MiFID II will have significant and wide-ranging implications for the strategy, operations, conduct and governance of a broad range of firms in Europe. It raises many important questions for the investment management industry. What are the key challenges and implications of MiFID II? How can investment managers gain a competitive advantage? And how much progress have investment managers made in implementation? We discussed these questions with 15 investment managers and two independent external experts to inform our new paper Navigating MiFID II - Strategic decisions for investment managers. The key findings are highlighted below.
Key challenges and implications of MiFID II for investment managers
Out of all the European regulations to affect investment management, all but one of our interviewees thought that MiFID II will have the greatest impact on their strategy over the next two years. The investment research rules, in their current form, were viewed as a key strategic challenge by the majority of our interviewees. These propose unbundling research from dealing commission and have been a contentious part of the implementing measures; the European Commission has delayed publication of the Delegated Acts, expected in November, which will provide further clarity. The increased requirements in relation to transaction reporting were viewed as an operational challenge by all firms we interviewed. Other key conclusions included the following:
- We anticipate that some firms will launch more 'non-complex' products relative to 'complex', mainly as a result of the re-definition of complex products under MiFD II and the stricter sales rules that apply to them. Some interviewees were considering restructuring their product offerings.
- Investment managers are likely to want multiple distribution channels which serve specific client segments. This in turn may drive an increase in direct to client offerings and investment in digital services. This has already been a trend in the UK and we expect it to become so in Continental Europe.
- The way investment managers interact with the market will change. We expect that the number of systematic internalisers will increase and that there will be a reduction in OTC trading. All-to-all trading venues can provide investment managers with an additional source of liquidity and so several interviewees thought that their use will increase.
- The MiFID II rules on investment research, if implemented in their current form, will make the price of research more transparent. We expect this to lead to investment managers increasing their scrutiny of the quality of research and decreasing their research budgets, resulting in more specialised offerings by research providers.
- In implementing MiFID II, the firms in the survey indicated that they will no longer choose to delegate their reporting to brokers, with most reporting in-house instead, and others undecided or preferring to outsource to a third party provider. We expect there will also be demand for a third party reporting solution, particularly among smaller investment managers for which bringing reporting in-house may not be a cost-effective option due to the technology implications.
- MiFID II will increase costs and reduce margins, as the increased costs are unlikely to be passed on to investors due to competition between firms and the increased disclosure requirements under MiFID II making charges more transparent for investors.
- As regards the impact on operating models, many interviewees thought that MiFID II could make the EU less attractive as a location for investment management activities, particularly with regard to the market structure, transparency and investment research rules. We do not expect MiFID II to drive any significant increase in outsourcing, although some standalone activities could be outsourced, such as Transaction Cost Analysis or operating a Research Payment Account.
How can investment managers gain a competitive advantage?
Larger investment managers will be better able to absorb the increased costs of MiFID II and the impact of MiFID II on smaller investment managers that focus on niche areas may be relatively more contained, leaving a 'squeezed middle'. Firms should consider where MiFID II disproportionately affects them compared to peers. Possible options are market consolidation, or changing product offerings and/or investment strategy.
MiFID II will give rise to a significant amount of new data. Market-leading firms will seek to use the new, increased data requirements under MiFID II to their competitive advantage and use MiFID II as a catalyst to ensure their data infrastructure is flexible and efficient.
MiFID II will drive changes in the distribution landscape. Investment managers that have multiple distribution channels and robust links with distributors will be in a strong position. Investment managers should be continually looking to innovate, recognising that online, mobile and social media are becoming primary channels for consumers.
Implementation progress and next steps
In the meantime, firms cannot rest on their laurels. In terms of implementation, most firms we surveyed said they had completed – in whole or in part – their project initiation and governance, impact assessment, gap analysis and project mobilisation (resource analysis and project plan). Most also plan to be well into their implementation programmes by February 2016.
With the 3 January 2017 deadline rapidly approaching and implementation programmes well under way, there is no time to lose in taking the necessary strategic decisions. In order to be market-leading, investment managers cannot focus purely on implementation, but must focus also on wider market and regulatory considerations.
Following publication of the Regulatory Technical Standards (RTS) by the European Securities and Markets Authority in September, we now have a clearer picture of how the transparency regime will be calibrated, but it may be some time before the impact of the rules on fixed income liquidity becomes clearer. The European Commission is expected to adopt Delegated Acts on many of the investor protection implementing measures in November, including on the investment research rules. Both the RTS and Delegated Acts must undergo further scrutiny by the EU Parliament and Council before being finalised. And investment managers must wait even longer for the Financial Conduct Authority to finalise its rules, with the first consultation paper expected in December 2015.
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