As from 3 January, European financial markets had to abide by the reforms to trading, product conception, distribution and reporting requirements brought about by the implementation of MiFID II.

MiFID II, which is widely considered as the greatest overhaul in the European financial markets, aims to increase transparency across financial markets in order to restore confidence among retail investors through increased regulation.

The main revisions affecting Asset Management Companies can be categorised as follows:

 

Product Governance - In order to safeguard the investors' funds, MiFID II has imposed a number of requirements aimed at identifying particular target markets and ensuring that the funds are compatible with such target markets. In determining the target markets, Asset Management Companies have to identify whether the investor is a professional investor, a retail investor or an eligible counterparty. Furthermore, Asset Management Companies have to assess each investor's experience, knowledge and expectations as well as such investor's financial situation, risk tolerance and ability to bear loss. Additionally, MiFID II obliges the Asset Management Company to carry out regular reviews of its products in order to ensure the continuing compatibility of the funds and the relative target markets.

 

Enhanced Market Transparency and Integrity - MiFID II provides for additional obligations on Asset Management Companies for the purposes of ensuring increased transparency and integrity of the market. In particular, Asset Management Companies have to report all transactions in financial instruments admitted to trading on regulated EU trading venues to the Regulator.

 

Recording of Electronic Communications and Telephone Calls - All Asset Management Companies regulated by MiFID II are required to record telephone conversations and electronic communications relating to any transactions concluded or intended to be concluded when dealing on own account and the provision of client order services that relate to the reception, transmission and execution of client orders. Such records are to be kept by the Asset Management Company for a minimum period of five years and must be provided to the client upon request. Asset Management Companies are, however, not obliged to record any phone calls or electronic communications pertaining to the discussions on market conditions.

 

Disclosure Requirements - MiFID II imposes direct obligations on Asset Management Companies to deliver specific information in relation to investment advice, financial instruments and the related costs and charges. Of particular note is the obligation of an Asset Management Company to report to its clients if the client's portfolio depreciates by 10 per cent or more since the previous reporting date.

 

Inducements - In accordance with the provisions of MiFID II, an Asset Management Company is only permitted to pay, or be paid, an inducement which can be a fee, commission or non-monetary benefit in connection with the provision of an investment service or ancillary service, where the relevant payment is designed to enhance the quality of the relevant service to a client and where it does not impair compliance with the Asset Management Company's duty to act honestly, fairly and professionally in accordance with the best interests of the clients. Additionally, the Asset Management Company must disclose to the client prior to the provision of the relevant investment/ancillary service, the existence, nature and amounts of any such inducement. Research, which prior to 3 January was usually provided to an Asset Management Company free of charge, is considered as an inducement according to MiFID II unless it is paid for through the Asset Management Company's own resources or if it is paid for through a separate research payment account controlled by the Asset Management Company, which account is furthermore subject to further regulation in accordance with MiFID II.

 

Best Execution - Asset Management Companies are obliged, according to MiFID II, to produce and make public an annual disclosure detailing their top five execution venues, for each sub-class of financial instrument, in terms of trading volumes over the preceding year for all executed client orders.

While the introduction of MiFID II aims to increase the regulatory safeguards in order to better the protection of retail clients, the Directive imposes a number of obligations on Asset Management Companies which can create increased pressure on such company's profits in order to ensure compliance with the same directive.

 

 

Disclaimer: Jeanine Thompson is a Risk & Compliance Specialist at BOV Asset Management Limited ("the Company"). The writer and the Company have obtained the information contained in this document from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate. This information may not necessarily be appropriate to your particular investments requirements and risk profile. It is therefore recommended that if you require investment advice or wish to discuss the suitability of any investment decision, you should seek financial, legal or tax advice from your professional advisers as appropriate. BOV Asset Management Limited is licensed to conduct investment services in Malta by the Malta Financial Services Authority. BOV Asset Management Limited, registered address 58, Zachary Street, Valletta, VLT 1130. Tel: 2122 7311, Fax: 2275 5661, e-mail: [email protected], Website: www.bovassetmanagement.com. Source: BOV Asset Management Limited.