In the last post I explained the importance of regulation for the asset management sector and how being outside of the EU means the UK industry can no longer make use of the regulatory framework which allowed them to passport their products around the EEA.

The article looked at the impact of losing the Ucits passport and how this meant companies now have to domicile both their investment funds and their management companies within the EU. I also discussed how future changes could result in asset managers having to locate even more of their activities within the EU.

This third and final post will examine the impact of the loss of the passporting opportunities provided by another regulatory framework – the Markets in Financial Instruments Directive. It will also look at the implications of future divergence from this directive.

What is Mifid and why is it important to asset managers?

The Markets in Financial Instruments Directive regulates how asset managers provide investment services to clients across the EU. In particular, it affects how investment funds – the collection of individuals’ capital which is then used to buy assets such as equities and bonds – are sold and marketed.

While a member of the EU, a UK asset manager could sell their product into the EEA using sales staff based in London because of the passporting rights provided by Mifid. Outside of the EU, the firm needs to have marketing and sales teams located in the EU so it can continue to take advantage of the Mifid passport.

For some firms these changes are less of a headache because they already have established European marketing and sales operations. But others have had to scramble to build this infrastructure. Once again, it adds to the cost and complexity of doing business.

Future complications

A recent FT article said a taskforce established by Iain Duncan Smith wants to use Brexit to set up a new regulatory framework. The report has recommended ‘streamlining’ Mifid.

One of the proposed areas for change is the rules around best execution. These rules require firms to achieve the best possible results for customers when buying and selling assets and to publish reports to show how this has been achieved. The aim of these rules is to increase transparency of trades so customers can be sure they receive a fair price.

The taskforce suggests these reporting requirements should be ditched, saying these reports are not necessary for wholesale clients as they already receive this information from brokers.

But asset managers have already set up these reporting and monitoring procedures to comply with Mifid. If the UK introduces a different regulatory system to the EU Commission, this creates a challenge for the industry.

Asset managers will have to figure out how to track, implement and reconcile the different regulatory approaches. Firms will need to assess how rules in the EU impact their UK business and vice versa. It will require beefed up regulatory compliance teams to track these changes.

The divergence is likely to have knock-on effects globally because the UK is a major financial centre. It means the business of selling funds cross-border in Europe is going to become more complicated.

“Ultimately, managing the divergence between the EU and UK is going to become a permanent feature of firms’ regulatory compliance teams,” says Sean Tuffy, head of market and regulatory intelligence, Citi Securities Services, in his 2021 FinReg Outlook. In other words, this will increase cost and complexity.

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