Sebastian Reger, partner, Sackers, commented: “Whilst much of MiFID II will not have a direct impact on pension scheme trustees, the new rules for brokers and asset managers may affect UK pension schemes’ current contractual relationships. Action points for trustees to consider include:
LEI Numbers (obtain one) – As a result of the changes, most pension schemes are required to obtain an LEI by 3 January 2018. An LEI is a global reference number which identifies legal entities that are party to financial transactions across all jurisdictions. LEI numbers can be obtained from the London Stock Exchange. Without one, the scheme’s managers will be unable to execute trades on behalf of the scheme.
Charging structures (talk about them) – A discussion about fees is something many trustees won’t want to confront. However they should be considering whether, as a result of the unbundling of charges, their managers will be looking to update charging structures. In particular, schemes should be asking how research will be paid for in the future.
Conflicts and best execution (ask for and review new policies) – MiFID II requires managers to review and update their policies on best execution and conflicts of interest. The focus will shift away from simply disclosing their approach to having to show that best execution was achieved. “Best execution” is not just about getting the best price – a number of other factors can be taken into account. Trustees should understand these factors and hold their managers to account. This is a welcome development for investors as they will get further clarity on how managers view and handle best execution and conflicts of interest. However, it does mean that more time will be needed to review these policies in future.
Reporting requirements (understand them) – Discussions with managers should also include asking them about the new reporting requirements and how these will be covered in any agreement they have.
Market infrastructure (test it) – Schemes should be asking managers how the changes to the market infrastructure could impact the mandate of their scheme.”
Reger continued: “MiFID II will significantly change the way financial markets operate, and we expect the full impact of these changes to emerge gradually over time. The most important message for trustees is to get familiar with the changes. Even though schemes won't be directly affected, this is all about being alert to the indirect positive and negative consequences.
While some of the changes offer an opportunity to push for greater reporting transparency from asset managers, it will be up to each individual pension scheme to decide how far they want to take it. We will be keeping a close eye on how the market reacts and making sure we reflect this in our negotiations with banks, funds and asset managers."
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