The implementation of the revised Markets in Financial Instruments Directive (MiFID II) in January 2018 means that firms operating within the European Union will be forced to spend much of next year preparing a strategy for the new regulatory landscape.
MiFID II compliance issues have been widely discussed by the financial press in recent months, but reliable estimates on the expected cost of MiFID II compliance have not been available until now.
The True Cost of MiFID II
MiFID II is expected to cost firms $2.1bn in 2017, according to new research published by IHS Markit and Expand, a consultancy owned by the Boston Consulting Group. The estimate covered the top 40 investment banks and top 400 asset managers.
In the United Kingdom, where the Financial Conduct Authority (FCA) has taken a tough stance on MiFID II and its implementation, UK-based firms are likely to shoulder a large portion of the financial burden.
“There are a number of ways of interpreting the rules and they [FCA] have, for example in research, taken the more onerous one,” said Tim Cant, a lawyer to Ashurst LLP in London, in a recent article for Bloomberg. “In ordinary man’s street-speak, that is gold-plating.”
Of all the firms surveyed, investment banks were found to be the least prepared for the likely event of a transformation within the financial services industry, according to the IHS Markit study.
The study found that most investment banks are planning to implement the vast majority of their MiFID II preparations in 2017. The decision to delay making preparations until months before MIFID II comes into effect could incur heavy costs for Europe’s leading investment banks. It is expected that other smaller firms in the space will gain market share as a result.
According to recent research published by EY, investment banks will be the hardest hit by the implementation of MiFID II.
Investment banks received a “high impact” score from EY in several key business and operational functions, including order handling, pre-trade transparency, post-trade disclosure, and derivative trading obligation, among others.
Critically, for the “Provision of investment services and protection of client interests” category, investment banks received “high impact” scores of 50% for all functions within that category. Namely, client assets/money, suitability, and appropriateness.
EY are not alone in their assessment. Recent PWC reports have also stated that MiFID II compliance costs will likely be highest amongst investment banks.
“MiFID II is going to require banks to rethink their strategy first of all; so they are going to have to redefine what sort of products they offer in the market, what sort of trading platforms they will operate in the future… And they will have to rethink the way that business lines interact with clients,” stated PwC in a recent report written on the subject.
The Competitive Advantage of Independents
Those least likely to be affected negatively by the implementation of MiFID II are independent research providers.
Independents dedicated to increasing transparency and efficiency in the investment research space have already begun to fragment the Asian and European marketplaces.
“We believe the quality of research produced will increase, not decrease as the research landscape shifts towards independent research providers. Increased competition in the research space will result in buyers taking a hard look at the true value add of their research spend. Ultimately, we think that this will result in the best outcome for investors,” says Jon Foster, Chairman of Smartkarma.
For more on MIFIDII and our coverage of the rise of independent research providers in Europe, read our blog post here.