The ongoing uncertainty of Brexit and the second Markets in Financial Instruments Directive (MiFID II) one year on, were the first discussions among a jam-packed agenda at this year’s TSAM London: the Summit for Asset Management.
One of the first panels of the morning saw panellist highlight the efficiencies and inefficiencies of both MiFID II and the Packaged Retail and Insurance-based Investment Products (PRIIPS) regulation, over a year after their implementation.
One panellist stated MiFID II has “created a barrier to entry for smaller firms” and indicated that smaller firms are at a significant disadvantage right now.
He said: “There is extra pressure on the whole in terms profitability, bigger firms find this easier, rather than smaller, growing new entrants.”
He further explained that the regulators behind MiFID II had not intended the regulation to affect small firms, but another panellist stated that this had happened and smaller sized firms have indeed suffered under MiFID II.
He said: “It has happened and pushed some firms out which could lead to less competition. Have I seen any fallouts on the buy side? No, I haven’t seen that yet—as of yet, that is hard to quantify.”
Another panellist discussed the rush to data exchange he saw in Q4 2017 as opposed to the lack of data exchange in Q3 2017, where from that he became concerned. When comparing Q4 2017 to Q4 2018, he stated: “Many firms had a much more peaceful Christmas in 2018.”
One speaker indicated that six months on from MiFID II implementation in January 2018, he saw a “massive wave of reflection” in June 2018, where firms were looking at exactly what they had implemented under MiFID II.
He highlighted that the two main drivers of MiFID were firstly a ticking box exercise and benchmarking. Secondly, it was about going through one of two cycles of reporting and trial and error—where firms were working out what was the most expensive method while attempting to make processes more efficient.
The panel went on to discuss the PRIIPS regulation, with one speaker affirming that the guidelines to PRIIPS are likely to change.
He said: “The guidelines are always changing with PRIIPS, regulators will always aim at making it more agile.”
One panellist said: “There is a theme of the complexity of data in the industry right now. We are aiming to keep up to speed on the technological speed of various functions, not just client reporting—as well as growing on the investment side and regulatory side. The markets haven’t fundamentally changed, I’ve seen no massive falls in liquidity—liquidity is poorly defined by trade volume, but when there is a dislocation, you should question if there are still buyers out there.”
In closing, the moderator asked both panellists their key wishes for MiFID II and PRIIPS—essentially how they would like both regulations to progress.
The first panellist said: “We had our big bang with MiFID II, a lot has happened since then. Let’s try and solve the unintended consequences of MiFID II before we start putting through new regulations.”
The other panellist said: “I completely agree with that. Let’s work with the industry, to make sure there is a level of consensus before moving ahead because clearly, that didn’t happen enough with MiFID II.”
The next panel gave an update on Brexit to which a head of legal gave an indication that most EU countries are taking it upon themselves to create agreements with the UK, or are creating domestic laws in preparation for a no-deal Brexit.
The panellist, who works at a global bank, said that the indications of individual countries doing this are similar to the European Securities Markets Authority’s (ESMA’s) recent deal with the Bank of England for the recognition of central counterparties (CCPs), in the event of a no-deal Brexit.
The recent deal also recognises central securities depositories established in the UK.
The speaker discussed the UK government’s possible vote on 12 March, to decide on a “tweaked deal or a no-deal with no transition”.
She added: “It is quite likely there could be no deal.”
The panellist said countries that have put forward or are drafting domestic laws and/or agreements with the UK in the case of a no-deal Brexit include Sweden, Austria, Malta, Finland, Spain, Belgium and Luxembourg, among others.
She explained: “All [these countries] have Brexit decrees, all have, or are, drafting decrees, they are going out on their own for contingency plans.”
Another panellist, who works at a global investment firm said all his business’ preparations have been moving toward a no-deal Brexit and he affirmed his business “would be ready if 29 March goes ahead”.
The moderator then asked the panellists how Brexit features in client relationships.
To this, one panellist said: “If you’re in charge of contingency, and you are ignoring a hard Brexit, you’re probably not doing your job properly.”
He added: “Moving clients is a process that can’t easily be reversed, but you need to have that insurance policy for Brexit. If you’re looking at fund jurisdiction, most firms now have a Luxembourg or Ireland product.”
Another panellist said he had not had to move many staff and looked at it as not a massive migration but an “expansion of capabilities”.
He added: “In Ireland, we have staffed up appropriately, it’s not hundreds of people being moved. We have hired locally.”
Technology was another topic on top of the agenda for TSAM, with one panellist stating that robotic process automation (RPA) will not take over human intervention in an afternoon panel on ‘Revolutionising Operations’.
An audience member also suggested that the industry shouldn’t let a robot carry out any critical processes. The panel moderator then asked the panel what governance and control the industry needs to implement and start managing that.
One panellist said: “There needs to be governance around the process of RPA, you need to centre your expertise internally, you must have people who know business on one hand and technology on the other.”
He added: “Your risk officer should always be involved, as well as your CEO.”
In a later panel, there was discussion around how important it is to know your client, with distributed ledger technology (DLT) and blockchain in mind.
To this, the panellist stated: “In order to get the big banks and investment firms of the world involved, you can’t go against government or regulation. So there will need to be some kind of transparency and ways to make sure we don’t let in the wrong people, trying to scam us. I can see where this libertarian approach comes into the notion of blockchain, but you still have to follow regulators.”
The moderator also asked the panel if they thought that London, in the context of Brexit, would remain a good start-up location for DLT or blockchain businesses to thrive.
The panellist stated: “London is still the location for this. Obviously, there is a lot of capital in London as well. Where blockchain is concerned, the top 20 tokens in the world are based outside of the US, so there’s an opportunity for a global movement of blockchain beyond Silicon Valley. London is well positioned to be one of the leaders.”
When discussing the biggest conception of blockchain and DLT, the panellist said: “Many tend to conflate bitcoin with cryptocurrencies, which was the case until recently.”
He added: “The biggest misconception is the governance of these companies, but when you have an engineering team sitting next to you as well as a design team, you can foster a lot of innovation in your decision-making processes.”
“Unfortunately, when people hear about scams, they start to ignore the space altogether. These are still early days, but I don’t think many people realise how quickly it will change the industry within the next few years. It’s only a matter of time before mass adoption.”
Toward the end of the day, a member of the World’s Pensions Council discussed the emergence of Environmental, social and corporate governance (ESG) initiatives in a panel entitled ‘The investment firm of the future: integrating financial, ESG and country risk metrics across financial markets’.
The speaker discussed the rapid level at which ESG initiatives are arising within pension funds and asset owner’s agenda.
He explained that ESG initiatives used to be an after-thought or impact mandate, but they are now becoming “essential to the future of finance. More smart investors and more asset owners want to buy a share of companies who have an investment in climate action, gender equality and water conservation. Asset owners are transforming the world economy.”
