Mifid II has had an awkward and messy start. At the time of writing, only 64% states had fully transposed the directive into their local laws.
Four states have not said anything to the European Commission about the transposition, and another six have only partially transposed the measure.
At the beginning of the year, the European Commission warned that it might take member states that have not fully transposed the directive to the Court of Justice of the European Union.
The commission has also said that the 19 states that had either delayed their transposition notification or had not completed their transposition would face infringement procedures.
While four states do not seem fazed by the new regime, despite pending disciplinary action, the knock-on effects could be felt in other countries.
Financial services lawyer Neil Robson said, in an interview with CNBC, that trade could be disrupted because states that traded with a non-Mifid II compliant state were technically not fulfilling Mifid II themselves.
A slow start
So, what does this mean for fund selectors in countries that have not fully transposed the directive?
For Madrid-based Bankia head of funds of funds and absolute return, Alvaro Martin Sauto, the implementation of Mifid II and Spain’s partial transposition had not changed his day-to-day dealings, but he said the directive had more of an effect on the bank’s retail business.
“In the institutional fund selector role, Mifid II hasn’t had too much of an impact yet. We select third-party managers for funds of funds, taking into consideration performance, investment process, fees etc, but we focus on ‘clean shares’ that strip out traditional commission payments so we don’t get any rebates,” Sauto said.
Sauto said that selectors in the private banking sector may have been more affected by Mifid II as they may have been more biased towards funds that had bigger rebates for private bankers.
Finland’s Evli Bank senior portfolio manager, Tanja Wennonen-Kärnä, said Mifid II had a significant impact on the financial industry as a whole – on fees, transparency and research – but had not had much impact on the selection process.
“It’s been really time consuming to implement all the different aspects [of Mifid II] to meet the directive’s demands. However, when choosing a fund it hasn’t actually made such a big difference,” she said.
“We had to change to clean share classes when we had not already been invested in the institutional share class – that has been the only practical change.”
The roll-out of Mifid II – which began on 3 January – has of course only just started. Wennonen-Kärnä added that it was possible that the new regime could affect her work more in the future.
She said the extra bureaucracy along with the added complexity of how investors could subscribe to a fund might scare investors even if the goal of Mifid II was to increase transparency.
“It might be that investors are reluctant to invest because of the fees, even though they are the same as before but they are now more visible,” Wennonen-Kärnä said.
Despite the clumsy start to Mifid II, Wennonen-Kärnä said she had not run into any problems with funds from countries that had not fully transposed Mifid II into local laws.
Making the switch
In true efficient Danish style, Denmark introduced the ban on inducements for discretionary portfolio management six months before Mifid II’s introduction, meaning Nordea Asset Management had to change investment fee classes that included inducements by July 2017.
Nordea’s head of balanced product and portfolio solutions, Claes Roepstorff, said his team had also changed investment fee classes for Norway, Finland and Sweden last year.
“There were quite a number of funds we had to switch. We operate in four countries so we have different performance solutions and in some cases different share classes,” he said. “It has been quite cumbersome and tedious work.”
Open to negotiation
Mifid II’s pressure on the industry to switch to clean share classes, along with the rise in the use of exchanged traded products (ETFs), has created an environment where third-party managers are more open to negotiate fees for institutional clients.
Sauto said third-party managers were most open to negotiate asset classes that were under pressure such as European short government bonds which have a low yield.
“You cannot charge 30 basis points when the yield is negative so in those spaces you can negotiate more straightforward fees. But all the third-party managers are very open to negotiating in whatever asset class in terms of volume,” Sauto said.
“If you don’t want to go for the straightforward mandate but you want to buy some capabilities with a third-party fund and you are open to invest a certain volume, then they are open to negotiate fees, or even open a specific share class for you.”
Data from Last Word Research found that 52% of fund selectors said they would now demand lower fees when they were asked how Mifid II would affect their fund selection process; 37% said they would choose from a smaller number of managers, and 21% said they would focus more on in-house products.
Just the beginning
While the implementation of the Mifid II regime has had a sleepy start, fund selectors expect there will be many changes in the way the directive is implemented over the next two years.
“The aim of the new regulations is really important, especially for private individuals,” Wennonen-Kärnä said. “But finding ways to implement it practically are on-going.”
Wennonen-Kärnä said it will be interesting to see the different ways institutions implement aspects of the regulation, such as how investors can subscribe to a fund.
She said figuring out how to make investments for private clients would be the most time-consuming as the directive required funds to suit clients’ needs.
Roepstorff said that Mifid II was a huge endeavour as it was a complex piece of regulation that affected many aspects of asset management.
“You could tick off the boxes and say ‘yes’ we’ve implemented it – but that will not be the end of it. In the future we will have consultations with the local financial authorities to provide further clarity on what needs to be adjusted. We’re not through with Mifid II yet,” he said.
“We’re spending an enormous amount of time trying to adhere to Mifid II and many things are still uncertain. We expect adjustments will be made this year and next year.”
One aspect that remains uncertain is discretionary portfolio construction and what the full concept of inducements means – and whether it covers further aspects such as placing an issue fee.
“There are still final details to be smoothed out. We need to be able to explain to customers what is new and why we have to follow the new rules,” he said.
“The challenge is that we will have to spend lots of time on areas that do not address the needs of the client when it comes to selecting a fund. Customers will need more explanation about what the new regime means.”
