MIFIDII is one of the most ambitious pieces of European financial regulation to affect investors in recent years. It governs everything from measures to reduce market volatility to policing potential conflicts of interests among financial advisers. Buyers and sellers of research must be ready to alter their existing strategies if they are to meet the new regulatory standards.
What is MIFIDII, and why is it so important to investors?
MIFIDII has been commonly regarded as a victory for common sense. Since the 2008 financial crisis, there has been a tangible sense amongst investors and policymakers alike that the EU should do more to ensure the robustness of its financial markets.
Michel Barnier, EU Internal Market Commissioner from 2010 to 2014, set himself the task of creating a ‘single rule book’ for European financial services in 2011. The goal was to prevent excessively risky practices from occurring again at the scale of 2008. Barnier first proposed a draft of MIFIDII in October 2011. After nearly three years of negotiations, a deal on the final version of the law was approved by national governments and the EU Parliament in 2014, with a commencement date of January 3, 2017. This date has since been extended to January 2018 due to ongoing negotiations.
What has caused the delays in the roll out of MIFIDII?
It took three years for Barnier’s proposal to be agreed upon by national governments and by the EU Parliament. In simple terms, the reason was that the law does not cover the technical implementation standards required to put its measures into operation. This task was given to the European Securities and Markets Authority (Esma). Esma was required to draft the required technical implementation standards and then send them for review by the European Commission, governments and the EU Parliament.
This was intended to be a small task when compared to reaching an agreement on the law itself. However, it has proved anything but. The technical standards run to more than a thousand pages, and their preparation has been slowed by debates over technicality.
What are the impacts of MIFIDII on the ways investors buy and consume research?
MIFIDII will have a significant impact on the way that investors buy and consume research. For one, if a firm wishes to use client funds to pay for research, it will be required to separate execution costs from research payments. Fund managers will have to report on providers paid from the account, the total amount they were paid and over a timeframe, the services received and the amount spent from the research budget.
Some industry-insiders have regarded these regulations as an unwelcome increase to their already burdensome administrative workload.
However, the legislation is unavoidable. MIFIDII is a byproduct of a desire for greater transparency that had been steadily growing since 2008. While its implementation will cause investors to rethink their current research strategy, this could actually help revitalize the industry.
“Any focus on value for money inevitably brings an emphasis on efficiency,” says Jon Foster, Co-Founder of Smartkarma. “A fragmented research market cannot deliver this. We expect to see consolidation or better still, a platform approach, to bring about cost savings. We are already seeing moves afoot, most recently highlighted by the merger between independent research firms Lombard Street and Trusted Sources.”
Gilles Bazy-Sire (CEO at Equity GPS), in an article recently published by FT.com, said that from the moment MIFIDII comes into effect independent research producers will reap the benefits of generating creativity and innovation in the industry. MIFIDII will push institutional research providers to differentiate themselves and provide deep, valuable insights to buyers. This will benefit the industry overall, injecting a fresh dose of innovation into investment research on European markets.
