MiFID II and its impact on asset managers
MiFID II will have a fundamental impact on the securities market when it comes into effect in January 2017. PwC’s David Pasley looks at the key issues for asset managers including distribution, governance and reporting.
MIFID II marks a significant step in the EU’s attempt post-financial crisis to increase market efficiency and choice, investor protection, market integrity and to harmonise regulatory standards in Europe.
David Pasley
David Pasley


How will it do this?
MiFID II enhances existing requirements around investor protection and transparency and reforms existing market infrastructure. It pushes more trading on to regulated trading venues and introduces greater requirements for pre- and post-trade transparency, curbs and controls on algorithmic and high frequency trading and a proposed near total ban on inducements, all applied to an expanded range of financial instruments, firms and activities.

Governance requirements are strengthened in MiFID II. There is particular focus on board composition, with directorships restricted and a new focus on diversity. Asset managers will have to review board composition across divisions or legal entities and may require some directors to step down or be replaced in order to be compliant.

Investor Protection is an area that will be substantially improved under MiFID II. National Competent Authorities (NCAs) will be able to restrict or prohibit the marketing, sale or distribution of a particular product, meaning that firms will have to stringently ensure compliance. The conduct of business and conflict of interest requirements have been strengthened while there are stricter provisions around execution-only services, investment advice and best execution.

There will be a spotlight on cost disclosure with all charges being broken down and itemised for investors, which is likely to lead to increased pressure on revenues for asset managers.

The client categorisation regime has been revamped and all client categories will be offered greater protection, including enhanced requirements for retail clients in several areas, meaning some asset managers may have to review the economic viability of providing services to certain clients.
Distribution is probably the subject that has caused the most controversy with asset managers. The proposed effective ban on most inducements, including commissions and rebates, for independent advisors will force many in the market to re-think their business model and how their funds are distributed.

In addition, there is still considerable uncertainty around investment research including what can be paid for research and who will ultimately foot the cost.

Product governance requirements have been extended; asset managers, when creating a product, must put in place a formalised approval process and must ensure that the product meets the needs of a specific target market while being distributed through the appropriate channels in order to reach that segment.

Trading and transaction reporting requirements have been extended considerably and they cover the increased scope of instruments and trading venues now captured by MiFID II meaning some asset managers will have to make significant technological investment in order for them to be able to comply with the new requirements.

MiFID II is due to come into effect on 3 January 2017 and will have a fundamental impact on the securities market and all that interact with it. Asset managers need to start assessing the impact now in order to be ready for implementation.
David Pasley is a manager in PwC Advisory.
This article appeared in the June 2015 edition.