News and Views MiFID II Special Edition 2016

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Markets and Securities Services | Issue 46 12
non-monetary benefits. 5 The FCA’s focus
on inducements and hospitality are already
having a significant impact on the current
hospitality arrangements offered and
received by asset managers to and from their
distributors. For example, the FCA has stated
that sporting and social events (golf, tennis,
concerts, etc.) are not conducive to business
discussions and such discussions could
better take place without these activities.
The new MiFID II requirements to assess and
evidence quality enhancements relating to
any inducements received can only serve to
reinforce such higher standards.
In the Netherlands, commission payments
are already banned for advised sales, non-
advised sales and portfolio management for
retail clients. In many other EU countries,
where there is no domestic ban on commission
payments, the impact of MiFID II will be more
significant. In Continental Europe, banks are
often the predominant distributors of funds
to retail investors, and mainly do so without
giving independent advice. Under MiFID II,
those banks receiving inducements will need
to do more to demonstrate exactly how an
enhanced quality of service is provided to their
clients as a result of the inducement received.
Investment research is another significant
area of focus under MiFID II. Any research
consumed by asset managers must be paid for
in a transparent way. Rather than receiving
research from investment banks for “free” or
in return for business, asset managers should
pay for the investment research they receive
explicitly. Some asset managers may choose
to absorb research costs themselves whereas
others may increase their management fees
to recover them.6 If asset managers choose to
pass on research costs to the funds and end
investors, these should be clearly identified,
aggregated and disclosed to investors, in
accordance with MiFID II’s costs and charges
requirements. Such arrangements could pose
significant challenges for asset managers
who choose to pass on the cost of research
in terms of allocating the cost fairly and
appropriately across all funds.
Overall, the inducements rules could
have a significant impact on the pricing
models of firms that currently receive
commissions for portfolio management or
that pay for investment research through
dealing commission. The MIFID II rules
on inducements will also create pressure
on distributors to demonstrate that any
commissions they receive enhance the
quality of service to their clients.
Conclusions
While most asset managers may perceive
these MiFID II requirements as another
burdensome regulatory implementation
project, they should also seek to identify and
take advantage of any potential commercial
opportunities by reassessing their product
catalogue, charging structures, distribution
and marketing strategies. In addition, asset
managers may also look to consolidate their
distribution channels, and use MiFID II as an
opportunity to identify potential cost savings
and efficiencies.
Manmeet Rana
Director
Risk Advisory
Deloitte LLP
Paul Fraser
Senior Manager
Risk Advisory
Deloitte LLP
1 Statement on European Union referendum result by the
Financial Conduct Authority. See
european-union-referendum-result-statement, last accessed
on 24 June 2016.
2 MiFID II Conduct Forum, FCA, April 2016, Point 3.3, Question
8, from
conduct-forum-minutes-180416.pdf, last downloaded on
1 September 2016.
3 Annex 2 of the MiFID II Delegated Regulation, European
Commission, April 2016, from
transparency/regdoc/rep/3/2016/EN/3-2016-2398-EN-F1-1-
ANNEX-1.pdf, last downloaded on 1 September 2016.
4 Annex 2 of the MiFID II Delegated Regulation, European
Commission, April 2016, from
transparency/regdoc/rep/3/2016/EN/3-2016-2398-EN-F1-1-
ANNEX-1.PDF, last downloaded on 1 September 2016.
5 Inducements and conflicts of interest thematic review: key
findings, FCA, April 2016, from
inducements-conflicts-interest-thematic-review-key-findings,
last accessed on 1 September 2016.
6 “Woodford publishes all fees paid by savers and removes
contentious charge for ‘research’ altogether”, The Telegraph,
April 2016, from
woodford-publishes-all-fees-paid-by-savers-and-removes-
contentio0/, last accessed on 1 September 2016.