Practical guidelines for implementing MiFID II
26 September 2016
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It will take more than a year before MiFID II, the new regulatory framework for investment firms, will come into effect. Its implementation will be challenging for many investment firms.
‘The capturing of data and the reporting to the regulators is a complex task’, says Arthur Kilian of PwC. ‘Also the internal change in culture will be a challenge. The services of investment firms should more than before focus on the demands and interests of clients. To do this in an efficient way and at acceptable costs will not be easy.’
Practical consequencesIn recent months there have been numerous publications about MiFID II. However, a publication that dives deep into the practical consequences of this new framework did not yet exist. Together with Ronald Janssen (Ortec Finance) and Tom Loonen (VU) Arthur Kilian wrote a whitepaper with guidelines that will fill this gap. It is titled ‘MiFID II: Suitability and appropriateness’ and focuses on the practical aspects of investor protection when servicing non-professional clients.
The protection of investorsMiFID II comes into force on January 3, 2018 and aims to increase the efficiency and transparency of the European financial markets and enhancing the protection of private investors. Investment companies will have to gain a much better insight into the financial situation of individual clients. This includes the client’s investment knowledge and experience and the client’s wishes and objectives. Acquiring this insight demands frequent interaction with the client and consultation of various systems in order to form a properly substantiated financial overview. This way of working has to be done in an environment with often out dated IT-systems and a company culture where client interaction is usually fairly product-driven.
More time neededThe original date for MiFID II to come into force was postponed. Loonen: ‘It wasn’t just the investment firms that needed more time. There were clear indications that the financial regulators were not fully prepared as well. Where investment firms have increase their reporting to the regulators, at their turn the regulators have to receive this and digest all that information and draw proper conclusions.’
Suitability and appropriatenessThe whitepaper by Janssen, Kilian and Loonen focuses on two important aspects of investor protection: suitability and appropriateness. Under MiFID II investment firms have to implement and execute obligatory tests, to establish what kind of investment portfolio is suitable and appropriate for a specific client.
Janssen: ‘In this case suitability means that before suggesting an investment portfolio to a private investor an investment firm has to establish his financial situation, including income and expenditures and the goals of the client. Furthermore it has to be absolutely clear why a certain investment portfolio suits the goals of a client. Appropriateness means an investment proposition has to match the investment knowledge and experience of a client. What makes it all extremely challenging is how an investment firm should translate the data it has or collects into valid conclusions and advice. In the future this will be a fully digital exercise. But at this moment, for many firms, it is still manual work. It also means taking the time to talk to a client’.
Guidelines for implementationTo facilitate a practical and efficient transition to MiFID II the whitepaper offers guidelines for the proper implementation of MiFID II. It tries to be practical and shows what the possibilities are within the new regulatory framework. It also clearly describes what investment firms can do at this moment in time to meet the challenges ahead.
Better prepared for the futureKilian: ‘I know of investment firms who have a rather narrow approach and only look at the legal aspects of MiFID II instead of a practical approach. We think a broader perspective is more effective. Simple trying to be compliant is not enough and will be an opportunity missed. Firms that also look at the business aspects and the IT will be more successful. Thus MiFID may be an opportunity to make the firm stronger and better prepared for the future’.
Loonen: ‘Investment firms that understand the value of collecting data and know how to translate those data into valuable insights about their clients will be more efficient and survive tomorrow. It is a matter of the right vision and the right advisory processes’.
Contact Arthur Kilian for more information: +31 (0)88 792 30 35. You can download the whitepaper ‘MiFID II: suitability and appropriateness’ here.
About the authorsArthur Kilian
Is director at PwC and works in the Asset & Wealth Management advisory practice. Also he is a member of PwC’s European MiFID II expertise group and PwC’s EMEA Asset & Wealth Management cluster.
Is professor ‘Effectiveness of regulations at investment firms’ with the postgraduate programme in investment management at VU University Amsterdam. He is also director of Wealth Management Services at bank Insinger de Beaufort, and a member of the ‘DSI Disciplinary and disputes committee’ and the ‘Banking disciplinary council’ in the Netherlands.