MiFID II greatest regulatory strategy issue for EU fund managers
Out of all the European regulations to affect strategy, MiFID II is expected to be the biggest priority for investment managers, with MiFID II investment research rules being highlighted as a key strategic challenge in a survey conducted by Deloitte. The rules have been a contentious part of EU negotiations, which if implemented in their current guise, would require the unbundling of investment research payments from dealing commissions.
In the survey, all but one of the 13 investment managers interviewed said MiFID II will have the greatest impact on their strategy over the next two years. 65 per cent of interviewees said the MiFID II investment research rules were a key strategic challenge. Investment managers believe that the proposed rules would lead them to increase their scrutiny over the quality of research and to shrink their research budgets. On the operational side, changes to transaction reporting were viewed as a key issue and costly to implement by all firms, due to the expanded scope of the rules.
Other strategic considerations for investment managers stemming from MiFID II are those around product offering and distribution channels. Some firms are considering restructuring their existing ‘complex’ products into ‘non-complex’ ones, such as UCITS, as a result of the stricter rules outlined in MiFID II for those products deemed ‘complex’. A trend that has emerged in the UK, of investment managers increasing direct to client offerings, is expected to emerge in the rest of Europe as well, according to the survey results.
“MiFID II will increase costs and reduce margins, as the increased costs are unlikely to be passed on to investors due to competition and increased transparency on costs and charges,” says David Strachan, partner in Deloitte’s EMEA centre for regulatory strategy. “Larger investment managers with greater economies of scale will be better able to absorb the costs of MiFID II, and small, niche firms may be less affected by certain rules. Managers that employ passive and quantitative strategies, which do not rely on investment research, will also be relatively less affected, although that will depend on where the Commission comes out when it adopts the Delegated Acts, expected in November. They will then need to undergo further scrutiny by the Council and European Parliament. To gain a competitive advantage, investment managers should be thinking strategically about how they can optimise their business under the new rules. Possible strategic responses to MiFID II include mergers and acquisitions, or changing product ranges or distribution strategies.”