Markets in Financial Instruments II (Mifid II) is of course a reform of Mifid I. It is a EU-led initiative designed to maximise transparency and reduce data fragmentation, enhance investor protection and introduce greater regulatory requirements to take account of developments in technology and market infrastructure within the financial services industry.
It is touted for implementation in 2014/15, but research from PwC shows financial services institutions are already at work to understand its commercial implications and are setting aside budgets to cover them.
Under Mifid II a wider scope of products will be deemed ‘complex’, requiring advisory models to be reassessed and PWC said firms must consider whether to pass on increased costs to clients and what the impact on their product portfolios might be.
Another of the main principles of the regulation, a ban on inducements for independent advice, will require a reassessment of charging structures. But luckily for UK-based firms this will have already been addressed because of requirements under RDR.
Wealth managers and discretionaries who use derivatives trading will also be affected because these products will have higher infrastructure and running costs.
Just one piece of the jigsaw
PwC said its Europe-wide survey highlighted the seriousness with which financial services firms are taking Mifid II. It showed most firms will start strategic planning before the end of 2012 and will focus on how the regulation will affect the pricing of products, whether increased costs can be passed onto clients and if there are key market opportunities arising from Mifid II.
Additionally, firms are looking at which products or services might become unprofitable following the implementation of Mifid II and the commercial implications of increasing pre- and post-trade transparency.
“Mifid II is one element of the regulatory jigsaw and understanding the interdependencies is imperative,” said PwC. Despite this, just over half (56%) of respondents to its survey are looking at Mifid II in the context of a wider landscape or regulatory change. The consultancy firm said ignoring the inter-connectivity of regulation would be costly because many of them have inter-related or overlapping objectives.
It this is not grasped firms might implement the same changes and processes more than once, thereby duplicating time and resource.
The half of respondents looking at Mifid as part of a bigger picture is probably comprised of the same 50% that are allocating budget to initial activity related to the initiative before the end of 2012, although they admit they are not clear of the ultimate costs of dealing with it.
Before undertaking work in the area, however, it is crucial financial services firms are aware of the strategic impacts the regulation could have on their businesses, otherwise they might invest in alterations that are not wholly relevant.
Lessons learned from RDR
Earlier this year the expected implementation timetable for Mifid II was put back a year from 2013/14 to 2014/15 which means financial services firms now have longer to assess and plan for the impact, PWC added.
Further updates providing details of what is expected under Mifid II are due to be released over the coming months, but the draft directive and draft regulation already available should be enough to start strategic work.
For most wealth managers Mifid is likely a distant spectre and one that should be dealt with as and when its implementation approaches. But financial services firms should take the extra time they have been afforded and learn from their past experiences with RDR.
Along this vein early preparation and business model changes were hugely beneficial, while doing an ostrich and hiding one’s head in the sand was not particularly constructive.
To read PwC’s full report “Are you taking control of the Mifid II agenda?” click here.