MiFID II – Buy-side topics

Hello and welcome to our latest financial services video.  Today I am going to spend just a couple of minutes talking about MiFID issues, specifically related to conduct and specifically related to the buy-side.

So, one of the key points to start with I think, is probably scope and applicability of the MiFID requirements to asset managers so of course we have got collective portfolio managers like AIFMs and UCITS managers who are technically outside the scope of MiFID, but they are subject to some of the conduct rules when they do MiFID top up activities, like the provision of investment advice or managing segregated mandates, but there is another complication which is that, for instance, in the UK the FCA has gold-plated some of the MiFID requirements and has extended them to some kinds of asset manager who would not otherwise have been subject to them.  A couple of key areas where they have done this, best execution, inducements and research and telephone taping.

So before coming onto talk about those specific technical areas in a little bit more detail, I think it is just worth bearing in mind the wider context.  We know that internationally, in the European Union and here in the UK, asset managers have been under increasing scrutiny over the last few years, that is continuing now and I think it is set to continue in the future.  When you look at MiFID II, some of the really important areas to the buy-side were ones that were really driven forward by the FCA and in Europe, they were absolutely at the forefront, inducements and use of dealing commission by research is a really good case in point.

What that means I think for the buy-side is that we probably won’t expect there to be any less scrutiny of this particular sector of the industry in the coming years and in particular following Brexit.  Look at the asset management market study, really a shot across the bows of the asset management industry by the UK conduct regulator (FCA).  I think asset managers in particular in these areas like best execution and use of dealing commission can expect the UK regulator to be looking at those quite hard post-MiFID II implementation in 2018.

So taking inducements and use of dealing commission first, we are seeing a lot of our clients spending a lot of their time in this area, really thinking about what their options are.  We know what the FCA’s preference is, they put out a statement really only in the last month or so where they made it pretty clear that from their perspective they see firms buying research with their own funds is the preferred course of action but not everyone is going to do that in the market and we are working with quite a lot of clients on how they can do something different, structuring their RPAs and so on.  Really difficult issues there.  What do you do about fixed income research, what do you do about global structures for instance.  What do you do when you are delegating your management out to affiliates or others, in the US for instance.  Some really thorny questions there and they are taking a huge amount of our client’s time.

Another really difficult area for the buy-side is around taping.  So currently of course, in the UK we already have our domestic telephone taping regime and for discretionary investment managers they have the ability to avail themselves of an exemption, where their calls are being recorded by their brokers.  That is going to go in MiFID II and there are no signs from the FCA that they are going to do anything differently from that.  So it presents a real challenge for firms and this is something that they are really grappling with, which lines they are going to record, what they are going to do around transcripts and record keeping and so on and so forth.

There are obviously a whole host of other issues that are really important to the buy-side.  Suitability is not that exciting but on appropriateness for instance, one of the key points to note from the FCA is that they are now looking at treating non-UCITS retail schemes as not automatically non-complex or complex, so fairly non-committal from the regulator but a better position than we think it might have been earlier, but there are plenty of other things that the buy-side is thinking about.  Take for instance how you categorise local authorities, whether they need to be categorised as retail or professional clients.  Thorny issues around product governance - the works really.  I think one of the key messages is not to under-estimate the sort of work that might be involved for firms on the conduct side, it’s more than just a re-papering exercise. The regulators are going to be looking for higher standards, much more bespoke, non-generic policies, procedures and disclosures from buy-side firms.

So in terms of where buy-side firms are with their preparations, some are more ahead of the game than others but most of them are really starting to look at this stuff now.  Key message I think to the industry is there’s not as much time left as you think and there’s probably a little bit more work involved than you think so absolutely keep going and keep powering ahead in order to meet the deadline for January 2018.

Thank you very much.