MiFID II: Wait for legislation wording finally ends
Finally, 10 months late, the European Commission (EC) has published the MiFID II delegated acts relating to research and inducements. This is one of the most contentious parts of the legislation, plagued by fierce lobbying, leak, rumor and speculation. In the process, European Union law-making has been criticized as farcical, but the end result is no tragicomedy. The EC has stood rock solid behind the core of the European Securities and Markets Authority’s proposals.
MiFID II will deliver full unbundling of commissions across the European Economic Area, with execution, research and other services separated out and explicitly priced for the first time: ‘…an investment firm should ensure that the cost of research funded by client charges is not linked to the volume or value of other services or benefits used to cover any other purpose, such as charges for execution.’ (para 27)
With regard to payment for research, as expected there has been a softening of proposals to prohibit the use of commission-sharing agreements such that client monies can be used to fund the cost of research, subject to strict new requirements for research payment accounts, budgets, client disclosure and record keeping.
The result of this softening, however, is a strict approach to corporate access, which is not research (para 28) and, most significantly, does not meet the definition of a minor non-monetary benefit: ‘In particular, any non-monetary benefit that involved a third party allocating valuable resources to the investment firm shall not be considered as minor and shall be judged to impair compliance with the investment firm’s duty to act in [its] client’s best interest.’ (para 30)
Further: ‘…non-monetary benefits received or paid by the investment firm in connection with the investment service provided to a client shall be priced and disclosed separately.’ (5a, page 25)
These are the single-most significant points in the document. What they mean is that corporate access cannot be received ‘for free’: it will have to be priced and separately disclosed. These points also introduce a new record-keeping and reporting requirement for corporate access, which will mean investment in systems. Most significantly, this will end the existing practice of investment banks arranging roadshows and corporate access meetings with no explicit charge. This part of the market is going to experience very material change.
Over the past few weeks, we have conducted a large-scale survey of attitudes to MiFID II, with participation from many of the world’s largest institutional investors and corporate IR teams from the US, the UK, Germany, France, the Netherlands, Switzerland and Denmark, This group [collectively] holds more than $4 tn in assets under management and has an aggregate market cap of more than $380 bn. The results are fascinating:
‒ 78 percent of corporates and 69 percent of institutions expect to arrange more corporate access directly in a MiFID II world
‒ 46 percent of institutions had already started MiFID II implementation. A further 23 percent say they will as soon as there is clarity from Europe.
This is not a 2018 story ‒ it’s happening now, and it will have broad impact: 36 percent of institutions plan to implement MiFID II standards across their global operations. Not a single respondent expects to implement just in Europe.
Two acts remain in this drama: EU Parliamentary approval and the Financial Conduct Authority’s introduction of MiFID II into the local rulebook. Both are expected within the next three months.
We now know what MiFID II will bring in the key areas that matter to IROs. Existing market practice will change radically and the impact will be felt globally. We won’t need to wait till the 2018 implementation date; the majority of firms will now begin to make changes. IR teams should be aware of the issues and prepare for change.
So what happens now? The delegated acts give us the framework for the changes IROs need to make and although the implementation deadline has been pushed back a year, the timing is still tight as there’s lots of work to be done. In a nutshell the transposition into UK law of the new rules must take place by July 2016 and they must be fully complied with by January 2018. That realistically provides only 12-18 months for new systems to be selected and tested and new suppliers commissioned.
Godot may have finally arrived, but his entourage isn’t far behind.
Michael Hufton is founder of ingage IR