City view: MiFID II hits choppy waters

Firms should engage actively with regulators to highlight practical issues that emerge from the implementation of the Markets in Financial Instruments Directive II (MiFID II)

CISI members can sign in to view the CISI Integrity Debate 2019: Environmental, social and governance: is it all a lot of hot air, a craze that will drift away?  

No new regulation regime is born perfect; MiFID II was blemished from birth and fresh wrinkles are still emerging. New rules from January this year, for instance, led to a torrent of letters notifying clients that their portfolios had dropped by more than 10% in value since the beginning of the reporting period. Given the bath that most world markets took in 2018, the generally high level of communication between advisers and their clients, and the regular use of platforms by investors to monitor their holdings, this will not have surprised many. The lack of responses to these letters, of which many tens of thousands were issued – individual firms are coy about the details – was probably because tuned-in investors would have seen their portfolios dip far more within the reporting period.

Had the new rules been in place over the previous decade, however, best estimates suggest that the bulk of firms would have sent them some 30 times, possibly more. Potentially alarming letters telling clients of 10% drops, then maybe 20%, or 30%, or even 40% or more (which would have happened for many in the seventies and the noughties) could lead to unfortunate and unnecessary sales by frightened clients, possibly even worse if a wave of selling triggered a major correction. Wise advice to take long-term patient positions could fly out the window. Regulators are not made of stone; should they bend a bit?

MiFID II is still bedding down; but fears of a MiFID III are misplaced. The FCA has made it plain that it sees MiFID II as a process, not an event, and values the work done by firms to cope with the 1,500 pages of legislation involved, plus the thousands more of guidance from the FCA and the European Securities and Markets Authority. It understands that some parts of the beast are purring more smoothly than others, and is gaining a better grip on what is, and what isn’t, working. Product governance and transaction reporting are notable headaches.

Potential changesThe FCA  is working on half a dozen potential changes to the legislation, the most profound of which involves firms based outside the EU, and new rules on suitability of environmental, social, and governance (ESG) investments. This was the theme of the 2019 CISI Integrity Debate on 28 March. ESG brings noble aspirations to our sector and profession, but the reality of delivering to clients real benefits needs clear thought. Firms should engage actively with regulators to bring the practical issues to the surface to help avoid imprecise regulation.

The Packaged Retail and Insurance-based Investment Products regulations – in force since January 2018 for retail investors as defined by MiFID II – is a classic example of this, and a mess. The current reform process is dictated by the timing of European Parliament elections, not by the needs of investors and firms. There is an urgent need to suspend the current regime and to take the time to produce a more informative and fit-for-purpose replacement in which clients and advisers can have confidence.

This article was originally published in the Q1 2019 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.
Published: 23 Apr 2019
  • Compliance, Regulation & Risk
  • Integrity Debate
  • ESG
  • City View
  • Mifid II

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