A strongly-attended conference in London recently tried to get to grips with one of the most important regulatory changes affecting European wealth management in years - MiFID II.

Larger organisations with the deep pockets to pay for rising IT and related costs are most likely to win through from next year’s regulatory juggernaut, the Markets In Financial Instruments Directive, (MiFID II) being rolled out across the European Union next January, a conference has heard.

MiFID II, as it is known (the first iteration of such rules went live in 2004), aims to make financial and investment advice and services more transparent, and ensure investors are put into markets that suit their genuine needs. While such goals are laudable, the challenge of collecting and storing data, ensuring this does not clash with data protection laws, and dealing with the costs of upgrading systems, is a formidable one. Surveys have shown that a significant chunk of financial services firms in Europe aren’t confident they will be ready for the start of January. 

These were some of the messages coming out of the WealthBriefing MiFID II Summit 2017 conference held in London’s Savoy Hotel in May. The full-to-capacity conference, hosted by the publisher of this news service, pulled together financial industry figures in the front lines of dealing with such rules, as well as technology companies, consultants, advisors and brokerages. Sponsors of the conference were Appway; Six Financial Information; Actiance; Cordium; Qumram; Salesforce; TIM Group; SDS; Touchstone; Industry Events Online; ProFundCom and smartKYC.

The conference, organised by ClearView Financial Media, was kicked off by Stephen Hanks, markets policy, of the Financial Conduct Authority. Hanks argued that it was important not to view MiFID II as somehow distinct or foreign to other regulatory initiatives of the FCA. “This is not something stuck in a box `over there’,” he said.

With MiFID II, there are four areas to consider: The importance of “culture and governance”; “smarter communication”; technology (including areas such as cybersecurity and outsourcing), and “policy” (covering areas such as inducements and research), he said. 

With the notion of “best execution”, Hanks said, it must be framed in terms of achieving the “best possible outcome for a client”. The regulations are not in place to stop people selling products but to be clear on what is sold, why and to avoid mis-selling, he said.

Hanks said that checks on the UK financial industry by FCA meant it is still concerned about the quality of suitability assessments by firms.

Inducements, research and clarity
One effect of MiFID II is to clamp down on brokers providing investment houses with research about companies and other areas without explicit payment because this will be treated as an “inducement”, creating a headache for smaller asset managers who may be unable to create in-house alternatives. “It does tilt the playing field in favour of the larger asset managers,” Colin Berthoud, founding partner at TIM Group, said in a panel discussing “unbundling of best execution and research”. “My prediction for research is that there will be less of it and you will have to pay more for it. Over time, the number of research providers will come down and coverage will come down.” In the short run at least, he said, the outlook for research is “dark”, Berthoud continued. Life for the smaller asset management houses could be more difficult, he said.

It is possible that new business models, focusing on low-cost provision, could come into fill gaps left as some traditional research provision changes, Jonathan Wilson, project director, EMEA, for Cordium, told the audience. “You may see an `eBay’ of research”, he said. 

Research, and the need for it, resembles water in some respects – it will come through and find its natural level at some point, Roddy Buchanan, head of wealth management, WHIreland, which offers wealth management and corporate and institutional broking, said. 

Earlier in the session, Buchanan said one conundrum stemming from MiFID II is how the regulations required there to be more detail disclosed to clients about investments and decisions and yet communicated so that clients can understand what’s going on. One approach is that extensive data will need to be collected and held inside an organisation, with a summary of what has happened sent to a client. Even so, this will not be easy to get right, Buchanan said. A client will ask “why are they [the advisor/investment firm] telling me all this? What are they trying to prove or hide from me?” There will need to be more disclosures about risks and issues in investment – some of this detail will go over people’s heads, Buchanan said.

In getting ready to report data back to clients, Berthoud said there are three classes of firm: “There will be goody-goodies who get everything done on day one; most will wait to see what the goody-goodies do, and then there will be the laggards.”

Cordium’s Wilson said one issue for industry players is understanding what it means to have made “sufficient” steps in being compliant with MiFID II; there remains some uncertainty around exactly what the regulators mean here, he said. 

Wilson continued: “ESMA has explained what it regards as sufficient steps in being compliant with MiFID II; these are largely about the quality and completeness of the best execution process, something the FCA has previously found wanting in many firms.”

One problem, Buchanan said, is that there is a vast amount of data that needs to be collected and disclosed to prove that “best execution” on an investment has been delivered; such a process is complex because of the wide range of instruments and securities used in modern financial markets.

Bruce Weatherill, chairman of ClearView Financial Media and chairman of the panel, raised the issue that a potential unintended result of the regulations is that wealth advisors will not be able to make certain investments for clients; or, they will have to take additional risks and disclose that to clients.
 

Enhanced reporting
In the first of the three panel discussions, industry figures grappled with the topic Enhanced Reporting: Leveraging Technology to Track Communications. This panel dealt with some of the concrete problems – and maybe opportunities – that come from how MiFID gets firms to report what they are doing to regulators and clients.

