Expert: Richard Pettifer, Vanguard
Moderator: Ian Wilkins
Key message
Distributors and manufacturers face rising overheads as transparency requirements rise through MiFID II. As no future delays are anticipated for kick-off of reporting under MiFID II standards, we expect the first full reporting structure to be present by year end 2018.
The industry can look to embrace the capabilities of larger custodians who can already handle multiple accounts to save on rising costs. Meanwhile DFMs and smaller scale distributors are likely to feel the biggest pinch with FCA suitability and reporting costs rising in the next two years, primarily resulting from investments into technology and IT to facilitate MiFID II and FCA reporting requirements.
Headlines
- MiFID II is primarily enforced with a view to “push value up the chain”
- Firms in the industry need to better understand and accept their present day readiness levels, their product governance and their overall cost structure to effectively tackle MiFID II
- Distributors presently face the biggest responsibility to both identify the MiFID II compliance of manufacturers while proactively and transparently representing costs in statements
- Discretionary Fund Managers are likely to see the largest overheads when tackling both suitability and fee transparency
- MiFID II is here to stay and the industry has a lot of ground to cover ahead of year-end 2018
Key themes
The session expert began the panel by asking delegates to openly share how many were ready and tackling MiFID II in isolation. Overall, three participants within the room raised their hand to dealing with MiFID II in isolation. To set the scene appropriately, Richard indicated that there were three key areas of focus for firms going forward to appropriately and actively tackle MiFID II:
- Readiness – understanding resource requirements and main ambiguities
- Product Governance – better understanding of relationships with distributors and manufacturers and product lines
- Costs and charges – fully identify the levels of granularity required and the costs of achieving MiFID II efficiently. In addition to understanding how to investors and distributors will use the additional transparency
The purpose of MiFID II was to achieve greater transparency regarding costs and origins of costs and
“doing away with cosy trading agreements between distributors and manufacturers.”
Regulators view the initiative as a way for markets to provide clients with more information on products and costs to mitigate mis-selling while establishing an ordered chain of getting products from manufacturers to distributors.
“It is pushing value back up the value chain. However, clients have shown that they see less value add due to having complete transparency (a lot of information) a lot of the time.”
The impact on Distributors
Overall the distributor landscape is set to change with heavier pressure put on smaller distributors with more firms looking to utilise vertical integration to be better prepared for MiFID II. Distributors are looking at the following steps to ensure their individual compliance:
- Confirming with all manufacturers and providers used that they are MiFID II compliant and capable of producing the relevant and appropriate type of reporting
- MiFID II brings new rules for certain funds which are more complicated in nature. Distributors need to identify and appropriately strip out costs and fee transparency across complicated funds
- Review business lines and custodian structures
- Overall, distributors should expect a more simplified business model as costs of achieving complete transparency increase
Distributors also face the prospect of providing MiFID II due diligence surveys which require distributors to inform manufacturers where their products are being sold. This will allow manufacturers to better assess whether their products are reaching the right type of client.
A challenge that presently faces distributors is the proposition of filling out X number of unique surveys for each manufacturer that they use. A question of efficiency beckons as one delegate expressed –
“Is there the opportunity for all fund managers to come together and provide one portal for distributors to input their information.”
Rising reporting costs for Discretionary Managers
DFMs face a more expensive challenge in complying directly with MiFID II due to the requirement of evidencing suitability across client portfolios. Further to this, the FCA presently requires record keeping of any decision and a record of the execution itself as they are two separate instances.
Delegates mentioned that there are some DFMs who are also providing an explanation to clients for every action taken on each individual reporting statement. This further compounds the cost overheads that DFMs face going forward in complying with both FCA and MiFID II regulations of transparency.
An area of confusion still remained as one delegate questioned:
“DFMs who use pooled portfolios typically have suitability reasoning provided on a portfolio level, but does this now mean that there is a requirement to provide/give personalised reasoning to clients?”
Conclusions
The discussion concluded by focusing on better understanding ‘what will happen’ as opposed to ‘what we need to do’. The group consensus was three fold:
1) There will be a tighter engagement model between distributors and manufacturers. This will inevitably squeeze out the smaller guys
2) The transparency of fees and charges will drive prices lower and clients can better understand their costs (margin compression)
3) The industry is likely to overload the client with information due to the depths of transparency demanded by regulators
Overall, MiFID II is not a regulatory action with an easy fix for all. Instead, a bigger forward facing worry might be the backlash from clients who have been given too much information. One delegate closed while quoting Winston Churchill –
“Nothing avails but perfection’ may be spelt shorter: ‘Paralysis”.”
