By John Westwood, Group Managing Director, Blacktower Financial Management Group
After the announcement in January from the Malta Financial Services Authority, stating the significant pending changes to Maltese pension regulations, both companies and advisers alike felt the net tighten around their daily practices.
The statement started one of the most significant shifts for the industry and sparked apprehension around those ill-equipped to provide fully compliant financial advice in light of the revised regulatory standards.
As an industry, we are all too aware of the gruelling application process to obtain a MiFID II licence and indeed, being licenced is not simply a brass plate on the office door. Beyond the paperwork, sponsorship, snowballing timescales and proverbial hoops that are to be jumped through; there is an unwavering requirement for an entire infrastructural overhaul, enhanced corporate governance and product management. And for anyone in doubt as to the breadth of MiFID II – regulations affect nearly every asset and professional occupation within the financial services industry across the European Union.
Infrastructure and increased administration aside, there is now also the demand for more sophisticated product governance. Companies need to have this function established to ensure that the investments proposed to retail clients are not only regularly reviewed and analysed, but also fully approved as the appropriate options for the identified target audience.
Why is this? Transparency; complete honesty is imperative to curating a long-standing and fruitful relationship between client and adviser. It is crucial to ensure that companies are doing more than merely paying lip service to putting the client’s best interests at the crux of all outputs.
Of course, it is a common rhetoric in the industry that we do not hold a crystal ball when giving financial advice and we must make the client aware of this. One cannot guarantee the market behaviour, and nothing is absolute. Nothing, that is, except for the adviser’s resolute dedication to practicing in the most ethical way. That must be ardently certain.
Integrity can no longer be a flag waved as a part of a marketing initiative, but fundamental to a firm’s front end sales operations. This benefits the client, and truly is best practice for any wealth management firm worth its salt.
With the insistence of scrupulous reporting obligations, mandatory quarterly client valuations, compulsory record keeping with regards to all electronic and verbal client communications and annual transactional statements issued, the administrative demands influenced by MiFID II now weigh on the industry more than ever before. In tandem, these new standards of communications monitoring are placing greater stress and importance on businesses employing a solid GDPR policy framework than ever before.
Indeed, for smaller firms, with the increased responsibilities along with time, cost and resource, there is need for a justified, commercial decision to be made on every potential client, and whether the value equates to the manpower needed to sustain the professional relationship in line with MiFID II regulation.
As such, it is not unreasonable to suggest that clients bringing in smaller investments may find it more and more challenging to seek financial counsel.
Not only this, but clients are becoming increasingly aware of their rights and the ethical responsibilities of advisors when it comes to their finances. With sensationalised media headlines at their fingertips and a developing reliance on immediacy, clients are generating a higher number of complaints than ever before.
Of course, while there is something of a consumer paradigm of what is right and wrong in the industry, bandwagon grievances only add to the heightened pressure on companies when adhering to regulation.
It is likely that we will begin to see an increase in smaller financial advisory businesses plugging in to larger existing networks in order to absorb and bolster licencing expenses and the potential increased overheads that can arise with the new regulatory standards now in play. In turn, shrinkage in the industry is a likely forecast, as more advisers look to consolidate with larger, more established firms or close shop altogether.
History proves that any new law or regulation comes laden with challenges; that is inevitable. MiFID II may present more extensive process workflows and intensive administrative labour in situ, but it is set to revitalise and reinforce transparency in our industry.
The changes not only offer greater protection to clients and their funds, but extract continually higher levels of excellence from the industry as a whole. So long as regulation is ever client focused and seeks to retain the quality of the commercial capabilities of our peers, then it is always going to be widely perceived as a positive change.
There is also clear motivation from a regularity standpoint to best utilise this increased transparency to greatly reduce the use of ‘dark pools’ – a term commonly used when referring to private financial exchanges that facilitate trading between anonymous investors. It is a practice commonly employed to protect identities of traders from public view during early stages of investment transactions. The revised MiFID II regulations aim to limit the trading volume of stock to 8% over a one year period.
As an industry, we pride ourselves on professionalism and anyone who strives for less than the utmost levels of integrity, ethics and knowledge simply cannot operate in this new era of heightened governance when providing financial advice.
We would strongly empower any client of private financial services to take serious consideration of the newly imposed MiFID II regulations. Whether you’re considering new investments or products, or are someone with an established relationship as an existing customer, there has never been a more crucial time to know your rights, have knowledge of the legislations in place to protect you and your finances, and to be asking important questions of your chosen firm.