The wide-ranging changes instituted by the new MiFID II rules, and its accompanying regulation (MiFIR), have raised concerns among some industry bodies who say its costly implementation will be passed on to unprepared investors.
The new MiFID II rules came into force on 3rd January 2018, seeking to strengthen the functioning of financial markets and increase investor protection. The legislative framework supplants the 2007 MiFID law (Markets in Financial Instruments Directive) across the European Union, and applies the lessons learnt from the 2008 global financial crisis, which revolved around weaknesses in the regulation of over-the-counter (OTC) trading and the derivatives market. It also implements amendments in line with developments within trading since the first directive was enacted.
As a result, the new version, implemented a year late across the EU due to its complexity, is broader in scope, impacting the entire investments lifecycle, and forcing firms to invest in meticulous reporting systems. Commodities, currencies and credit products, together with their derivatives, now fall under this new regime, considered to be the most radical set of regulatory changes faced by the industry recently, with broad consequences on the financial industry and investors alike. Banks, fund managers, exchanges, trading venues, pension funds and even retail investors are expected to be the most affected.
“While investment firms adopt all the changes to operate in line with the new requirements, the concerns turn to investors,” Jesmond Mizzi, Managing Director of Jesmond Mizzi Financial Advisors Limited, said, doubting whether investors were ready for the changes this would institute.
“Changes include enhanced customer due diligence, increased transparency, comprehensive disclosure of costs and charges, amplified monitoring for discretionary portfolios and reporting. These changes require much effort across the industry, ranging from updated IT systems to more reporting to clients and the regulator, together with enhanced testing of investors’ attitude towards risk, knowledge and experience, to be able to provide a personalised recommendation,” he said.
Moreover, among the new rules, financial institutions are being forced to give detailed information about millions of transactions in an effort to increase regulated trade exchanges. Onerous reports must be completed, in some cases within 15 minutes of a trade – or the firm risks getting fined.
This increased rigour has come at a cost. Reports in the international media have claimed that banks and trading firms all over Europe have spent millions of euros getting ready for the implementation of the legislative framework – and the steep expense is expected to be borne by the investors themselves. “All these drastic changes are costly for investment firms and consequently these will result in more costs and charges for the investors – some investors will be turned away by institutions given the ongoing obligations. Thus, the question is, who will the small retail investors turn to?” Mr Mizzi asks.
Indeed, while the changes implemented by the directive will result in greater transparency and accountability, Mr Mizzi pointed to the increased documentation which must be also prepared by the investors’ advisors and insisted that investors must be made aware of this increased documentation.
According to Mr Mizzi, while investors will have the advantage of more frequent reviews of their portfolios and more frequent statements of their assets, the benefits are less likely to be enjoyed by non-individual investors, such as companies, partnerships, trusts, and associations, due to the necessity of having a valid legal entity identifier, the 20-digit code which identifies participants in the financial market. This must be renewed on a yearly basis at the participants’ expense. “This measure is costly and has not gone down well,” Mr Mizzi explained.
These concerns were echoed by Bank of Valletta. In underlining the “considerable challenge” faced by financial firms “in view of the significant and wide-ranging implications on their operating and business models,” BOV Compliance Executive Anatoli Grech noted the downside for investors and, echoing Mr Mizzi, stated that “many investment firms and banks are charging their clients for investment advice to cover the cost of the ongoing monitoring and reporting requirements.”
Mr Grech also referred to the introduction of MiFID II/MiFIR provisions related to investment research, and to those standards and requirements aimed at increasing investor protection stating that “as with other regulations, investor protection comes at a cost to the same investor.” He refused to speculate on whether the legislative framework would provide the long-term beneficial effects promised from the outset, stating that “only time will tell whether these requirements will in fact provide greater investor protection and make markets more efficient and resilient.”
On the other hand, HSBC Malta pointed to the new opportunities which the implementation of the new rules can create, stating that “MIFID II and MiFIR are not just a regulatory compliance exercise and as such should be viewed as a tangible means that can present new market opportunities for those market players who are aligned to these rules.”
According to an HSBC Malta spokesperson, the benefits arise out of the implementation of new regulations “aimed at extending and enhancing protection for customers trading in financial products” which “introduce new standards on how investment services providers should operate and what clients should expect when they deal in investment products.” As a result, the new directive, and its accompanying regulation, will “deepen relationships with clients, while ensuring that the required regulatory standards are adhered to,” the bank insisted.
Simon Zammit, CEO of the Malta Stock Exchange (MSE) reiterated the positives presented by MiFID II and MiFIR, highlighting the hard work which went into the full implementation of the rules at the Exchange to ensure it was fully compliant. A multi-disciplinary project team, which worked closely with the Malta Financial Services Authority (MFSA) to ensure clarity on the amendments to various reporting obligations, was set up, and stockbroker member firms also played a critical role – that of bringing all relevant client information and market-related data up to scratch.
However, this was also an international effort, requiring coordination with other European bodies. “There was also close coordination with the Deutsche Bourse team in Frankfurt who implemented the necessary technical changes and managed the process of bringing the operations of the XETRA trading platform and its functionalities in line with the new requirements and standards,” Mr Zammit explained.
The motivation was the strong belief in the benefits presented by this broad and wide-ranging set of revisions to the previous regulatory framework. Indeed, in the adoption and implementation of these requirements, their focus was “on the core principles of operating a fairer, safer and more efficient market that now adheres to a much higher level of regulation, transparency, reporting, and accountability,” Mr Zammit continued.
All that hard work paid off, according to the CEO. “This long and complex project led to the smooth and successful transition over the year end period, and on 3rd January, MSE operations were fully compliant with the MiFID II reporting requirements,” he emphatically stated.
He also stressed the ways in which these EU finance reforms will encourage stability in the long-term. “The adoption of this new regulatory structure will not be a one-time event, but a journey that should lead to even greater levels of investor protection and market efficiency.”
This article originally appeared in The Business Observer