The Markets in Financial Instruments Directive (MiFID II) is the biggest priority for investment managers, according to a survey by Deloitte.
The survey of 13 investment managers with collective Assets under Management of £475 billion found all bar one of the respondents identified MiFID II as being the regulation that will impact their businesses the most.
65% of respondents identified MiFID II’s clampdown on the use of equity commissions to pay for investment research as being a major challenge. The rules are likely to force an unbundling of investment research payments for dealing commissions.
This will particularly impact smaller managers. A study by Berengberg estimated asset managers could see profits reduced by 20% to 30% if the £1 billion to £1.5 billion annual research spend is incorporated into profit and loss (P&L).
Some managers will have little option but to increase their management fees or to create pre-funded research payment accounts, fully paid for by investors. The latter will require negotiations with investors, and could be problematic for firms with thousands of accountholders. Retail investors lacking the sophistication of institutions may also question the research spend. The biggest risk would be if performance falters if managers are not able to access research easily.
“Larger investment managers with greater economies of scale will be better able to absorb the costs of MiFID II, and small niche firms may be less affected by certain rules. Managers that employ passive and quantitative strategies, which do not rely on investment research, will also be relatively less affected, although that will depend on where the Commission comes out when it adopts the Delegated Acts, expected in November (2015), “ said David Strachan, partner in Deloitte’s EMEA Centre for Regulatory Strategy.
The Deloitte study said managers are going to increase the scrutiny of the quality of the research they receive and shrink research budgets. Many managers complain that a considerable amount of sell-side research is rarely read anyway.
The Deloitte study also found transaction reporting would be a key issue. Transaction reporting will apply to any MiFID regulated investment firm, and will include instruments traded on EU trading venues such as multilateral trading facilities (MTFs) and organized trading facilities (OTFs), including any over-the-counter derivatives (OTCs).
The Deloitte research also predicted more firms would launch “non-complex” products such as UCITS relative to “complex” products due to the stricter sales rules attached to products deemed “complex” under MiFID II. It also found managers were looking to restructure “complex” products into “non-complex” offerings for this same reason.MiFID II is due to be implemented as of January 3, 2017 although some experts are already anticipating a delay. The European Securities and Markets Authority (ESMA) published its final technical standards in September 2015. The European Commission (EC) was expected to publish its Delegated Acts in summer 2015, but this has been pushed back. Irrespective, the time-frame for compliance for affected financial institutions is likely to be tight.