Investment Information Providers, MiFID II and Some of Its Challenges

Investment Information Providers, MiFID II and Some of Its Challenges

Investment information providers such as brokers, tied agents and other individuals providing services to investors on behalf of a company must comply with both Articles 24 and 25 of Europe’s Markets in Financial Instruments Directive (MiFID) II.

Under these two articles, investment information providers selling financial instruments, structured deposits, investment services or ancillary services must “act honestly, fairly and professionally,” provide information that is “fair, clear and not misleading,” and provide feedback and report back to clients on their investments’ suitability and costs, among others.

Given the scope of these regulations, which came into effect across the EU on January 3, 2018, the responsibilities and compliance obligations assigned to investment information providers have greatly expanded, exacerbating the challenges they face in their professional roles.

What are some of these challenges and what are some potential solutions as championed by industry experts?

Knowing the Regulation Inside Out

MiFID II, which has brought transparency and strengthened protection mechanisms for investors in financial instruments, has both increased the amount of data that has to be reported by investment information providers and expanded the requirements to achieve best execution for their clients.

With this in mind, one of the primary challenges for interested parties is to fully comprehend MiFID II’s scope, their obligations under this new directive, and the potential sanctions involved for non-compliance.

It might be a wise idea for investment information providers to enroll in a comprehensive course on MiFID II and all the minutiae that it entails.

Complying with the Copious Reporting Requirements

TORA, a cloud-based technology provider for the trading industry, believes most companies, particularly on the buy-side, find MiFID II’s onerous transaction reporting requirements as the largest obstacle to overcome.

According to the Romania-based company, this is because: “a) a much broader set of asset types is covered under the new regime (equities and non-equities), b) a much greater number of data points must be reported, including who made the trading decision and for whom (which client) and c) the full transaction details must be reported to the local regulator within T+1.”

This requirement for greater data, in turn, writes Paulina Pielichata for Pensions & Investments, “could lead to pricing smaller brokers and money managers out of the market…as the costs for establishing connections to all exchanges to get the data is considerable.”

One potential solution to this particular challenge is to report via an Approved Reporting Mechanism (ARM) for MiFID II such as that found in MAP Fintech’s Polaris Reporting Hub. Overall, ARMs break down a firm’s compliance obligations, double-check the data reported to avoid mistakes, and ensure that data is not being over or underreported.

Growing Profits Following Changes to Retrocessions

One of the major changes brought about by MiFID II was the elimination or stringent regulation of retrocessions or inducements, a move that ultimately sought to protect investors from non-optimal investments.

As explained by Deloitte, under MiFID II, “advisors will no longer be allowed to accept any monetary or non-monetary benefits paid by any third party, except for minor non-monetary benefits—but only if they improve the quality of service and do not prevent the firm from acting in the best interest of the client.”

With this in place, Simon Kucher & Partners believes profits for wealth managers will dramatically decrease.

In their blog, Partner Petra Knuesel writes: “If no concrete action is taken to strengthen the revenue side, most institutions face revenue losses of between 10 and 25 percent. For some wealth managers, more than 30 percent of their current revenues is at risk. Given the enormous costs associated with MiFID II and ongoing digitalization initiatives, the increasing costs to serve, and changing client behavior, the key question is how can wealth managers stay profitable and survive in the new environment?”

Knuesel then goes on to suggest a six-tiered approach to avoid losing revenue as a result of this ban on retrocessions.

This solution includes: 1) “Developing new products and migrating clients; 2) Enhancing revenue and monetizing services and innovation; 3) managing discounts effectively; 4) Innovating in discretionary portfolio management; 5) Internalizing external funds, and; 6) Implementing platform fees.”

Getting Squeezed Out of the Market

With MiFID II’s research unbundling, brokers have been pressured to lower their costs to remain competitive and keep their jobs.

According to Investment Week’s Mike Sheen, with asset managers curtailing “the amount of research and number of brokers they are using, and analysts [having] left brokers in their droves, the average stock on the main market saw a reduction in research coverage of 6.2% in 2018.”

This has resulted in added benefits for asset managers who have seen prices for research drop.

Gianluca Corradi, a Director with marketing, strategy and pricing consulting firm Simon, Kucher & Partners, believes a “price war” has erupted between brokers.

Corradi explains: “Large investment banks are currently pricing their research low in order to push smaller research providers out of the market. They expect a consolidation of the industry and want as much market share as possible now in order to be one of the eventual winners.”

Despite this trend, Christ Turnbull, who co-founded Electronic Research Interchange, thinks the industry is still a long way from establishing an improved research market.

“We must now accept that achieving an effective research market will be a slow process, as we are very much in the infancy stage at this point,” Turbull said.

Ultimately, training is paramount according to Bobby Johal, Managing Consultant for ACA Compliance.

Writing for Finextra, Johal believes firms should provide constant learning opportunities to their employees to better adapt to this new regulatory environment brought about by research unbundling.

“Educating employees on what constitutes substantive research in the context of the firm’s specific nature and activities undertaken is of high importance, in order to ensure that consistent evaluation of the research providers is taking place,” Johal said.

“Employees should be clear as to what criteria they are meant to be using to evaluate the research they use, as well as to how that criteria applies to different types of research.”

EIMF offers a variety of courses and certifications for individuals and organisations interested in regulatory compliance training. For additional details on these offerings, please view our calendar of scheduled educational programs found here, or speak with an expert learning and development adviser at EIMF at +357-22274470 or