Recent EU pronouncements show it is preparing significant concessions to ease the administrative burden of MiFID II and support the economic recovery and recapitalisation of European companies following Covid-19. The European Commission proposes relief measures “to remove formal burdens where they are not strictly necessary” which were introduced by MiFID II.
Concerned that MiFID II has further inhibited issuers from connecting with investors through a downward trajectory in research coverage on small and mid-cap issuers and fixed income instruments, the Commission is proposing to introduce a targeted exemption from the research unbundling rules.
Therefore, where research is exclusively on small and mid-cap issuers, those below a market capitalisation of EUR 1 billion in the 12 months prior to the research, or on fixed income instruments, the Commission proposes that investment firms can choose not to apply the current MiFID II requirements to set up a research payment account or to pay research from their own resources. Such investment firms may pay for execution and research together but only where there is an ex-ante agreement between the investment firm and the research provider as to the fee split attributable to research and execution. Investment firms are also required to disclose details of the joint payment to their clients. The Commission’s consultation on the draft Delegated Directive amendments is open to 4 September 2020.
Information requirements, product governance and position limits
Further targeted amendments are included in another proposed Commission draft Directive to provide flexibility for wholesale clients. The proposals are summarised in the draft text, but of particular interest, as they were controversial changes introduced by MiFID II, are:
Investor disclosure – a blanket exemption from providing ex-post statements to eligible counterparties and professional clients, including the end of day loss reporting (10% portfolio depreciation), but with a professional client opt in. The Commission states the end of day loss reporting “promotes a short-term view among inexperienced investors and fosters “herd behaviour” which is not conducive to taking informed views of the market.”
Best execution – a temporary suspension of the “RTS 27” reporting obligation pending a review and possible permanent deletion or this reporting requirements. These reports are “not read by investors, while buy-side investment firms receive all the relevant information via other means (e.g. via brokerage meetings)”.
Ex Ante cost disclosure – Implicit transaction costs
Firms producing PRIPS or calculating ex-ante costs for MiFID II will be familiar and likely frustrated by the requirement to measure and disclose the implicit costs of a transaction, or “slippage”, between the price when an order to transact is transmitted (the “Arrival Price”) and the price it is executed at, which sometimes results in negative transaction costs, which, their feedback suggests, consumers find difficult to comprehend.
In their report, the European Supervisory Authorities have responded to draft proposals to amend the relevant PRIIPs regulation which underpins this disclosure requirement, but they remain committed to the view that measuring slippage is of value. The proposals include
These proposals will be relevant to managers looking to continue to distribute funds and services to retail investors in the EU following the end of the UK’s withdrawal transition period.
How will the UK respond?
The Commission appears to acknowledge that MiFID II contained “unnecessary” and “overly burdensome” requirements for firms providing services to Professional Clients. However, there’s little joy here for investment managers of retail clients.
In steps HM Treasury, who have published proposals to give the FCA from the end of the UK Exit Transition Period, the power to change the on-shored PRIPS delegated regulation and rectify concerns with it. In the longer term, HM Treasury intends to conduct a review of the disclosure regime for UK retail investors and explore, for example, how to harmonise the PRIIPs regime with requirements set out in the Markets in Financial Instruments Directive (MiFID) II.
The Commission’s proposals reduce regulation so we anticipate the FCA will reciprocate with alleviation of its own. Retail managers could claim their clients and businesses would benefit from the relaxation of similar obligations applied to them, particularly while a long-term review is to be conducted. Investment managers may want the FCA to go further than the Commission proposes, and protect them from a second-wave of these and other regulations in the near-term, bearing in mind that similar regulations applying to retail investors were summarily but temporarily suspended by the FCA when Covid-19 struck.