MiFID II: Cost Transparency & Investor Protection — A View from The Experts
In September 2015, the Markets in Financial Instruments Directive II (MiFID II), was put into motion as the updated EU regulation of the previous MiFID I directive by European Securities and Markets Authority (ESMA). One of the key elements of this regulation, which is to be implemented by January 2018, is to serve as a protection mechanism for investors. Although the cost transparency will benefit clients, the new regulation is reported to be very complex to understand, thus will be difficult to implement. As a response to the financial crisis, the MiFID II regulation strives to increase stability and transparency in the financial field.
This two-part Marcus Evans webinar series, taking place last October and December, intend to illuminate the various issues surrounding the implementation of MiFID II, and discuss the structural changes that will be seen after its completion. The first webinar looks at the cost transparency aspect of MiFID II; an array of topics are discussed, including how the new level of cost transparency will affect customer relations, how it will affect the portfolio of products offered, and changes in the models that are being used. The second webinar endeavors to investigate the investor protection challenges to the whole business model, using the aspects of Article 24 to enhance our understanding.
Sitting on the first panel to provide more insight into the implementation and complexity of the MiFID II regulation are; Werner Schorn, Project Manager of MiFID II at Erste Group; Subbu Loganathan, Founder & CPO of Almeda partners; Martin Hofer, Executive Director & Head of Fund Services and Infrastructure Securities Services at Raiffeisen Bank International; moderated by Wolfgang Göb, Head of Business Development at Software Daten Service.
An important aspect of MiFID Cost Transparency is its affect on client advice. Although it is still unclear what will be shown to the client in the product costs, it is suggested that the retail client side will be strongly affected by the new regulation. It is likely that firms marketed as having the top products and independent advice will have to adopt a non-independent advice model, to ensure that they adhere to the MiFID regulations. The cost transparency becomes a tool allowing customers to compare; therefore banking becomes very open.
Looking at the technical and organizational implementation of MiFID II, the panel enforces that the hurdles faced will vary depending on the type of financial institution. Where a small scale asset manger might not have the infrastructure to adhere to the regulations, a large scale asset manager (or large wealth management firm) may have already been conducting the data gathering, thus only requiring a new provision platform that allows firm-wide access. Consequently, economies of scale will prove to be essential in future years.
Once finalized, the annual reports on actual costs and charges will leave little room for interpretation because the cost transparency removes the flexibility previously allowed in their preparation. Regulators do not trust the financial institutions to give the best advice anymore, consequently the reports must be handed out ex-ante and ex-post the investments. The downside of this is the cost intensity to the institutions; due to being a huge IT challenge, the increase in production costs will eventually have to be passed onto the customers.
Under this tsunami wave of regulation, MiFID II could cause a decrease in cross border business between EU and non-EU firms; and alongside this, it contradicts the European Union’s open structure in which anyone can buy anything from anyone.
The presenters of the second webinar include, once again, the software expert Dr. Wolfgang Göb; Dr. Zsolt Wieland, Head of General and Retail Services at OTP Bank who led the MiFID implementation; and Dr. Akos Ferenc Tisza-Papp also of OTP Bank, Head of Corporate Lending.
Beginning with Zsolt and Akos, we better understand that in order to provide a higher quality of services/ products, the business has to be driven by the best interest of the clients, and that this needs to be the philosophy in order to create sustainable long-term business models. As a response to the financial crisis, the MiFID II reform will provide a more stable and transparent field.
We gain a detailed insight into the 5 major parts of Article 24: Product governance, pre-trade information to client, inducements, cross-selling and package products & gold-plating and authorization.
In terms of product governance, it is important to note that this is a key part for investor protection. The new ESMA guidelines ensure that there is more proactive checking, thus guaranteeing the product designs are appropriately satisfying the needs of the target market. The pre-trade information of Article 24 still states as before in MiFID I that all information shall be fair and clear, but the reformed version reinforces that Eligible Contract Parties (ECPs) are also now clients, thus need to be dealt with in a fair way. The firms providing independent investment advice are prohibited from receiving inducements from third parties, unless they are passed on in full to clients, and must be disclosed and enhance quality.
Wolfgang goes on to look at another intricate aspect of Article 24; regulating the costs and charges to investors ex-ante and during the existence of an investment. Ex-ante reporting of costs shows that many are hard to calculate, although ESMA have specified how to display the costs, in some cases it is still hard to know where these numbers come from. Moreover, costs that ‘may’ occur have to be displayed, adding to the complexity of the implementation. Another issue is choosing which software should be used or created to provide a platform for these processes. On the positive side, the cost transparency could encourage the use of innovative technologies. However, these regulations provide transparency and thus are a game changer to an industry which now must be accurate, attractive, and easily explained to customers.
Although there are many hurdles to overcome, the various EU bodies have the same core philosophy; the business has to be driven by the best interest of the clients and not the profitability, and this is what the MiFID II regulation sets out to do. Through the two Marcus Evans webinars presented, we are able to gain a valuable insight into the pros and cons of this updated regulation, as well as the new infrastructure that the financial sector might see in the coming years.
Download the webinars and their accompanying slides here:
