December 2017

EVENT: Making sense of MiFID II

MiFID_eventAs deadlines loom, asset managers in Asia are scrambling to understand how a major piece of European regulation will affect them. To describe the second version of the Markets in Financial Instruments Directive as complex would be an understatement. Even compared with other pieces of European financial services regulation, which are not known for being succinct, MiFID II is a whopper. In all, it is reportedly 1.5 million paragraphs in length. For those fund companies that have yet to assess their exposure or liability under the directive, it is time to panic. The deadline for implementation is January 3, 2018. Fund companies in Asia may ask whether MiFID II is relevant to them. The directive is aimed, principally, at the countries of the European Union. It is an attempt to make the capital markets in Europe work more effectively and with more transparency. Should an asset manager based, say, in Singapore, know or care about this initiative? That question was the theme of a panel chaired by Funds Global Asia at a seminar held in Hong Kong and hosted by the Association of the Luxembourg Fund Industry (Alfi). The answer, unfortunately, was yes. A large proportion of Asia’s funds industry will be affected, either directly or indirectly, by MiFID II. But, according to a survey of Funds Global Asia’s readers, many fund professionals in the region are yet to appreciate their responsibilities – and that could be a problem. The data
A total of 36 Asia-based funds professionals participated in the online survey, which was carried out in September and October 2017. According to the first finding, 86% of respondents expected MiFID II to have an impact on their organisation. When asked why they expected their organisation to be affected, the most popular answer was “I do business with European asset managers” followed by “I’m part of a European business”. These findings indicated an awareness, among survey respondents, that MiFID II was a matter of concern for them. However, the following result was not reassuring. Only 30% of respondents agreed with the statement that “I am confident I know enough about MiFID II”. A larger proportion, 44%, disagreed with it. It would appear that many in the funds business in Asia lack a full understanding of the directive. Given the incoming deadline, that could have worrying implications for compliance with the new rules. A lack of understanding of MiFID II among some respondents could be excusable if colleagues were up to speed on the regulation. We asked how many people in respondents’ organisations were responsible for preparing for MiFID II. The most popular answer was “between two and five employees”, which attracted 40% of the responses, followed by “more than five employees” with 30%. In a small fund company, a staffing level of less than five people may be appropriate; however, it is notable that in larger European asset managers, some compliance departments have more than 100 people working on aspects of MiFID II. The survey also found that 13% of respondents said “none of the above”, which suggests no employee was working on the directive. Known unknowns
MiFID II will place a burden on the back office. In order to meet the directive’s requirements on transparency, fund companies will be required to collect and maintain a significant amount of data. The survey asked if respondents’ back-office systems were equipped to deal with these regulatory requirements. Only 30% said yes, 20% said no and the remainder said they didn’t know. A similar uncertainty was revealed in the next question, which referred to one of the most salient parts of the directive for asset managers – a requirement that fund manufacturers supervise distributors to avoid mis-selling of funds. Respondents were asked if their organisations had enough data to allow them to perform this oversight. The results were almost the same as those for the previous question. A minority, 32%, said yes, 18% said no and half of the respondents said they didn’t know. Only on the final question did the results tip fractionally from “don’t know” to “yes”. Here, the survey asked about the topic of unbundling. Under MiFID II, asset managers will no longer be able to bundle payments for research along with trading commissions. Instead, managers will either have to absorb the cost of research themselves or pass it on to their investors as a separate charge (the majority of asset managers that have so far declared their plans say they will absorb research costs themselves). The survey asked if respondents’ firms would be able to prove they are separating money flows for trading research. Half said yes, 4% said no and 46% said they didn’t know. Discussion
Clearly, there is a lack of knowledge about MiFID II among Asia’s funds professionals. Panellists who joined Funds Global Asia to discuss the directive at the Alfi conference argued that asset managers in Asia should act soon to avoid compliance problems once the directive comes into force. Tasos Zavitsanakis, consulting director, advisory services at PwC in Hong Kong, said Asia-based firms may be affected by MiFID II in various ways. If they have a licensed branch in the European Economic Area (EEA), or if they deal through EEA parties, products and trading areas, Asia-based fund companies will be impacted by the rules. He urged Asia-based fund companies to seek advice on their responsibilities under the regulation as soon as possible. Rosemarie Kriesel, managing director, global client coverage Hong Kong, RBC Investor & Treasury Services agreed that Asian companies should put in place a MiFID II strategy. She said it was concerning that half of the respondents in the survey did not know if their back-office systems were equipped to deal with the burden of MiFID II. In order to comply with the directive, it is crucial for fund companies to collect and handle data. If companies are unsure about this, it might be wise to talk to their service providers about outsourcing certain functions, she added. This point met with agreement from the third panellist, James O’Sullivan, head of securities services for Hong Kong, transaction banking, North East Asia and Greater China, Standard Chartered. Before moving to Hong Kong, O’Sullivan worked on the first version of MiFID, and assured the audience that the second version represents a significant increase in terms of complexity. However, he urged the funds industry not to take too pessimistic a view of the incoming regulation. The focus on transparency in MiFID II ought to have positive effects across the financial industry and, he said, should ultimately lead to a better experience for the end investor. ©2017 funds global asia

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