MiFID II is coming. Whilst the regulations are still to be finalised, by the time it arrives in Jan 2017 the way in which investment firms do business is set for major change. This change will impact on relationships between manufacturers, distributors and customers, but will also likely impact on profitability. Businesses that are not agile enough in their approach to change will find themselves left behind as the market races away with more streamlined and competitive offerings. Even those fast moving firms that have traditionally displayed agility can find the change required for internal and operation processes daunting.
The good news is you can take steps now to minimise the impact on your business.
The biggest changes arriving with MiFID II are in the form of commission based relationships and a move towards ensuring customers’ best interests
These changes have already happened in the retail investment market under the RDR (Retail Distribution Review), 2012. A 2014 report by the FCA examined the effect of removing commission in the retail market and found evidence that the RDR has been transformational. It states that the removal of inducements has led to more competition which, in turn, has created better value for the customer, (FCA post implementation review 2014). Products have reduced in price and, in some cases, this reduction has been larger that the original commission price paid on them prior to RDR. One reason for this is many products have been simplified, reducing costs and resulting in lower charges to the customer. Also, the lack of inducements means many firms who did not accept commission before RDR are now far more competitive when compared to distributors who did.
Another report from the CASS Business School (2013) showed the number of advisors fell following the implementation of RDR. However, it also showed that firms adept at meeting the requirements of a more tech savvy and informed client base were more likely to see a strong demand for their services continuing over time, (The impact of RDR on the UKs market for financial advice)
The lessons to be learnt from this retail example is that firms who remain agile and embrace the changes of MiFID II will be in the best position to thrive post implementation. Those who stay still, or are slower to adapt, will lose out.
Removal of commission payments will fundamentally change the relationship between manufacturers and distributors. This will likely impact the independent distributors most as the time and cost involved in proving true independence could negate the viability of the business model.
Distributors will have a legal duty to choose the best product for their customers. This could lead to increased competition as manufacturers bring products to market that were previously held back because of the commission model. Furthermore, as products are simplified and costs reduced there may be more consolidation of products across the market.
The rules on execution and advisory only products are also going to change with the viability of many products on an execution only basis left in doubt. For example, many UCITs (products that comply to the single European regulatory framework for an investment, meaning it is possible to market the products across the EU without worrying which country it is domiciled in) that were previously execution only, will now become complex products and by definition not execution only.
Working in partnership with FutureProof we have developed a ‘Product Control Health Check’ that focuses on how you sell your products now, and highlights the changes you’ll need to maintain future compliance.
MiFID II will change the way you market and sell your products, and who you sell them to. With the removal of commission for recommendation and sales the future viability of products in the market place needs to be reviewed. Our review of the new MiFID II regulations has also indicated that much of the compliance will centre around recording information and documentation of the relationships between manufacturers and distributors. To remain successful post regulatory change you need to;
Achieving this state requires a complete understanding of your current situation, in terms of what you sell, to whom, and how you record all this information. Only when you have this comprehensive oversight can you determine what needs to change to ensure your future success.
The health check, using advanced data analytics from FutureProof, will demonstrate how the products will be affected by change and the impact this will have on your profit and loss. It also gives you powerful interactive visualisations that let you model what-ifs and make the best decisions for your business. By looking at your highest performing and most influential products first we can deliver you business value and benefit quickly. Outcomes are used to develop a template for replicating change over a complete product portfolio, whether that change be to processes, documentation or sales strategy.
We want your business to remain successful, that’s why we’ve developed this health check. Only by understanding your current situation can you truly be prepared for the change to come.
The compliance health check could provide the insight your company needs. With prices starting from just £5,000 for up to five of your highest performing products, you’ll receive tangible results and the foundation for successful, detailed, change management planning. For more information give us a call.