Investment managers are weighed down by the sheer volume of regulatory change at the moment – many will still be digesting AIFMD and changes to the CASS rules, and others will be focusing major resources on preparing for UCITS V. Matthew Baker argues that there is a real risk managers will ignore, or at least underestimate the effort required to implement MiFID II.
MiFID II – state of play
MiFID II must be implemented by firms by January 2017 (although as discussed below, this may be subject to a 12-month delay). We had expected the European implementation process to be further along by the end of 2015, however, there have been a number of delays and the main implementation measures are still awaited at the time of writing this article.
The knock-on effect of this is that the FCA has indicated that it, too, expects to be delayed in publishing its rule changes, and will not be publishing part of its necessary consultations until spring 2016. At the time of writing, it is looking increasingly likely that there will be a 12-month delay to the implementation of MiFID II. Whilst this will be welcome news, there is much that still needs to be done and investment managers cannot simply sit back and wait to see what others are doing.
What should investment managers be doing now?
Probably more than for any other sector affected by MiFID II, the actual impact of these reforms on investment managers varies significantly depending on exactly what the firm does and how its business is conducted. For example, many of the more onerous rule changes will only be suffered by firms which either have internal dealing teams or which transact directly with retail customers. However, groups containing firms with AIFMD or UCITS permissions need to be giving some thought to how the various elements interact with each other.
Some of the biggest changes for every investment management firm will be driven by the way that MiFID impacts its clients and service providers. The distribution of funds and investment products will be impacted by the reclassification of many more products as “complex”; whilst insurers and retail distributors will need more information on the managers and their products to meet their own disclosure and reporting obligations. Managers will also need to look carefully at how they perform their dealing activities since more investment firms will be treated as markets and far fewer transactions will be able to take place over-the-counter. Many managers will also be waiting to see how brokerage firms plan to address the likely ban on paid-for investment research.
Managers also need to consider how MiFID II will impact other areas of their organisation. For example, it will impose stricter standards of corporate governance. There will be restrictions on the number of board appointments held by senior management. Senior management will also have a direct responsibility for the design and approval of new products offered by the firm. These changes, as well as the need for enhanced compliance oversight and reporting, mean that managers need to take a fresh look at their governance and reporting procedures.
“Wait and see” is not an option
Once the detail of the rule changes appears in 2016, Managers should be ready to undertake a more detailed analysis to assess where the gaps are between their existing processes and procedures and what will be expected of them from implementation. When the original MiFID was implemented in 2007, there was a flurry of activity from managers seeking to update their client terms and communications. Managers themselves also received a deluge of similar documentation from their brokers.
Whilst much of that last-minute activity is likely to be unavoidable this time round, I think that managers should not be complacent. For example, changes to rules around the content of agreements may well require that firms need to overhaul their discretionary IMAs and other agreements with professional clients. Where you have individually negotiated agreements, or are a business that has incorporated different sets of agreements through acquisitions, this could result in a significant workstream.
This significant change means that managers need to look carefully at how they design, sell and monitor their products, as well as how their group and group compliance functions are organised. Whilst the temptation is to wait and see how other managers, their clients, and their brokers adopt MiFID II, I think managers will delay thinking about MiFID II at their peril.