In the beginning of 2018, MiFID II entered into force and became a reality for banks, financial intermediaries, distributors, trading venues and manufacturers of financial products. From an EU distribution angle, while AIFMD has changed the placement rules in the EU for AIFs, MiFID II adjusts the distribution dynamics for all financial instruments in terms of distribution economics and product information. This article digs into the nature of those changes.
The changes in distribution economics
The main driver of the expected changes on distribution is the new regime on inducements. MiFID II bans the possibility to receive third party inducements in case of portfolio management and independent advice. It also limits this possibility when the distributor is providing non-independent advice or execution-only services.
In Europe, two Member States (i.e. the United Kingdom and the Netherlands) have introduced restrictions with respect to inducements. MiFID II will enhance these national regimes; the EU won’t be directly involved in that matter however. The current expectation is that inducements will remain in the retail market distribution and some segments of the advisory market.
How changes to the inducement regime impact investment firms
Changes to the regime on inducements are likely to have a significant impact on the service mix and product shelves of investment firms. Firms will no longer be able to “neutralise” the costs of creating and maintaining their products shelves with retrocessions. It will lead them to re-assess their service offering and the client segments they wish to focus on, so they find new sources of revenue.
Investment firms may consider the following aspects:
Re-assessment of their service offering and the scope of productsoffered per client segment. The current ‘open-architecture’ models are also likely to put pressure for some client segments not able to afford a reasonable level of advisory fee.
Re-design of share classes to enable distributors to target different client segments with ‘loaded’ or ‘clean’ share classes in accordance to the MiFID II restrictions per service level.
Introduction of new fees by intermediaries and platforms to compensate the decrease or disappearance of inducements (i.e. trailer fees).
VAT applied to most service fees introduced by the distributors to compensate the inducements.
There are two sides of the economics around distribution. On one hand, product manufacturers (i.e. asset managers) are likely to spend less trailer fees; on the other hand, they are exposed to additional fees to access sales channels (i.e. platform fees).
The rules around product governance
If the changes to the inducements regime are an important basis to re-assess both the service mix and the product shelves, so are the rules around product governance. They will affect both MiFID firms in their role of manufacturers and/or distributors, non-MIFID firms – asset managers and none-EU firms – as related parties are required to provide the necessary data/information.
Products manufacturers will have to provide to all EU distribution partners (i.e. B2B) the following key information:
Target market, at a “sufficient granular level” to avoid the inclusion of investors the product isn’t compatible with.
Cost disclosure, including the ongoing charges/total expense ratio as existing, but enhanced through the inclusion of ‘hidden’ costs, such as transaction costs at portfolio level.
Product manufacturers will have to ensure that the product information on the target market is available for all products (retail and institutional) to all EU distribution partners. It can be either via product information providers or via direct interfaces with the respective partners. The European MiFID Template (EMT), complementary to the PRIIPs regulation, defines the format of disclosure. At the same time, it obliges every packaged retail product manufacturer to produce a PRIIPs available to EU distributors.
What we think
Olivier Carré, Regulatory & Compliance leader at PwC
MiFID II framework introduces a wide and diverse range of new requirements. They will result in fundamental shifts for all stakeholders. Impacts on processes, documentation, organisation and IT systems are considerable. To comply with MiFID II it’s not enough to adapt and be well equipped for the new environment. Firms have to go beyond this compliance exercise. They have to engage in a strategic reflection on their own services and products and/or on their distribution set-up.
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Cookie
Duration
Description
cookielawinfo-checkbox-analytics
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy
11 months
The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.