With less than six months to go now until the introduction of MiFID II, are you ready for the new regulation? The second incarnation of the European Union’s Markets in Financial Instruments Directive becomes legally binding in January 2018, leaving precious little time for asset managers to ensure they are compliant.
MiFID II is a broad-ranging piece of regulation and not all of it will be relevant to every asset management company, or necessarily to its fund marketing functions. It doesn’t help, moreover, that UK regulators are still finalising the detail of how they will apply the regulation in this country. Still, in certain areas it is very clear that marketers will have to act – here are five key issues to address:
MiFID II continues the regulatory trend away from the idea that fund managers are simply product providers; it imposes a requirement on managers to outline the target market that each of their funds is aimed at, as part of an ambition to ensure investors are only sold products appropriate for their risk tolerance and needs.
Fund managers will need to think carefully about how they achieve these goals. Can you show, for example, that you know who your investors are? And what about the platforms and intermediaries distributing your products – are you working with them to ensure suitability?
The new rules specifically prohibit fund managers from bundling the cost of research into their headline charges. That will leave managers facing an unpalatable choice – either they take a hit from paying for research costs from their own balance sheet, or they ask investors to pay a separate fee to cover these costs, which may be unpopular.
The research industry, aware that it is squarely in the firing line of this change in the rules, is trying to develop codes of best practice to help fund managers meet their new obligation. But no manager should be waiting for a third party to ride the rescue – you need to confront this issue now, including how you will communicate your response to investors.
Greater transparency is a key objective for MiFID II, with more demanding rules about the information that asset managers must communicate to potential investors. In addition to greater detail on charging practices, the new requirements include better information on risk, return and the underlying investments that funds hold.
Many in the industry believe that compliance will effectively be a two-stage process. Clearly, fund managers will need to get to grips with exactly what information they are required to give to their investors. But also, just as importantly, they must work out how to provide that information in a format that is accessible and understandable, rather than conducting a box-ticking exercise. The complexities of communicating across a range of different platforms will add to the challenge here.
Fund managers, i.e. other financial services firms, have increasingly understood that their ability to effectively handle the cases of dissatisfied customers can add significant brand value. However, MiFID II ups the ante, with a much stricter approach to how managers must handle complaints.
The new rules extend the current rules on complaints made by retail investors to professional investors too, and also give potential customers the right to complain. New record-keeping and disclosure regulations will also apply.
The challenge for fund managers will be building these reforms into existing customer complaints procedures in a way that is compliant, while also ensuring mechanisms are in place to help the business learn from its experience. That may require new reporting structures, for example, to ensure senior management has access to complaints data.
The Financial Conduct Authority’s investigations into the fund management sector, including the final Asset Management Market Study published in laterJune, offer a pretty accusatory picture of the sector and have resulted in recommendations for a series of reforms. In many areas, however, the FCA has yet to issue its final proposals because it is concerned about how new rules will interact with MiFID II.
In particular, there is ongoing doubt over charging practices – the FCA says it wants to introduce a single all-in-fee for funds, but it hasn’t yet worked out the detail of such a move, including how it would be compliant with MiFID II. Watch this space for an update later in the year.
The European Union (EU) MiFID II regulations, which come into effect in January 2018, will have a huge impact on the asset management industry. But many managers do not yet have the technological solutions to comply and thrive in the new regime and software providers expect a capacity crunch as investment houses rush to prepare. We look at some of the issues and opportunities.