How well prepared do you think the financial services industry was for January’s second Markets in Financial Instruments Directive (MiFID II) deadline?
I don’t think it was much of a surprise to anyone that many firms were not very well prepared. Over the last two years, preparing for the MiFID II deadline has been a slow and painful process, plus we have seen variation depending on country, company type and size.
Most firms have made trading reporting requirements a priority, which are important for market functions.
In terms of research unbundling, very few firms have established a clear policy on their MiFID II position. In 2017, the sell-side went through the process of price discovery, while the buy-side has been securing prices and trying to better understand the new regulation in terms of their own internal processes and avoiding inducement breaches as set out by MiFID II. We are now a few weeks in so it will be interesting to see if preparations made before the 3 January deadline have been sufficient in meeting requirements.
What should firms focus on now that the deadlines here?
From a research perspective, this year is going to be about tracking consumption and putting a proper evaluation framework in place. It’s really the first in-depth analysis and understanding of investment research that has been done, so that’s what everyone is going to be focusing on.
Once investment firms have a good idea about what they consume and they value, they can step into the next phase, which is to diversify their research provider sources going forward.
In late December, ESMA delayed the enforcement of the legal entity identifer (LEI) requirements, for MiFID II, do you think this was a relief for many?
I have a mixed opinion. The reason being because LEI requirements don’t affect the majority of trading volumes. The release came late so the industry wanted to delay it for around six months.
I don’t think that’ll be long enough because MiFID II comes with a massive IT revamp. There’s a lot to be done in terms of technology and for the firms involved it will take some time for this to be implemented.
Do you think there’ll be more challenges over the next month or so and for the rest of the year? Do you expect to see any other challenges?
The challenges we see can be broken down between operational and data challenges. Essentially, a lot of business workflows are changing. The challenge for the firm is to redesign, implement and control new ways of doing things.
If you take research, most firms have announced they will absorb costs, meaning they are going to pay for research directly rather than charging it to clients. With this in mind, they absolutely need to track, in an exhaustive way, what their portfolio managers are going to consume.
Compared to pre-MiFID II, it’s very unlikely that portfolio managers will have the luxury of accessing reports whenever they wish and from whatever channel or source. They need to adapt to new workflows now. So that’s a human challenge.
Analytics is the second part. What MiFID II reveals in terms of data, is how much investment firms have been failing to invest in infrastructures to generate business intelligence data for their day-to-day operations and strategic positioning.
MiFID II has also revealed that there’s a lot of technology missing, and that all comes at once, so it’s challenging to decide and opt for technology to sustain most of your MiFID II data plan. You need to have a data-driven strategy just to survive.
The FCA has now confirmed it will act if pricing reaches a stage where research appears significantly undervalued. Do you think the FCA should have stepped in sooner?
Definitely. The message that the Financial Conduct Authority is trying to get across is that asset managers have a responsibility not to consume research prices that are too low or they risk breaching inducement rules.
But in the longer term, there must be a responsibility from the asset manager to make the research market work because they are the buying power and the consumer of the research. There are huge benefits for them to start mapping and consuming valuable information which comes from a wide number of sources, and not just the big providers. If the banks oligopoly remains, that will mean MiFID II has failed.
Most of the funds expect a grace period. But everyone is carefully watching when and how the European regulators are going to sentence regulatory failures and how strongly they are going to sentence them. The FCA has been very active recently. The law has been designed and explained, now we’re in the enforcement phase.
In the long run, do you think that MiFID II will have a positive impact on the industry?
If we can erase some of the oligopoly that exists, making the markets more transparent is going to be achievable for Europe. It will lead to innovation, and will mean better investment for everyone.
The goals of MiFID II are clear, to have a set price for research and a rich offering, to increase the quality of investment research and ultimately to generate better investments and better transparency for the investor. For the active asset manager and user of the investment research, it will mean more investment in technology whilst better evaluation of resources that they are actually using. It should level the playing field and help create a more competitive environment. Much of the investment process is very manual. Acquiring the right technology can help to automate and augment the portfolio manager day-to-day. This will raise standards across active asset management.
