact of the legislation on client relationships can feel daunting for advisors, so it’s important that all market participants offer those under the microscope of this regulation as much support as possible to help guide them through this time of adaptation and change.
Anecdotally, we’re hearing that some advisors in the market are struggling to keep up with new record-keeping requirements, finding the paperwork burden is making their jobs ever more difficult. Further, the level of detail now required around suitability, especially when completing bespoke transactions, has made the trading process more laborious than it already was, which is hindering long-term strategies and relationships. In short, there is a danger that some of the implications may affect the long term bottom lines of both advisors and their clients.
This additional time-pressure is coupled with the slimming of commissions, as more trading is completed electronically. As a result, bank margins and profits are thinning, giving rise to a pretty perfect storm of more time, less payment, for all involved.
So, whilst MiFID II was intended for the good of everyone, the value proposition that has emerged as a result of its implementation is different for clients and advisors. Most clients value it, as efficiency and transparency increase, whereas some advisors are struggling to find value in it, as commissions shrink and the time required to complete their jobs inflates.
If this situation doesn’t improve, it won’t just be individual advisors, salespeople or traders who struggle over the long term. Firm-wide constraints are being felt as a result of investment into implementation, with technology budgets being eaten into whilst commissions fall. As a result, global banks could post soft trading numbers in the near term. And who will lose out as a result? Shareholders and end clients.
In its current form, it’s easy to see why some are struggling to see the value of MiFID II.
Building a sustainable future
‘Teething problems’ are an apt way to describe the opening quarter we’ve all seen under MiFID II. But whilst there have been undeniable challenges, we’re confident that a better balance can be found, and that it will be found once advisers grow more comfortable with what’s required of them, especially as due diligence, client profiling and suitability checks become more efficient.
Technology can help, offering a solution to the problem of transparency. Many firms have the required systems in place. Those that don’t are the ones struggling with the requirements. These firms should consider utilising third-party providers and partners who can help fill the gaps in their systems, helping them to fully comply in a timely and cost-efficient manner.
New legislation always takes time to bed in. MiFID II is no different. One way in which we can help advisers navigate the new challenges they face is by educating them more effectively around requirements, especially in light of the fact that MiFID is just one in a series of regulations that have been introduced, quite rightly, since the financial crisis.
It’s thought that MiFID III — an updated version of II — might be in the offing at some point in the future, but we should only think about drafting amendments by listening and learning from those on the front line, the advisers, as they work out how best to transparently and efficiently support their clients but also, most importantly, how best to comply.
At Arkera, we believe that regulation is crucial, but overregulation kills progress, and growth in financial markets is needed at a time when the world faces much geopolitical and economic uncertainty. As we know, there’s always a balance to be struck between progressive regulation and open markets as all market participants seek ways for banks to work more effectively on behalf of their clients.
Given where we were a decade ago, the challenge to rebuild trust across our industry remains a great one. However, looking back at Q1 2018, whilst MiFID II might not be a perfectly elegant solution, it feels like it could be a step in the right direction.
For more information, visit www.arkera.ai