The new rules that came into force at the start of 2018 produced a lot of commentary and reaction. One important feature is the requirement for firms to inform clients if their portfolios fall by more than 10 per cent from their last report. The UK has now suspended that requirement, which rather questions why it exists at all.

The arrival more than two years ago of the mammoth pile of European legislation known as MiFID II was a big deal for the wealth management sector in the EU. It even affected firms outside the EU that do business with entities in the bloc. The directive squeezed sell-side research, and required firms to spend on new IT, train staff and change processes. And the payoff for all this, so the argument went, was to protect investors and ensure that they are not ripped off. 

The turmoil in financial markets since the COVID-19 pandemic outbreak has tested advisors and clients. And some of the reporting requirements set up by MiFID II are being put under the microscope. As the author of this article argues, some of those MiFID II tests are either not being used, or rendered almost irrelevant. 

As if to underline the point, last night the UK’s Financial Conduct Authority sent one of its “Dear CEO” letters to wealth and asset managers. The letter said the MiFID II requirement that they inform clients if their portfolios have fallen by 10 per cent should be suspended until at least September. But if that is the right course to take by the FCA – and it may well be – it sort of begs the question of why such a requirement sits on firms in the first place. 

The coronavirus crisis is demonstrating, in lots of different ways, how some regulations designed to protect the public are arguably not fit for purpose, or a waste of time and effort. (Consider how drugs regulators’ powers of enforcement have arguably hampered the production of face masks.) Bureaucratic red tape has built up like ivy around a tree in the global financial sector, and yet if rules are suspended or even scrapped at times like this, why bother with them at all? Surely an audit needs to be done of the entire regulatory apparatus. A great deal of time and money has been spent on systems to comply with MiFID II, often at the expense of growing a business. 
 
The author of this article is Mark Young, director at JHC, the technology firm. The editors of this news service are pleased to share such views; the usual editorial disclaimers apply to comments from outside contributors. To respond, email tom.burroughes@wealthbriefing.com or jackie.bennion@clearviewpublishing.com.

In 2018 a raft of new measures were introduced by MiFID II designed to protect investors following the aftershocks of the 2008 financial crisis. But it is only now, three years after it was introduced, and in the face of some of the most significant market volatility in living memory, that cracks are becoming apparent.  

The market instability of the last few weeks driven by COVID-19 has seen one particular requirement of MiFID II brought firmly to the fore. Namely, the need to issue letters to investors if their portfolio dips more than 10 per cent since their last report. 

In recent days there have been calls for the Financial Conduct Authority to offer guidance on how wealth managers should be dealing with regulatory obligations in the wake of unprecedented global uncertainty. As firms across the country are dealing with meeting government requirements, and adjusting to new working patterns, 10 per cent drop letters present an onerous and time-consuming administrative task. Aside from the fact that some firms haven’t got automated systems in place, there are logistical questions which could not have possibly been anticipated. For example, what if a wealth manager doesn’t have the ability to send physical letters (if that’s what the client has requested) from home? 

But aside from the unique situation that the world is currently facing, there are wider questions about the effectiveness of this particular measure. The majority of investors are much savvier than the FCA seemingly gives them credit for, understanding that their portfolio will fluctuate. This could be taken as a reflection of how wealth managers are successfully educating clients about the inherent risks that can be associated with an investment portfolio. 

Arguably, if an investor has been deemed suitable for a portfolio with a proportion of risk assets then they shouldn’t be rattled by a 10 per cent drop. Investors will almost certainly be following the news and will be well aware of market drops significant enough to affect their portfolio, surely a letter is stating the obvious? Indeed, we have heard anecdotally from wealth managers that end investors are just ignoring these communications. If this is the case, then it begs the question as to why so much time is being spent on them in the first place, time that could be better spent servicing clients? 

There is also a question as to whether this particular part of MiFID II is driving the right behaviour from the investors it was created to protect. It seems that a letter of this nature might panic a less well-informed investor and drive them to change their investments to a lower risk strategy or take their money out altogether. But this is not always the correct course of action, and if a long-term investor takes their money out every time the market drops, then they will not reap the benefit of recovery further down the line. 

The market drop of the past few weeks has served as a monumental wake-up call as to the practicalities and necessity of 10 per cent drop letters, one that the industry is calling for the regulator to address. COVID-19 has provided the first stress test of this particular measure and exposed other flaws in its wake. When the dust settles, questions should be asked about the behaviour this regulation has triggered and whether this has resulted in better outcomes for consumers.