Banks, risks and opportunities from MiFID2 in 2018
MiFID 2 is the new European Directive on investment services and financial markets, which came into force on 3 January.
The stated objective of the European regulators is to increase the transparency and efficiency of the financial markets, to reduce the information asymmetry towards the client and to further limit the conflict of interest, trying to progressively drive the market towards a remuneration related to the services provided rather than on products sold.
The introduction of a greater transparency on cost & charges will enable customers to assess exactly the nature and amount of costs for the services received and for the product bought or sold. This may potentially generate a downward effect on pricing. If the differentiation will be based only on the price there could be a cannibalization of the demand by less expensive services for the customer. This is why banks must consider variables such as quality of service, customer satisfaction and universe of accessible products.
On the side of the inducements received by the intermediaries from third parties, MiFID 2 intervened, subordinating their eligibility to a check that the inducement will increase the quality of the services provided by the Bank without prejudice to the duty to act in the best interests of the customer. In this context, the legislation has also introduced the notion of non-monetary benefits, which can constitute real inducements when they do not meet specific requirements. Introducing a limit to the perception of inducements can potentially generate problems related to the profitability of investment services, which could lead intermediaries to offer increasingly personalized and value-added services.
Furthermore, with the Product Governance discipline, the regulator divides the responsibilities between Manufacturers and Distributors throughout the creation and sale of financial instruments. For each product, this process is aimed at identifying a target market of end customers and a distribution strategy that allows the Distributor to reach these customers. This requires intermediaries to establish a constant dialogue with the Manufacturers of financial instruments, at the risk of limiting the architecture of recommended products to a smaller number of Manufacturers. However, on the other hand, this requirement ensures that the financial instruments are sold exactly to the customers for whom they were designed, increasing the quality of the advice provided.
Finally, the new directive requires intermediaries to assess the knowledge and competence of the personnel who provide (or provide information on) investment services, with the aim of guaranteeing customers a qualified interlocutor for the management of their savings.
Undoubtedly, MiFID 2 has led to an increase in compliance and operational costs for the implementation of the new requirements, as well as a reduction in profitability associated with the sale of financial instruments.
All this obliges the intermediaries to review their business models and to promote transformation processes in order not to lose competitiveness in the new regulatory context.