Talk of Mifid II has finally hit UK shores, having seemingly taken some time to travel upstream. Perhaps this is due to preoccupation with RDR and the sense we have already implemented the “tricky bit” of the new regulatory requirements: the commission ban.
Mifid II will require all European IFAs to forgo commission. Some may well forgo their independent status instead: “restricted” or “tied advisers” can continue to receive fund manager rebates under the current rules.
Some markets have moved beyond the minimum requirements. As you know, the UK commission ban applies across all financial advice and has been extended to the execution-only space. Elsewhere, the Dutch market has banned rebates for non-independents too, while the Swedish regulator has recently announced it will be enforcing a more all-encompassing ban.
Some believe that Mifid II is a slippery slope to an RDR-like commission ban across Europe. However, our research shows the majority of distributors, platforms and fund managers believe different markets will respond differently to the new rules.
Many envisage a kind of north/south divide, with big retail banks and life companies in France, Germany, Italy and Spain hoping to protect the status quo as far as possible.
While opinions differ on the likely implications of Mifid II, there is consensus IFAs have significant challenges ahead of them. IFAs on the continent already struggle to gain significant market share in retail distribution, overshadowed by the banking giants and their advisory networks. Rather than continue with generalisations about the fate of IFAs in Europe, it is probably best to focus on a few country examples – starting with our neighbour across the Channel.
In France there are around 3,000 IFAs (or CGPIs), which account for roughly 5 per cent of total fund assets. Larger IFA groups are beginning to emerge as a result of consolidation.
We anticipate the consolidator firms will do well in the run-up to Mifid II implementation, as some smaller IFA firms find it difficult to reshape their business practices to comply with the new rules.
At the same time, CGPIs are partly shielded from the changes because most new business goes through unit-linked insurance contracts, which the European Parliament decided should not be subject to Mifid. The major French insurers are lobbying hard to keep themselves out of scope of any kind of commission ban.
Meanwhile, the German IFA market is the largest in Europe, with roughly 40,000 registered, although banks still account for the lion’s share of retail fund distribution.
Both Germany and Austria have moved ahead of Mifid II in implementing a ban on IFAs receiving commission payments. New regulation also requires IFAs to obtain a licence, which entails having damage liability insurance, demonstrating an advice process and sitting an exam among other stipulations aimed at increasing professionalism.
These new requirements are too onerous for many IFAs. Some are tackling the additional regulatory burden by entering into a kind of liability umbrella provided by an IFA pool (similar to our advisory networks), which fulfils some of their compliance-related obligations on their behalf.
Others are outsourcing investment management altogether by arranging for a discretionary manager to run their clients’ money. We anticipate huge contraction in this market, not least because the majority of German IFAs are approaching retirement and reluctant to change their business practices.
Elsewhere, IFAs account for roughly 10 per cent of retail distribution in Sweden. The more “professional” firms already offer a fee-based rather than commission-based service, making them more geared up for Mifid II.
There has been a trend towards vertical integration in the IFA channel, with firms of sufficient scale taking on an asset management functions. Some have been building their own fund-of-fund ranges, while others have been putting together Nordic country ETFs.
Interestingly, the very nascent Italian IFA market has little to lose post-Mifid II.
Established in 2008 following Mifid in its initial carnation, this is a niche, typically fee-based channel consisting of 300 or so individuals across circa 20 firms. Mifid II could in fact give a boost to Italian IFA SIMs if consumers begin to open their eyes to the true cost of investing through banks, factoring in hefty front-end loads and more expensive share classes thanks to relatively high rebate demands. SIMs are also waiting for a public register to be established, which would give them the legal recognition currently lacking.
Each IFA market has its nuances. Overall, we expect some movement of business from the advised market to the D2C channel as a result of Mifid II.
However, the extent to which this takes place depends on the ability and willingness of IFA firms to adapt their business models and embrace new professionalism requirements, as well as the level of prior D2C culture in their home market and whether the banks will eventually have to offer fee-based advice.
In the meantime, expect the European distribution landscape to resemble a patchwork quilt, with cross-border fund houses and platforms responsible for stitching it all together.
Annalise Toberman is senior researcher at The Platforum