MiFID’S EFFECT ON INVESTMENTS

New EU market investment rules will spark turmoil and job losses

WITH the start of Europe’s MiFID II rules less than five months away, banks, brokers and asset managers are scrambling to prepare for a regulatory overhaul that risks doing more harm than good to the finance industry.

Aimed at making markets fairer and more transparent, the European Union’s revised Markets in Financial Instruments Directive (MifidII) impacts everything from how firms trade to how research is distributed.

“The bubble of MiFID II feels painful,” said Gerard Walsh, who heads up equities business development for Northern Trust Capital Markets in London.

“It’s a bit like Britain all of a sudden changing to driving on the right-hand side. It will create disruption but eventually people will adapt.”

Here are just a few of the consequences of the new rulebook that officials may not have intended:

Less research Forcing banks to charge for research separately from trading services is among the most controversial aspects of the new regime. An immediate consequence might be that spending on analysis declines as the buy side becomes more discerning.

US and European fund managers will probably cut more than $300m from their research budgets, according to a survey earlier this year by Greenwich Associates. This equates to a 7pc drop in commission spend for European firms.

Job losses (and some gains) Less demand for research will mean less demand for analysts. McKinsey expects the rule change to cost hundreds of jobs as banks cut about $1.2bn of investment in the area.

The top 10 sell-side banks spend about $4bn a year on research, but that will drop 30pc after MiFID, the consultant said.

There is an upside, for a lucky few anyway, as asset managers including Schroders build up their in-house research teams to offset MiFID’s impact. Vanguard Group, the world’s largest mutual-fund company, also plans to rely more on internal analysis.

Specialist research houses With banks likely to cut analysts, whole industry teams that aren’t ranked in the top three or four in their field could be axed from trading floors. Northern Trust’s Walsh reckons those teams may choose to strike out on their own, helping to create “a cottage industry of specialization”.

Shrinking buy lists Because firms will have to document transactions in far more detail, there’s concern MiFID II will have a chilling effect on sales in continental Europe. Banks and insurers selling funds may limit the number of asset managers they deal with, curtailing the competition that EU regulators say they want to promote.

Boston-based consultancy Cerulli Associates says business in southern Europe is likely to be the worst affected.

... and shrinking investment universe MiFID II requires firms involved in selling investment funds to make sure that investors are sold products appropriate to them – defined as the “target market.”

Under the UK’s interpretation of the rules, portfolio managers also have to adhere to this requirement as they’re classed as product distributors.

“The rules may see the universe of companies that fund managers feel able to invest in shrink,” said Dick Frase, a partner at law firm Dechert.

“It means that they’ll have to consider whether an individual investment decision, such as picking one stock over another, is appropriate for the target market. It doesn’t make any sense.” (Bloomberg)