The UK’s Financial Conduct Authority (FCA) has published multi-firm review findings indicating the Markets in Financial Instruments Directive’s (MiFID II) has improved asset managers’ accountability over costs, saving investors millions.
One of the core aspects of MiFID II was to ensure portfolio managers serve as good agents with the best interests of their clients and that their investment decisions are not unjustifiably influenced by third-parties.
After 3 January 2018, asset managers were required to pay for research separately from execution services, and charge transparently or pay for the research themselves. Before the regulation came into force, research costs were typically bundled with opaque transaction fees borne by investors’ funds. The FCA stated a lot of firms had not been adequately controlling how much of their clients’ money was spent on research.
In its new research, the FCA found most asset managers have decided to pay for research through their own revenues instead of their clients. Furthermore, firms have improved their accountability and scrutiny of both research and execution costs, including where firms have chosen to charge clients for research.
The FCA claims this has resulted in UK-managed equity portfolios saving around £70m in the first six months of 2018.
Another highlight from its analysis is that budgets set by firms to spend on research have fallen on average by 20-30%. While budgets have been cut, asset managers stated they are still getting the research they need.
Moving forward, the regulator will monitor both competition impacts and research coverage of SMEs following MiFID II reforms, by analysing market data and other reviews.
The FCA will continue to investigate the area over the next 12 to 24 months.
MiFID II has been a major regulation for the EU. The financial services industry has spent around €2.5bn to implement changes and regulators have needed somewhat 30,000 pages to explain it. The regulation has helped the RegTech market, with many new vendors entering the market to help firms with compliance.
Since 2014, 5.9% of the total $10.9bn invested into the global RegTech sector has been deployed to companies building RegTech solutions.
The complexity of the regulation has meant there have also been some failings. One of the challenges facing firms was this greater sense of protecting investors, MAP FinTech regulatory analyst Andreas Savoullis believes. Rather than taking “reasonable steps”, firms must make “sufficient steps” when executing client orders.
Savoullis also stated that the regulation’s complexity has left many firms failing to understand parts of its best execution components and the relevant checks required for compliance. He believes the regulation has required a lot of resources from firms.
He said, “Keep in mind that complying with the new regulation’s obligations requires active participation from a firm’s compliance, technology and operations departments, as well as senior management. Moreover, even if the companies had sufficient resources to allocate to this new requirement, it would still have been very difficult to properly comply with the law’s requirements.”
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