Is MiFID II a headache or an opportunity for private banks?

Christoffer Malmer, co-head of the corporate and private customers division, SEB

Although the near decade-long aftermath of the financial crisis has seen the dawn of countless regulatory initiatives, perhaps the most comprehensive one is now on the cusp of implementation, namely MiFID II. 

With its multiple aspects of reporting requirements, ongoing suitability tests and ex-ante price reporting to name just a few, it is easy to understand why the industry is hard pressed to have all the pieces in place before January next year when the regulation comes into force in most European countries. 

Indeed, most European banks will probably spend the better part of their 2017 IT budgets towards MiFID compliance in one way or another. And it is a race against the clock which is made all the more challenging by parts of the rulebook only just recently being finalised. Against this backdrop, one would be excused for believing that MiFID II is nothing but a severe headache for incumbent banks across Europe. 

Then think again. Consider that the financial industry is facing unprecedented levels of disruption driven by new technology in combination with rapidly changing customer behaviour. The competitive landscape that is consequently unfolding is allowing customers to switch providers more easily, to pick and mix products and services from multiple providers and to access information much more readily, allowing for better informed decisions. 

For a traditional industry, embracing this kind of change could take time. Now enter MiFID II. The overarching spirit of the regulation is encouraging exactly the kind of behaviour that is required in order to build a truly customer-centric business model for the brave new world, namely transparency and suitability. And time is short. Every bank planning on providing financial advice in any form from January 3, 2018 must articulate very clearly what the value proposition looks like and how much it will cost. 

At SEB, an in-depth review of the current pricing model led to the conclusion that a lot of client value is delivered but never really charged for as the industry has been used to bundling the service into the price of the product. While transitioning to a new pricing model will require an active and open dialogue with customers, having done the work, the organisation can be confident that our value proposition is solid. Adapting to the new rules serves the purpose of pegging up the organisation to deal with not only the new requirements from the supervisory authorities, but the new competitive environment. 

Moreover, many aspects of MiFID II compliance will be fulfilled through the development of new digital solutions. Regulatory terms like ‘enhanced quality’ or ‘ongoing advice’ are effectively just parts of a modern customer journey where a combination of personal interaction and digital tools will form the basis of the customer relationship. The closer the spirit of the regulation is aligned with the purpose of the business, the more overlap there will be between a bank’s regulatory compliance agenda and its customer value agenda. 

This is regtech working in favour of the customer. Private banking has always been based on profound values like trust and security. With sustainability now firmly taking place alongside these traditional values, a MiFID-propelled drive towards transparency and suitability will undoubtedly be part of a world-class service offering going forward.  

Thomas Piske, CEO, LGT Private Banking

Banks are hard at work to ensure they will be prepared when MiFID II arrives. Although the administrative and financial burden of implementation is enormous, there is also a positive side.

One thing is for certain: the implementation of the current wave of regulation entails very substantial outlays for all banks. The new duties and requirements translate into added complexity and risk, resulting in an additional administrative burden. But complaining is pointless. The regulation is coming and every bank is tasked with making the best of it, both for themselves and their clients. 

Traditional private banking essentially provides three services: wealth management, investment advisory and the simple execution of orders without any advisory services. Most impacted will be the advisory side and one of the changes will be a significant increase in cost transparency. The importance of the scope of services offered and the quality of advice will become even greater. The goal for private banks should be to implement the regulatory requirements for advisory services in a way that results in added value for all parties. 

LGT will be significantly expanding the scope of our services and will more clearly differentiate our advisory services according to the needs of our clients. For example, there will be new opportunities to personalise services, and risk monitoring will be significantly expanded. For clients with sophisticated needs, new options will be introduced for the implementation of specific requirements relating to investment objectives, investment recommendations and risk monitoring. 

Overall, we will be substantially upgrading our advisory services, and it will be recognised that these services are complex, add value and require substantial expertise. 

In order to cope with a potential administrative nightmare caused by regulation, banks will require even more sophisticated technology solutions that integrate and support all front and back office processes. 

LGT is therefore developing an entirely new technology platform alongside its new offering. This will support our relationship managers across the entire advisory process. In the future, many administrative tasks will be significantly easier and more streamlined and some will even become redundant. Ultimately, thanks to this technological support, the burden for the relationship manager arising from compliance-related tasks should actually decrease, notwithstanding MiFID II. 

The new technology platform will have a far-reaching impact on the work carried out by the front office. The new requirements will be stored in the system as rules and will steer work processes so that these are automatically incorporated when advisory services are provided. Steps in work processes that are not impacted by the regulation will also be supported. The platform will be a very efficient tool for helping relationship managers identify the appropriate investment opportunities for clients. 

Ultimately, this means relationship managers will have more time for their clients and can provide even better advice. This will result in greater client satisfaction as well as higher earnings and acquisition potential for the bank. 

In the end, regulation gives banks the opportunity to create a true competitive advantage.  

Uner Nabi,  executive director, EY EMEA FS Risk and Regulation Practice

The seemingly ever increasing and complex burden of compliance means MiFID II is currently a definite priority for private banks and wealth managers. Those firms focused on meeting its requirements know navigation of unknowns is as important as execution of clear regulatory requirements, requiring a robust and, at times, pragmatic approach. While resourcing remains key to this, strong business-lines and executive engagement is equally important. 

The challenges facing wealth managers include changes to operating models and reporting on costs and charges.  In terms of operating models there are a number of factors likely to result in the need for change, not least profitability. The cost implications of MiFID II compliance obligations and the pressure on revenues from the focus on costs and charges, as well as inducements, will force a review of operating models for efficiencies.

Costs and charges reporting is one of the biggest challenges for many firms. This is not just due to the operational complexity of consolidating and calculating the cost figures but also the implications of disclosing costs that may appear more expensive than peer firms, at a time when there is increasing focus by regulators on value for money and specific MiFID II obligations to consider costs when providing advice. 

The challenge is further exacerbated by the additional European regulation, for example the PRIIPs and Insurance Distribution Directive as well as the FCA’s proposals. These regulatory rules apply similar yet slightly different obligations on firms in relation to costs and charges disclosures. 

Firms therefore need to implement MiFID II in the context of their broader costs and charges obligations. Failure will mean wasting time and resources. 

Ultimately, clarity on the net impact of costs and charges on returns is good for investors and irrespective of the differences between various regulations, the increased focus on costs should over time result in product consolidation across the industry and the new environment is likely to favour low cost products. 

Global players and firms working within and outside of the European Economic Area (EEA) will also be looking at the direct and indirect impact of MiFID II on their non-EEA businesses.  There are challenges in the uncertainty of how different countries will implement the requirements. The uncertainties themselves are in some instances resulting in global operating model changes. 

Firms with European presence where commissions on sales is significant must review their services to determine whether changes are required in order to meet the quality enhancement criterion. In terms of investor protection, while a thorough suitability process addresses the client interaction aspect, firms will have to capture more data to meet all their reporting obligations, and will be under greater scrutiny to adopt robust processes and record keeping compliant with both MiFID II and the General Data Protection Regulation (GDPR). 

The impact of MIFID II will be  extensive. The regulatory changes will result in a new environment and firms will need to respond to this effectively to survive and thrive. Regulatory intent is clearly to benefit the end customer – time will show whether this objective will be achieved.