In addition, a whole raft of asset managers have announced how they will handle research costs under Mifid II, with most opting to absorb them and a handful passing the cost onto clients.
But what about those who are falling behind? Matt Smith, founder of regulatory compliance firm SteelEye, notes the regulator is likely to be lenient towards firms that are not yet up to speed with Mifid II if they can show they are taking relevant steps and making good progress.
He says: “Across the market, when comparing larger and smaller firms, there is significant variation in their readiness, with many smaller firms that do not have the extensive operational resources of their larger peers lagging behind in terms of their preparations.”
Smith adds that while the concerns are valid, it is also worth remembering that Mifid II presents opportunities including risk reduction, enhanced communications and greater data transparency.
Unintended consequences
As with any new regulation, there is likely to be some unintended consequences as stakeholders look for the best way to navigate the landscape.
Russell Napier, co-founder of Electronic Research Interchange, fears the measures could result in a research price war as providers start to charge unreasonably low fees for research.
“While fees for a range of research services have suffered downward pressure since this time last year, peppercorn prices are unacceptable,” he says.
Napier observes the FCA’s intention to intervene if pricing reaches a stage where research appears significantly undervalued, but notes it will take time for the watchdog to act.
“The regulator will want to assess the impact of Mifid II across a variety of areas before deciding whether any remedial action might be necessary. It could take up to 18 months to determine and then intervene in a research market where the product has been undervalued, and measures should be put in place sooner to ensure a fair value for research.
“High quality research is a valuable tool that can be used to meaningfully improve investor outcomes. Devaluing it could harm the end investor, in direct contrast with Mifid II’s ultimate aim.”
Ken Wotton, fund manager at Livingbridge Equity Funds, warns that an unintended consequence could be reduced coverage of smaller quoted companies as asset managers source significantly less research from banks and brokers.
“There are some asset managers who are very reliant on the research produced by sell-side analysts to maintain their knowledge of particular stocks and sectors,” he says. “With less pre-packaged insight and research available going forward, investors considering smaller quoted companies need to consider how best to access potential returns from growth companies, while mitigating the associated risks.”
Other regulatory burdens
Alpha FMC’s Glessing believes while Mifid II has only just landed, firms will soon have their hands full with other areas of regulatory change, such as GDPR and Securities Financing Transactions Regulation.
“Further groundwork will also be required in those areas where FCA consultation is evolving such as the Senior Managers Regime and the Market Study,” he adds. “2018 will be a year of change for the asset management industry and all these deadlines are approaching fast.”
EY’s Nabi names a list of upcoming obstacles for asset management firms to grapple with, including issues around data limitations, as well as forthcoming guidance from ESMA on suitability assessment obligations of investment firms when managing portfolios, and from the FCA on costs and charges.
For now though, it’s all eyes on Mifid II, but for Michael McKee, partner and head of financial services regulation at law firm DLA Piper, it is “more of a whimper than a bang”.
He adds: “While it is one of the most important pieces of EU legislation for securities markets in years, the reality is that on implementation day, 3 January 2018, many member states will not have implemented it and consequently it will still be some time before these major market changes hit home.”
