Preparing MIFID III
With MiFID II ripe for review, this article identifies the four areas of potential change for MiFID III
Pascal Martino - [Sponsoring] Partner - Banking and Human Capital Leader - Deloitte
Simon Ramos - Partner - IM Advisory & Consulting Leader - Deloitte
Benoit Sauvage - Director - Risk Advisory & Consulting - Deloitte
Kevin Demeyer - Director - Advisory & Consulting - Deloitte
Paul Emmanuel Delaneau - Senior Manager - Advisory & Consulting - Deloitte
Published on 15 July 2020
MiFID II and MIFIR have been live across all member states for over two and a half years (since 1 January 2018). This set of regulations has introduced some significant changes in working practices for investment activities, both for banks (retail, private and corporate or institutional banking) as well as for asset managers. Today, after a turbulent start to the year with a new European Commission and Parliament and COVID-19, there is a sense that the MiFID II package is ripe for a review. This article aims to identify and prioritize potential areas of change, even if in the distant future
As MiFID is a massive legal instrument with over 7,000 pages of regulatory text, a full review is likely to take some time, with the effects potentially only going live in 2025 after the text is finalized at the EU level and the various transposition periods. However, “anticipating is already acting” (Fayol)—anticipation is the essence of long-term business development, so here we seek to seed the elements of potential change. At this moment, we can identify four areas of change:
- Review of interactions with investors;
- Digitalization of MiFID communication;
- Review of the status of research as inducement; and
- Consolidated tape and FX.
With the MiFID II review already made likely due to review clauses and the final arrival of Brexit, the degree of certainty reached a climax in February 2020, with a European Commission consultation questionnaire spanning more than 90 questions on a variety of topics.
REVIEW OF INTERACTIONS WITH INVESTORS
Core to the MiFID II challenges were the changes regarding the quantity and granularity of information to provide to and receive from investors. This blurred the line between the professional and retail client categories, leaving few, if any, differences between the groups of investors
This is an area ripe for change, with the realization that the universe of clients within each category is highly heterogeneous, especially among the retail category. We can expect MiFID III to not only try to present information to retail investors in a more manageable way along the less-is-more principle but to also introduce a new “super-retail category”. Thanks to digitalization and client comments, authorities have realized that providing too much information tends to hide the forest for the trees; namely focusing on a tiny detail that obscures other valuable information. For example, a higher cost for a fee but forgetting the better risk/reward outcome of the product or service.
Concretely, one can expect that the new version will require information to be presented in a slightly different manner: more targeted, with fewer details by default, but more available on-demand. For example, a total expense ratio displayed first, then details on-demand. A note of caution: data management and granularity of information at the financial institution level will most likely become increasingly challenging in order to cope with new demands.
If the concept of “less is more” is already partly present in the supervisor’s mind, the other “super retail” idea may have a bigger effect on a firm’s organization. This could conceptually be a huge plus for private banking actors, as it would represent a quasi-professional status with accompanying simplifications in information exchanges, and potentially wider products or service access. However, this idea requires major changes to be made, namely the reclassification of all investors into new buckets alongside the necessary paperwork.
If the ability to offer more products to private banking clients in a simpler way looks appealing, it raises at least one question: if the change is introduced, how will the current three categories evolve regarding rights, duties, and communication obligations? This idea gained further momentum thanks to the CMU experts’ report, which was released by the European Commission at the beginning of June to increase the investment eligibility of retail investors to financial instruments.
DIGITALIZATION OF MIFID
This area of change aims to align MiFID II with the realities of the world at large. Remarkably, when MiFID II was being written between 2010 and 2014, the internet was not properly taken into account. The approach was paper first, digital second; namely, requiring paperwork or a signature first, then authorizing the famous “durable medium” support (concretely, a pdf file). Thanks to market comments and the EU’s will to enter a digital strategy and insight form into the MiFID II consultation document, this is likely to change 180° to digital first, paper second. Therefore, providing information digitally first (through an app, website, online-banking, etc.) then on paper, when not possible to do otherwise.
For MiFID firms, this digitalization would have practical consequences in how they approach and communicate with clients. Counterparts may see some influence with, for example, the increased integration of information across different firms. With a shorter time to market, this digitalization will most likely enable the spread of information to clients and the reception of their consent (in the case of ex-ante information and approval of orders for execution) and communication regarding solutions to clients’ problems rather than about the product of the month.
REVIEW OF RESEARCH STATUS
One of the last battles fought by regulators regarding the MiFID II drafting process was the decision to split research from brokerage by considering it a forbidden inducement. This had seismic consequences for many firms, both brokerage, but also on the buy-side. Suddenly, investment firms lost access to valuable information that helped them in the investment process. The consequences were either a loss of information or the need to pay for research. For many issuers, it was a loss of visibility, as most of the research is concentrated on large companies to the detriment of the bio-diversity of the economic system.
Even if the industry has moved on from the topic, a few member states are highly motivated to reopen the debate on research.
CONSOLIDATED TAPE AND FX
The European Commission is determined to reintroduce the concept of a consolidated tape—a place where all information at the trading level is concentrated—despite the fact there is no marked interest until now.
The inclusion of FX spot trades into the MiFID’s scope represents another significant challenge that the European Commission seems willing to pursue. Today, spot is excluded from the MiFID’s scope; if included, it means applying all requirements such as target market, pre- and post-trade disclosure, cost and charges … and reporting to comply with the amendments proposed under Market Abuse regulations.
One of the lessons learned from MiFID I and MiFID II is to anticipate the possible changes of the future MiFID III, so any adaptations to the new regulatory environment are gradually introduced into the organization and well-intertwined in its business strategy.
While implementing a MiFID III project right now is certainly too early, overlooking changes and missing the direction of where the wind is blowing is perhaps not the right idea either.
Besides the introduction of ESG (sustainability requirements) into MiFID II, the current agenda is that the European Commission will collect copies of market stakeholder responses from its consultation. Then, it will analyze the responses and produce a draft paper for discussion by its two peer EU institutions in probably two years’ time, with a likely transposition phase of 18 to 24 months. Therefore, if all goes as planned (and we know that is not always the case) the new obligations should go live sometime around 2024–25.
MIFiD II overview
By end-2016, the 28 EU member states will transpose the MiFID2 Level 2 into National Laws, to introduce a range of measures in order to increase market transparency and efficiency, improve investor protection and increase regulators footprint in the financial instruments market.