The post-MiFID II Asset Management market in 2018

Guest blog from Julia Kirkland, Senior Partner at FSTP
If you don’t know already, which of course you do, the Markets in Financial Instruments Directive (MiFID) is EU legislation which first came into effect in 2007. It was created to regulate firms providing services to their clients which are linked to ‘financial instruments’, these being shares, bonds, units in collective investment schemes and derivatives. In addition, it covers the venues where those ‘financial instruments’ are traded.
 
Fast forward 10 years or so and we have an updated version – MiFID II. This includes the revised MiFID and a new Markets in Financial Instruments Regulation (MiFIR). January 3, 2018 is the day MiFID II must be implemented across Europe.
 
Now we’re on the cusp of this deadline, the thorny and sensitive topic of Knowledge and Competence (K&C) is bubbling up as a major concern across the industry.  We’ve spoken with numerous firms in both the Asset Management and Wealth Management sectors and they have one thing in common; they’re all grappling with the assessment of competence of information providers.
 
Who is in scope? 
In Asset Management, this may cover a wide range of roles from sales teams, client services, broker servicing staff to Portfolio Managers (the really sensitive aspect of K&C). Managers may struggle with the fact they must tell a Portfolio Manager of 20 years plus who hasn’t got a formal qualification, they need to be assessed as competent and in a very short timeframe too.
 
In Wealth, the scope may cover desk assistants, team secretaries and portfolio assistants who may all be in direct contact with clients, giving them information about prices, valuations, charges and providing generic market or sector views. Additionally, research teams who might attend meetings with clients to provide market, sector or stock views on a non-advised basis may fall under this too. Most of the firms we are speaking to are including research teams. Most of the above staff members have never been included in formal K&C Schemes before but this has changed.
 
What happens in 2018?
As it stands, information providers not assessed by January 3 will need to be supervised in their activities and oversight of any client interaction must be in place. If you’re not prepared, January 2018 is fast approaching and maybe it’s time to look outside your company for third party support and assistance.
 
Our guest blogger Julia Kirkland, is Senior Partner, FSTP
FSTP is a training solution provider with expertise in MiFID II and the company also runs workshops to cover Wealth and Asset Management to meet the ESMA requirements and provides advanced K&C assessments for more seasoned, professional staff.

Another interesting FT article, pointing to a potential adoption of the MIFID II remuneration rules on investment research (aka "unbundling") by the SEC. Some global US asset managers (e.g. Capital, MFS ...) have decided to apply the unbundling approach to all of their global operations, i.e. they would pick up the cost of investment research and NOT pass it on to their clients. They are doing so, in order to provide equal treatment to their clients globally. Said global asset managers are now urging the SEC to adopt the same provision as the EU, and bring it into US law. The SEC seems receptive to this approach, as per FT ... such a move would a be an interesting example of a sensitive harmonisation of regulations, on the back of the globalisation of  the asset management industry ...
Will the SEC take this move, or will they?
Any other pieces of regulation going global, that you can think of?
 
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2018 was always going to be an interesting year. Kicking off with MiFID II, moving to GDPR in the late Spring and of course this Summer brought a surprise World Cup Semi Final and a blistering heat wave (but a still-stagnant Brexit) suffice to say, it’s been a busy time all round.
 
At AlgoMe we think it’s really important to understand what our wider community is thinking and to get under the skin of the burning issues for 2018.  As result we’ve created The AlgoMe Industry Pulse report which we’ve published today. It has looked into these key issues and themes, from regulation through to Brexit, unearthing some interesting and useful insight. We found optimism and change, along with a level of insecurity too.
 
What drove these varied responses? Well optimism came in the shape of the 59% who believe Gender Pay Gap Reporting will improve the career progression of women whereas change with learning MiFID II and GDPR is affecting around two thirds of people. Conversely Brexit is creating uncertainty on a number of levels – people want to stay in London, but they’re concerned about their jobs and whether their companies will move away. 30% of those surveyed felt Brexit is a risk to their job security. While 68% believe their companies will stay in the UK, only 54% of individuals said they will definitely stay put versus 27% who are actually considering relocating. When it comes to relocation people chose Dublin, Paris and Amsterdam as the top three choices of European cities to move to. Additionally, regulation will take add to felt insecurity this year with MiFID II impacting 64% of people’s roles and GDPR 60%. Diversity in the workplace is considered important by 64% with 20% remaining neutral and 16% in disagreement, demonstrating there is still a lot of work to be done in both these areas.
 
We’ve developed 5 key insights which summarise the in depth research:
 
 1. Job confidence pre-Brexit: A workforce in need of reassurance
Industry and government need to act fast to gain the confidence of the sector as 30% are feeling insecure about Brexit and believe their jobs may be in jeopardy.
 
2. Will London remain the financial centre of Europe? Best to leave the lights on post-Brexit
The City is definitely open for business; our industry sector is loyal to London and a majority of workers want to stay here post Brexit.While 27% of respondents expressed they would move as a result of Brexit and 14% of felt strong about this, most people (54%) would not consider moving as a result of Brexit, whereas 68% believe their companies will remain in the UK.  There’s no clear leader in Europe to replace London when it comes to the most desirable places to relocate to and work from; Dublin was the top location (25%), followed by Paris (21%) and Amsterdam (19%).
 
