With the 3 January 2018 deadline for the Markets in Financial Instruments Directive (MiFID II) approaching, the FCA has issued a statement urging firms to prepare.
“We expect any firms who have not submitted a complete application by 3 July 2017 to do so without further delay. We will determine complete applications received after 3 July 2017 within six months, but we cannot guarantee to do so by 3 January 2018,” the
statement, cited by
Finance Magnates’ Colin Firth, says.
Firms that submitted applications for authorisations, or variations of permissions, by 3 July are guaranteed these by the time MiFID II comes into force. However, those that have not met the submission deadline – and therefore are not certain of authorisation before 3 January – have been advised to prepare contingency plans.
When the new legislation comes into play, any unauthorised business activities will be in violation of the Financial Services and Markets Act. “Where we become aware of firms carrying on regulated activities without the required permissions, we may take such action as we consider appropriate,” the statement says.
Finance Magnates article
Investing in researchWhile the new directive is designed to safeguard the operations of financial markets, compliance is proving to be costly for financial services businesses. For asset managers, one of the most notable costs is research.
Until now, asset management firms have traditionally used a commission-sharing agreement that passes research costs on to investors “at a variable rate correlated to trading volumes”, says
Investment Week’s Anna Fedorova. Under this arrangement, fund fees are used to pay a broker “on the understanding that a portion of this charge will be passed onto an independent research provider”.
MiFID II requires asset mangers to allocate a research budget that is charged to their own account, rather than charging a variable rate for every payment. This fee can be paid from a firm's own profit and loss, or businesses have the option to raise management fees or charge investors from a separate client research payment account.
"In absorbing all costs associated with research, we hope to demonstrate our continued commitment to transparency and best practice"
In response to the increasing regulatory pressure surrounding external research providers, Deutsche Bank has invested in a dedicated research division within its asset management arm, Deutsche AM. According to Fedorova, the launch is also reportedly linked to the firm’s plans to partially sell off Deutsche AM before the end of 2018.
The new Research Institute, led by Stuart Kirk, former head of thematic research within the markets division of Deutsche’s investment bank, will assist fund managers in finding investment opportunities, as well as offering clients an analysis of economic developments.
A number of other companies – including Hermes Investment Management, Baillie Gifford, Woodford Investment Management, M&G Investments, Jupiter Asset Management and L&G Investment Management – have also promised more transparency in relation to external research costs, announcing that they will stop passing costs on to clients.
Investment Week article
A costly process
Philip Howell, CEO of investment management firm Rathbone Brothers, has spoken out about how these costs are affecting his business.
Quoted by David Thorpe in
FT Adviser, Howell says: “We have had to make investments to prepare for MiFID II and the General Data Protection Regulation. Both of those are quite material bits of regulation. [But] we think transparency is important, and we have been ahead on that, introducing a flat fee for many clients.”
The firm will absorb the costs of all research payments that are currently charged to funds as of 1 January 2018. Citing a statement from Rathbone Unit Trust Management, Thorpe notes that this change, alongside the banning of risk-free box profits, will affect the business’ margins, “with the benefit accruing to investors in the funds”.
Despite these challenges, the firm is “broadly supportive” of the FCA’s proposals, says Mike Webb, CEO of Rathbone Unit Trust Management, who is also quoted by
FT Adviser. “In absorbing all costs associated with research, we hope to demonstrate our continued commitment to transparency and best practice, aligning our interests with those of our investors.”
IT, and the upgrading of technology, is also an area that has required substantial investment. According to Howell, the firm is working on the development of a new customer relationship management system, as well as more advanced cloud technology.
Although the impact of research costs on margins will be significant, Webb believes the strong growth in assets under management will be enough to offset the change and ensure businesses remain profitable.
FT Adviser article
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