MiFID II will force much greater pre and post trade transparency but with that cause an avalanche of data. We are talking 100s of trillions of pieces of data to try to justify who has done what and why, with whom and how …to ensure best behaviour. How is the regulator going to regulate those decisions with rules based diagnostics? It’s certainly a challenge.
Another tenet of MIFID II is to also resolve the quandary of research pricing and unbundling. When writing research for investors, analysts have previously been allowed remuneration from the investor to reward them. This payment was often made by proffering, to the broker, commission business to execute. From 3rd January, when MiFID II becomes operational, this will not be able to occur. You will not be able to offer any research as an inducement to get business. Research will be paid for separately and, in most cases, out of the investment manager’s own coffers rather than out of the funds he manages, as was previously the case. Consequently, the overall commission pool has fallen dramatically and will continue to do so.
Investor protection is never a bad thing. However, the danger lies in the expense of implementing the new regulations. The Christmas crackers at advisory firms, accountants and lawyers, will be large this year and the cost of it will inevitably find its way back into higher transaction charges and greater fees for retail clients. It would be a terribly sad failure if that was the case.
The financial industry starts to look like a template for what will happen across other industries. I recently discussed career choices with my children. We are a very interesting family. My naïve opinion was to suggest a job to do with technology or something to do with regulation. If you could find a career with both, Bingo! My daughter,
with a sullen nod of her head, suggested that technology creates efficiencies and causes job losses and of course she is right. She is like her mother. However, the financial ‘industry’ illustrates clearly that the more technological gains you achieve the more regulation you will be forced to overlay to check the efficacy and probity of those gains; layers of regulatory scrutiny dwarfing the cost savings of technological advances.
In far flung foreign climes every innovative invention necessitates three chaps at the airport rubber stamping the new processes. The same wasteful consequences appear equally evident in ‘the City’. The headcount of investment institutions has risen inexorably since the financial credit crisis and very little of it has been in revenue earning areas. The ‘Bonfire of the Analyst’ will rebalance that and perhaps few, outside of the financial markets, will shed any tears but I can guarantee that within ten years we will be bemoaning the privileged access to market moving research and the injustice in the exclusivity of it.
For every lever MiFID II pulls, in its noble but bloated aim to control the asylum, another lever pops out the other way.
Andy Ash E:
andy.ash@
admisi.com T: +44(0) 20 7716 8520
7 | ADMISI - The Ghost In The Machine | November/December 2017
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