William Maye reports from CoreData UK about the likely effects of the upcoming Mifid II legislation.
UK based financial advisers have been through four years of regulatory change and there is slim prospect of this change abating.
In fact, advisers are now bracing for a tidal wave of European regulation in the form of MiFID II, which promises to unleash further disruption on business models.
The goal is a single rule book for financial institutions; the European Union’s revised Markets in Financial Instruments Directive (MiFID II) will come into effect in January 2018 and aims to improve investor protection, transparency, and product standardisation while ushering in a new period of market stability.
The UK regulator the FCA has said that the Brexit vote will not matter – it will ensure that MiFID II will still apply to the UK in the wake of the country’s vote to leave the European Union.
With its rules taking up over 1,000 pages, MiFID II is broad in scope and ambition.
The changes are so big in fact that its implementation date was delayed by a year to allow firms more time to comply with the sheer complexity and size of regulatory requirements. From trading to data recording to transparency around research costs, MiFID II’s tentacles stretch far and wide.
The complex and technical regulatory shakeup will impact almost all aspects of the financial services industry including advisers, pension providers, banks, asset managers and traders.
For example, advisers will be required to record telephone conversations, asset managers will need to unbundle payments for investment research, and banks will have to overhaul their IT systems. None of the changes appear simple or cheap.
The early estimates are that the financial industry will need to fork out more than €2.5 billion (A$3.5 billion) complying with the meaty regulation. It’s clear that Mifid II comes with a heavy cost. But perhaps the real cost will be the impact it has on financial service business models.
A study published by CoreData Research UK in December 2016 based on a survey of 612 advisers found nearly half (45%) think the incoming regulation will negatively affect the advice sector. Just 17% of advisers said they expect MiFID II to have a positive effect, with 38% expecting its impact to be neutral.
Furthermore, advisers think they will be the group most negatively impacted by the upcoming legislation, followed by DFMs/fund selectors (cited by 39% of respondents) and asset managers (38%).
The study further found that MiFID II cost and client disclosure requirements are uppermost in the minds of advisers. A large majority (86%) said getting clients to provide up-to-date information to meet MiFID II requirements will be challenging, while 82% flagged the monetary costs of additional administration and compliance as a challenge.
Advisers polled in the CoreData study also think Mifid II will lead to a rise in restricted and specialist advice. More than half (52%) expect to see advisers move from independent to restricted in the post-Mifid II world and 75% predict an increase in specialist advice offerings.
Meanwhile, concerns about regulatory overlap have led some industry players, such as the Wealth Management Association, to call for Mifid II to replace RDR. Some aspects of Mifid II, such as those around consumer protection, echo core RDR principles.
But there are mixed views on whether the process of becoming RDR-compliant has prepared advisers for the introduction of Mifid II. Almost half (48%) are unsure of whether this is the case, while just over a third believe RDR has helped with Mifid II implementation and 18% think it has not helped at all.
Interestingly, the pessimistic outlook on how the regulation will impact the advice sector as a whole comes despite the fact that 43% of advisers polled by CoreData are unsure about how MiFID II will personally impact them or their business. This hints at a certain level of unpreparedness on behalf of some advisers and, with the implementation clock ticking, those not up to speed would be well advised to get their skates on.