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MiFID

​​Markets in Financial Instruments Directive (MiFID) II review: don’t treat bank customers like children​


Updated: October 2019


PROPOSED SOLUTIONS AND ACTIONS 

In our opinion, reforming MiFID II should be a key priority for the new European Commission. ESBG would encourage a well-thought review of MiFID II taking into account the issues stated above in order to eliminate the challenges that are counterproductive and do not increase investor protection. 

EBSG would suggest to include a further category, between professional investors and retail investors, for people who are not professionals, but trade very frequently within a certain reference period. A separate, adjusted set of rules would probably make sense for both sides to facilitate the trading experience while ensuring a reasonable level of investor protection. These investors may not need dozens of pages containing the exact same information on a very regular basis (i.e. every time that they are active on the markets). 

We would recommend also reviewing the requirement to record all telephone conversations taking into account the downside effects on customers experienced by ESBG members. We would suggest that clients should have the option to waive voice recording. 


IDENTIFIED CONCERNS 

ESBG identified several issues in the implementation of MiFID II:

  • Burden of the requirements from the clients’ point of view: It appears that the administrative burden and the additional steps did not improve the investment experience. Many clients did not welcome the changes that MiFID II introduced and complained about the amount of not always helpful information they have to go through, in particular ex-ante and ex-post costs disclosures. Many clients therefore feel ‘misunderstood’ and wish for ‘opt out’ options. Clients in particular complained about the amount of not always helpful (and overlapping) information. They feel overwhelmed by the sheer amount of information and would rather have the possibility to waive parts of it. In our opinion, the reduction of administrative burdens regarding advice given on capital markets products would promote asset accumulation.
  • Cost of compliance: The enhanced MiFID II investor protection requirements have an effect on the provision of financial advice to retail investors, and in particular the most modest of them. ESBG has had reports from small savings banks that the fixed administrative costs of providing financial advice under MiFID II is making it unsustainable when the amounts invested are low. For this reason, already they are redirecting their clients towards their online platform where the costs for the intermediary are much lower as it is the only viable option. This shows that the high regulatory costs triggered by MiFID II come at the expense of clients.
  • Delay in ordering processes: Members experienced delays in ordering processes, this is particularly worrying in the context of orders given by telephone because banks are not allowed to execute orders immediately but only after informing the customer in writing about the cost of the transaction. 
  • Record of telephone conversations: Many clients complain about the new obligation to record telephone conversations. They feel patronised and feel that the relationship of trust with their advisors has been impaired. 
  • Transparency requirements: Under MiFID II, many obligations have been exceeded to transactions with professional clients. This means that even banks have to be informed about the costs of the transaction. This information is superfluous since both groups, professional clients and eligible counterparties, are aware of the costs. The requirements should be limited to retail investors. 
  • SMEs’ initial public offerings (IPOs) and market animation: The availability of Mid Cap Equity Research guarantees market animation. However, ESBG believes that MiFID II is hurting SME research. Banks need to receive specific payments for SME research and are prohibited from cross-funding their SME research via their research on larger listed corporates. Similarly brokers will have to establish a price for investment research separately from execution services. Asset management firms will also have to develop research budgets, and either pass the cost of research on to clients via pre-agreed research payment accounts or absorb the cost of research themselves. Today we see that the main losers are SME listings. Without transparency investors cannot invest in SMEs. These developments underscore the challenges that MiFID II creates and we believe that the EU should address them. 


WHY POLICYMAKERS SHOULD ACT

ESBG Members have experienced that customers feel overwhelmed and confused by the excess of information. Many investors want to decide for themselves if they wish to do without certain information (such as constantly repetitive information on costs) or receive information after - wards (following telephone orders, for instance). ESBG is not fully convinced that the current set of rules gives the right incentives for retail investors to consider investing their money in the markets (and providing the real economy with financing thereby). Quite to the contrary, many clients have already (partly or complete) withdrawn from capital markets. This is a very alarming development as the investment in financial instruments is a very important aspect of private retirement arrangements (especially in times when interest rates are permanently low). 

Moreover, ESBG Members are facing high cost of compliance in order to meet MiFID II and KID PRIIPs requirements. This would have a great impact on the financial advice services provided by local savings and retail banks. 


BACKGROUND 

In June 2014, the European Commission adopted new rules revising the Markets in Financial Instruments Directive (MiFID) framework. These consist of a directive (MiFID II) and a regulation (MiFIR). 

MiFID II aims to reinforce the rules on securities markets by ensuring that organised trading takes place on regulated platforms, introducing rules on algorithmic and high frequency trading, improving the transparency and oversight of financial markets including derivatives markets and enhancing investor protection. MiFID II and MiFIR became applicable as from 3 January 2018. The European Commission, taking into consideration ESMA’s advice, should issue a review of the implementation of the MiFID II by March 2020.