3. Regulation is a necessary inconvenience:
Undoubtedly 2018 is a big year for the regulatory calendar and this is having an impact in the short and long term, so we expect temporary upheaval while MiFID II and GDPR are bedded into to working practices
 
4. Gender Pay Gap – Unwelcome truths for some, seen as much needed by the majority:
The implication for Gender Pay Gap Reporting is, it will continue to highlight industry inadequacies for some time; transparency and action should expedite change
 
5. Diversity – More change afoot needed to accommodate a changing workforce:
Diversity will need to be top of the agenda across the board to effect meaningful progression across the industry
 
We hope you enjoy this latest report and find the insights valuable to yourselves as professionals, you can download your free copy here.

Brexit, MiFID II, GDPR, Gender Pay Gap and Diversity are the themes we consider top of mind currently which is why we’ve created the Summer 2018 AlgoMe Industry Pulse Report.
 
We wanted to get under the skin of some of these key events and burning issues for 2018. In doing so, we revealed some very interesting results and statistics.
 
Given a choice of 7 cities, Dublin, Paris and Amsterdam are the top three choices for Asset Managers, Fintech and Financial Services employees to relocate to following Brexit. While 54% would not consider moving as a result of Brexit.
 
When it comes to regulation; we are not surprised to find MiFID II and GDPR will affect over 60% of the roles in the industry.
Positively, 59% believe Gender Pay Gap Reporting will improve the career progression of women.
 
Please read the report for the full information and do get in touch if you would like to know more about your industry workforce.
 
Rob Carter, CEO, AlgoMe

The Markets in Financial Instruments Directive (MiFID II) is regarded as one of the most significant and far reaching regulatory initiatives undertaken since the economic crisis of 2008 and the last ten years.
 
In 2009, when the G20 committed to manage the risk associated with OTC derivatives trades, the European response was European Market Infrastructure Regulation “EMIR” (into effect as of August 16, 2012) and MiFID II. Eight years on, it’s pretty reasonable to ask – are we there yet?
 
MiFID II was originally scheduled to come into place as off January 2017. Due to concerns over the tight timeframe to implement the directive, its complexity and the necessity to build IT infrastructure systems, the implementation date was delayed a further year to January 3, 2018. Where previous regulatory changes often had a phase in period, MiFID II is a kind of ‘big bang’.
 
MiFID II is going to impact the overall business. From transaction reporting, product governance, general inducement rule and unbundling of research to best execution and market infrastructure, its aim is to reshape the European capital markets. The impact will be felt way beyond Europe. For example, third country firms providing investment services or activities in the EU will have to submit transaction reports to the regulator which authorised them.
 
What are some of the key challenges companies are and have been facing when implementing MiFID II?
 
Data management
The financial services industry is known for its legacy systems and challenges it faces in handling the multitude of data needed to comply with the requirements of MiFID II. Fit for purpose IT systems are easier said than done. This very thing has already caused significant headaches for many companies even for what is considered to be the “simplest” increase of client reporting with now 65 data fields instead of previously 29. It is not only the increase of data which is a challenge, but equally the correctness of data when extrapolated from legacy systems or in general.
 
Adequate oversight and governance
According to Don Scott, Director, KPMG Regulatory Advisory Services in the recently published report ‘MiFID II The Time To Act Is Now’, “industry practice will continue to change until a market standard has evolved”.
 
But MiFID II has far reaching oversight and governance changes. Within the product management cycle, manufacturers and distributors become both responsible for ensuring that investment products are distributed to a target market of end clients. This does not stop with the design, development and launch of a product but needs continuous oversight throughout the life cycle of a product. The responsibility lies with the manufacturer as well as the distributor to prove products are and have been distributed to the target market. Equally they need to prove clients remain fitting the target audience and this is achieved through ongoing verification of the suitability of the clients profile.
 
Equally, the responsibility of companies for showing they have adhered to “best execution” of trades has changed from taking “reasonable steps“ to “all sufficient steps”. This previously applied to equity asset classes and has now been extended to non-equity asset classes combined with a significant reporting obligation on where these trades have been executed. Clearly this will bring significant challenges for companies to show and “evidence” their compliance, not on a trade by trade basis, but through a robust set up of processes, procedures and governance over it. A 2016 asset management market study by the FCA has highlighted that investment managers are still failing to ensure effective oversight of best execution.
 
Accountability and conduct
This is most felt through the inducement rule and the unbundling of investment research and execution. Some EU countries already banned commission payments for retail clients (UK, Retail Distribution Review) with MiFID II making this more generally prohibited across the EU to avoid conflicts of interest.
 
The unbundling of investment research and execution aligns very much with the rule of “best execution” of trades and sets clear rules for when investment firms use “broker commission” to pay for research. Ultimately it is up to the investment firm to show that the research which is being paid for from broker commission is to the benefit of the investor.
 
Transparency
Creating transparency of the overall financial market aims to better understand, from a macro point of view, the risk(s) that investment markets in general pose to the stability of the financial markets and as such better protect investors. Reporting requirements are increased and broadened significantly and the capital markets playing field is made more balanced by bringing more asset classes and instruments within a regulated market environment as well as tightening the rules around it.
 
So are we there yet?
While this weighty agenda has been with us now for some time, the implementation date of January 3, 2018 is clearly not the end date of MiFID II.
 
The rules will continue to be interpreted and understood and therefore develop and evolve.  Looking back at MiFID I – which came in to play in April 30, 2004 and into national law as of January 31, 2007 – it’s fair to say there have been ongoing developments ever since. MiFID II and its outcomes will therefore very likely also impact companies and markets alike and remain on our collective agendas over the next five to ten years.