_ MiFID has been occupying the actors in the fund market for years. Indeed, almost a decade has elapsed since the transposition of the first set of MiFID rules into the laws of Luxembourg and of other European Union member states.
Terms such as protection of investors, qualification of customers, best execution and consultation protocol now form an integral part of the financial world. However, the financial crisis demonstrated that the legal framework MiFID I1 set was not suitable for creating transparent financial markets providing a reasonable degree of investor protection. In addition, financial products have become increasingly complex, so much so that the European Legislator decided to strengthen the existing legal provisions by enacting MiFID II2.
Unfortunately, the timely implementation of MiFID II in the relevant member states on 3 January 2017 failed due to the lack of elaboration and determination of technical standards. According to the current timetable, MiFID II shall enter into force in the relative member states no later than 3 January 2018.
Although the provisions of MiFID II will not directly be applicable to the fund market, the transposition of MiFID II into the respective national laws will likely have a direct and concrete impact on this market, and it shall henceforth be considered an overarching legal concept. In this respect, several activities of the fund market, such as the marketing of products, will fall under the scope of MiFID II.
The application is because investment firms, such as independent asset managers and investment advisors, will be obliged to guarantee transparent and independent investment management and investment advice to their clients when marketing fund products. In order to ensure that the investment advice is given in an independent and risk-diversified manner, such investment firms will be obliged to offer diversified portfolios of products to their clients and will be subject to monitoring obligations with respect to the financial products offered.
From our point of view, the main challenge for the investment firms active in the financial market as well as in the fund market consists in the MiFID II prohibition of financing services with fees or commissions investment vehicles pay for the introduction of new investors (so-called kickbacks). Because of this prohibition, the different actors subject to the provisions of MiFID II will likely have to revise their existing fee policies. Indeed, in the past, the services investment firms rendered to their clients were mainly financed by kickbacks, as described above, habituating clients to the provision of services at a highly fee-reduced level. As the kickbacks investment firms receive must be credited directly to the clients’ accounts under MiFID II, investment firms will have to change their existing fee policies and invoice their services directly to the client. However, it is doubtful that cost-sensitive clients will be willing to pay fees for services investments firms rendered almost for free in the past.
Against this backdrop, it currently remains unclear whether the provision of investment management services and/or investment advisory services has an economic future when the quality of such services must simultaneously be improved as requested under MiFID II.
As we observe a general trend toward cost sensibility, an aggravation of the constant competition in the sector seems inevitable; in particular, small investment firms will likely face major economic challenges in the near future. We expect that such constant competition will significantly reduce the number of financial actors and will henceforth lead to a growing monopolisation of the financial services sector.
At this stage, the reaction of the fund market to the change in the legal framework under MiFID II is unpredictable, primarily because the technical standards of MiFID II have not yet been finally elaborated and the wording of the corresponding laws integrating MiFID II into national laws is currently unknown. However, it is to be expected that the transposition of MiFID II will trigger a consolidation phase in the Luxembourg fund market that may have a negative impact on investors’ economic interests.
1 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (“MiFID I”).
2 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments as amended by directive (EU) 2016/1034 of the European Parliament and of the Council of 23 June 2016 and Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments as amended by Regulation (EU) 2016/1033 of the European Parliament and of the Council of 23 June 2016 (“MiFID II”).