The cost burdens caused by these rules mean that for some, especially smaller, firms, the only solution is to invest in technology, Ramon Lladós Bernaus, corporate services division director, Credit Andorra, told delegates. Technology has to be real-time, easy to use, and mobile. A challenge is to marry the core system of a bank with what clients get to see at the front end, he continued. “You have to redesign your processes.”

The cost of regulation, including those of preparing for MiFID II, are heavy, he said. In Spain, for example, financial firms will see as many as 40 per cent of their clients leave the market because costs will make it uneconomic to serve them, he warned. 

Speaking on the same panel, Robert Roome, head of technology at WDX, said a tactical approach to preparing for MiFID II and other rules, rather than an over-arching one, will drive up costs. A single, consolidated view of a client is needed, he said. Matthias Wegmueller, co-founder and head of business development at Qumram, meanwhile, said: “To reduce complexity and manage your costs, you have to manage your data. I don’t think you can capture data only for compliance purposes, either.” He said that data capture must also be viewed as a potential competitive benefit for a firm because it generates an extremely rich source of big data, which can be analysed to learn more about customers’ behaviour and preferences, and can be used for business improvement purposes.

One issue to grasp is the difference between unstructured and structured data, such as when information is gathered from social media channels such as WhatsApp and when it is captured in response to specific questions and fields, Nigel Sirett, sales director UK of Appway, told the audience. “If in using certain channels you become more chatty with a client, so will their replies,” he said. “We are in two different compliance worlds here,” he said. A challenge is to take hold of conversations with clients in ways that can be formally recorded for MiFID II purposes, Sirett said.

The demand to bring in more data also raises cybersecurity issues, Roome said, making it important to educate staff, set down procedures and ensure that only those staff who need to collect/see data actually do so.

Robin Smith, Technical Director International for Actiance, said firms must be very clear in their position as to why they collect data and for what purpose, especially where it could be considered personal in nature. The European General Data Protection Regulation (GDPR, taking effect in May 2018) potentially applies to any organisation world-wide processing European citizens’ data. Under MiFID II you may need to retain data that under GDPR you may be required to remove from your systems. Firms should seek formal advice, but in order to avoid penalties Regulators tend to advise adhering to the retention of data in such circumstances, but that policy and the reasons for retaining such data should be well documented.

A related issue, of different “layers” of regulation, Sirett said, highlights the benefit of firms having one single storage point for clients’ data so that companies don’t harass them by asking for the same details each time a new financial relationship or transaction is entered into. “There are too many organisations that keep it [data] in different places and replicate it,” he added.

Ramon Lladós Bernaus, asked about the issue of outsourcing of functions by banks, stressed that the firm outsourcing functions such as data collection rested with the entity that outsourced the job in the first place.

Protecting the investor
Technology seems to be an answer to the chore of collecting data on clients as and when they are given advice, panelists said in the session entitled Riding The Wave Of The Financial Tsunami: New Age Investor Protection. 

One challenge for the industry is that in the past there was a one-to-one relationship between the financial firm and a regulator when it came to disclosure and reporting. Under MiFID II, however, the reporting web expands with the need to obtain disclosures from investment manufacturers, Alexander Dorfmann, senior product manager, SIX Financial Information, told the panel. “What now comes into play is the manufacturer and the [product] issuer,” he said. “I think products will disappear in the market because some will not be able to withstand the costs of MiFID,” he said. 

Haney Saadah, senior manager, risk and regulation programme advisory at EY, said it is important to see MiFID II on a pan-European perspective. Some European players don’t have a sophisticated understanding around client suitability in investments, he said. Challenges for the industry are staff training, rigorous record-keeping and the ability to ask the right questions of clients.

Simon Elvidge, board director at EOS Investment Management, said a challenge is to take a “holistic” approach to making full use of the knowledge that exists inside a financial organisation. In practice, senior management and the MiFID2 teams need to ensure that they do not become siloed in their approach, thus avoiding segregating the different work-streams. Since there is so much to cover, it is tempting to just focus on “your area” as there is no time to sit back and consider the bigger picture. Significant benefits can be gained by using this as an opportunity for a step change, for example re-engineering processes, using the data for multiple purposes, making sure other areas such as HR are involved in processes, etc. Elvidge gave the example of using data gathered for suitability and appropriateness purposes to also be applied when responding to requests from investment banks (in their capacity as issuers) about investor profiles under MiFID2.

Asked about the different impact of MiFID II on execution-only services and more advisory and discretionary services, Saadah said that “off-the-cuff execution-only will be challenged”.

Jeremie Vuillard, head of advisory at Kleinwort Hambros, was asked how the widening use of “robo-advice” and related digital technology fitted into the MiFID II picture. “If you dig deeper into this market you realise most of them [robo advisors] are mainly platforms, or actually a discretionary service,” he said. “In essence, it’s about having the right technology and tools supporting investment advisors throughout the whole advice process, from sourcing to delivery. At the end of this chain, we should always offer clients the possibility of contact,” he continued.

MiFID II, in essence, consists of “two streams” – suitability and transparency. It is not so much about databases but about processes in how data is used, collected and why, Dorfmann told delegates. 
“A problem for us is that from a high level all regulations look the same. I think that MiFID will clean up some of the market because it is going to be too costly for some firms,” he said.