Deloitte interviewed 13 investment managers, representing £475bn of global assets under management (AUM) and median global AUM of £270bn, as well as two asset service providers and two independent external experts. All but one said MiFID II – the revision to the Markets in Financial Instruments Directive and accompanying Regulation – will have the greatest impact on their strategy over the next two years. 65% of interviewees said the MiFID II investment research rules were a key strategic challenge. These rules have been a contentious part of EU negotiations, which if implemented in their current form would require the unbundling of investment research payments from dealing commissions. Investment managers thought they would lead them to increase their scrutiny over the quality of research and to shrink their research budgets. On the operational side, changes to transaction reporting were viewed as a key issue and costly to implement by all firms, due to the expanded scope of the rules.
Other strategic considerations for investment managers stemming from MiFID II are those around product offering and distribution channels. Deloitte expects that some firms will launch more ‘non-complex’ products, such as UCITS (excluding structured UCITS), relative to ‘complex’ products, mainly due to the stricter sales rules attached to products deemed complex under MiFID II. Some firms were even considering restructuring their existing ‘complex’ products into ‘non-complex’ ones for the same reason. Investment managers are also likely to increase their direct-to-client offerings and investment in digital solutions. This is already a trend in the UK and we expect it to become so in Continental Europe.
Overall, as these regulatory changes are expected to increase costs and reduce margins, Deloitte predicts a ‘squeezed middle’ to emerge in the industry.
David Strachan, partner in Deloitte’s EMEA Centre for Regulatory Strategy, said: “MiFID II will increase costs and reduce margins, as the increased costs are unlikely to be passed on to investors due to competition and increased transparency on costs and charges.”
However, the picture is not entirely black and white.
Strachan continues: “Larger investment managers with greater economies of scale will be better able to absorb the costs of MiFID II, and small niche firms may be less affected by certain rules. Managers that employ passive and quantitative strategies, which do not rely on investment research, will also be relatively less affected, although that will depend on where the Commission comes out when it adopts the Delegated Acts, expected in November. They will then need to undergo further scrutiny by the Council and European Parliament. To gain a competitive advantage, investment managers should be thinking strategically about how they can optimise their business under the new rules. Possible strategic responses to MiFID II include mergers and acquisitions, or changing product ranges or distribution strategies.”
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