New EU financial market rules designed to protect consumers are having an uneven impact on smaller advisers and may even lead to the extinction of niche players who are unable to free themselves from the red tape. The Markets in Financial Instruments Directive II, or MiFID II, has been in place for just two months and is already sparking consolidation, concentrating power among major financial institutions.
“We’re seeing the first signs of impact on the business models of the smaller providers in the market — be they advisers or fund firms,” said Bernhard Langer, chief investment strategist of US investment management firm Invesco in Germany. “Given the high costs that MiFID II entails, they’re reviewing their business models and have to consider whether it’s worth carrying on.”
MiFID II’s introduction has progressed more smoothly than expected, most market participants agree, despite the scale of the directive. But that’s not to say everything is up and running now. There are persistent delays and hitches and, in Germany, online banks in particular have struggled to meet the requirements. ING-Diba, a subsidiary of Dutch bank ING, in January pulled some 80,000 derivatives from its offerings until it can comply with the new rules.
“We immediately need a moratorium for new reporting requirements for small banks.”
Lawyer Christian Waigel, a partner at law firm Waigel Rechtsanwälte, said the entire sector is coming under pressure to consolidate. The number of products on offer could shrink to just a tenth of the current level, he warned, and small fund firms may give up in droves, leaving just seven or eight major companies. US investment banking advisory firm Evercore already shut its London trading business just a few weeks after MiFID II. High-frequency traders may become the next victims if the EU goes ahead with plans to introduce new capital requirements for them.
“This may in particular force the smaller specialists, who are very important in their niches, for example with options and futures, to give up,” said Mark Spanbroek of the European Principal Traders Association.
The cooperative banking industry, which consists mainly of small banks and is an important pillar of the German banking sector, is also hurting. “We immediately need a moratorium for new reporting requirements for small banks,” Ralf Barkey, head of the RWGV Cooperative Bank Federation, told a news conference in February. He said the lenders were perturbed by a new rule that all investment advice provided by telephone must be recorded.
The directive should make trading platforms for stocks, bonds, commodities and derivatives more transparent, among other improvements. Investors should then easily be able to check whether they’re getting the best deal. The goal is to enhance competition and improve financial advice. But a wider range of trades must also be reported to regulators in order to spot market abuse.
The full impact of the new regulations won't be felt for years.
But smaller firms and foreign players are still failing to provide data on their target markets and costs, said Mr. Waigel, the lawyer. According to industry estimates, those firms account for some 20 percent of the total fund volume.
Smaller firms also face a harder time meeting the rules on justifying so-called trailer fees, paid by fund managers to salespeople who sell funds to investors. Under MiFID II, financial advisers can only withdraw those fees from a customer’s investment if they provided added value. That’s easier for bigger firms to prove since a large bank could simply argue that its branch network justifies the fee.
Meanwhile, the new government being formed in Berlin has stoked further uncertainty with a plan to put independent financial advisers under the supervision of Germany’s Federal Financial Supervisory Authority (Bafin).
At present the country’s 40,000 small advisers are monitored by local trade supervision offices. So far, the planned “grand coalition” of Chancellor Angela Merkel’s conservatives and center-left Social Democrats has yet to state whether the advisers will be subject to the stricter MiFID II rules. If they do, the number of advisers will likely halve, experts estimate. The full impact of the new regulations won’t be felt for years, but they’re already making a difference.
Anke Rezmer covers the investment fund industry for Handelsblatt out of Franfurt. Katharina Slodczyk is a Handelsblatt finance reporter based in Frankfurt. To contact the authors: email@example.com, firstname.lastname@example.org