By David Curmi
The introduction of Mifid II has been billed as the biggest shake up in European financial markets ever seen and certainly the 1.7m paragraphs of the Markets in Financial Instruments Directive appears as testament to the breadth and depth of this far reaching directive. As of 03 January 2018 Mifid II is a reality.
Its aim is to increase transparency across all financial markets and restore confidence amongst retail investors following the financial crisis of 2007. Time will tell whether Mifid II achieves these objectives but there is a real possibility that other external factors such as regtech, create a bigger influence on its success or otherwise. Meanwhile industry players have worked to change their processes in order to comply. From a practical perspective one must certainly question whether retail investors will benefit from the increase in regulation in the way that regulators hope. There are reasons to doubt this will be the case, at least from a domestic perspective. Below are some of the key changes that investors will be faced with under Mifid II.
One of the key changes taking place is that of transaction reporting. Investors should now assume that details of all financial transactions, including client names, will be reported to the MFSA. There are exceptions but the purpose of this article is not to go into that level of detail. This means that all levels of confidentiality have now been removed including in those cases where investors trade under the name of the investment firm. One must keep in mind here that the purpose of the information is nothing else but to allow regulators assess the operation of markets.
The greater disclosure of information, especially when it comes to rebates and the provision of independent advice, is one area that will benefit investors. Historically investment firms received rebates from fund houses that they recommend to their clients. This comes in the form of rebates on management fees that are charged to the fund and also could be a refund of a part of the fund price charged to clients. Mifid II now requires investment firms to clearly declare to clients, a priori, whether they are receiving such rebates, the extent of such rebates and whether they are giving independent advice. Naturally this form of rebate creates a conflict and becomes a real issue when you compare the size of transaction fee that the investment firm would otherwise have charged to the amount that is being rebated.
This issue could also impact the way local IPOs are conducted since it is standard practise for issuers of securities to pay a sales commission to the firm that is placing such securities. The conflict is similar to the example above. A client can and should know who the investment firm is acting for. Is it the client or the issuer of the security?
Suitability and appropriateness is another area which will see development. Further ongoing obligations on the suitability of investments to clients have been brought onto investment firms that operate advisory and discretionary relationships. Additionally investment firms are required to issue a suitability report on an annual basis for discretionary clients. Naturally this will require an annual assessment, and what clients are likely to experience, is a greater and more regular effort by firms to collect and hold updated financial information on each client.
Regular reporting by investment firms to clients will also undergo significant change. Each year firms will now need to report the total amount of fees, including commissions, charged to clients, and state how this has impacted the performance of their portfolios. Additionally clients will now receive statements quarterly, and each firm has an obligation to inform its discretionary clients within 24 hours, should the portfolio fall by 10% or more since the last reporting date.
Trading on the local exchange will also see some changes. Previously trading in equities took place at any price subject to increments of €0.001. SFC could trade at €8.505, €8.517 whilst BOV could trade at €1.80, €1.801, €1.814. Rules on tick sizes, determined by reference to liquidity bands and price ranges of each equity, will govern at what price level trades can take place. SFC will now only be traded at €8.50, €8.55, €8.60 whilst BOV, due to its greater liquidity and price band can be traded in €0.005 increments at the current price range. Full details of the current tick sizes can be found on our website however these tick sizes can change if price ranges or liquidity in each equity changes.
Mifid II is indeed a sea change for all. One hopes that this extra regulation helps our financial industry, and those that utilise it, develop and mature in a way that makes it clear where the lines of responsibility for investment decisions, and their outcomes, lie.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.