Friday, 30 June 2017| By: Rodney Taylor, Business Development Director at Profile Software
The regulators have been clear in communicating the instruction that they expect best efforts to be made to comply with the fast approaching 3rd January 2018 deadline for MiFID II. Whilst an army of consultants have spent months explaining the challenges and interpreting the regulation, now is the time to move to the next phase if you have not already done so.
For many Wealth Managers two years of work needs to be squeezed into the next six months. With such a tight deadline it is inevitable that choosing the right technology will be key to achieving the best outcome.
So where should Wealth Managers be focusing their time?
Inducements and Suitability
The requirements for Investor Protection under MiFID II is likely to result in an increase in the level of document production. This is an area that will place a heavy burden on Wealth Managers where the primary advice is given to retail investors and does not include the ‘eligible counterparties’ that are largely excluded. The key areas to implement solutions will be conflicts of interest, product disclosure, and cost disclosure.
- For conflicts of interest ESMA has been explicit that a generic disclosure will no longer be sufficient and that any conflict should be specific and tailored to the recommendation being made. The approach here is to record any corporate interests and compare them to the corporate structure of the products being advised upon.
- ESMA has also counselled that for independent advice any suggested product should be evaluated against a diversified selection of products and that the comparison should not be limited only to products that firm provides. Under MiFID II the solution should be set up to ensure that the criteria used for comparing instruments are built into the organisation’s workflow to minimise inefficiencies. Also included in this it will be important for the Wealth Management solution to ensure that the classification of the type of client being advised determines which financial product is marketed or sold.
- Inducements are another area that is significantly strengthened under MiFID II. There is a clear direction that any third-party fees must be passed on in full to clients as quickly as it is possible at firms providing independent advice. From a practical viewpoint, it will be essential for the Wealth Management system to be able to account for fees such as execution fees, research fees or other commissions and benefits and that these are clearly communicated in reports to the clients. Research fees will of course be the major change here and firms will be left with the choice of either paying for research themselves or passing the cost on to customers, and most importantly research cannot be linked to execution fees.