Background: This week the Danish Financial Supervisory Authorities (Finanstilsynet) published its second thematic report on the implementation of the MiFID II directive. The first report published in June 2018 assessed the structure of the Danish UCITS fund market post MiFID II
Jens Lohfert Jørgensen, Manager | The 8th of February, 2019
The New Report
The new report assesses the quality improvements in investor advisory services offered by Danish banks. As will be known, quality improvements in investor advisory service is a precondition for the distributors (the banks) to receive an inducement (“provision”) from a third party – typically a UCITS fund. This MiFID II regulation is all part of the principle of securing the investor from conflicts of interest in the investment advisory situation. Or in plain words: If a bank is receiving inducements indirectly paid by the investor, then the investor in turn should receive proportional and truly value adding quality investment services from the bank.
The FSA report is based on a questionnaire sent to seven of the largest Danish banks servicing the retail investor market. The report is in its form very prosaic and heavy on legal wording and to a lesser extent grounded on hard figures and facts. Likewise, all responses from the individual bank are kept anonymous, and hence the report is to be a status of market practices among the banks.
The full 30 pages report can be downloaded here. However, if you prefer a quick interpretation of the report, then just read on below. It might even be adding value to you.
The report highlights just how complex it is to evaluate regulation related to intangible matters. How do you rate and evaluate the actual value in money terms for an improved service? What is the specific added value for an investor having access to an investment advisor “24/7” as opposed to have access only weekdays from 9 to 5? Not an easy task to express in money terms.
What the FSA found when looking for quality improvements in investor advisory services can be described as a Fata Morgana: An optical effect known from the dessert when hot air is meeting cold air and an illusion of seeing something, that is not present, is occurring. And speaking of improved quality in investor services and hot air – then that’s just what the FSA found…
The Danish FSA is caught in its own regulatory spider web of setting up intangible preconditions for the banks to be allowed to receive inducements. In the report the FSA, with great effort, is trying to evaluate improved services out of soft parameters like access to reporting, trading platforms, advisory staff, instruments and even suitability test of investors.
Also, the report tries to evaluate to which degree the various business models in the banks adhere to the MiFID II principle of proportionality. The inducements received should according to the FSA reflect 1) The distribution model (execution-only versus advisory), 2) The type of client (large versus small investors), and 3) The type of instruments traded (differentiating inducements according to risk profile of the instrument).
And yes, if you think this all sounds very complex, you got it right. In fact, it is so complex, that the banks are losing their direction in setting up appropriate business models to meet the preconditions of receiving inducements. The FSA are obviously not impressed by the banks, and the FSA is announcing more investigations, more reports and eventually maybe even new rigid regulation.
Quality Improvements That Are Valid
Credits should however be given to the FSA, for finally trying to guide the banks on which types of quality improvements that are valid, and which are not. The FSA lists several examples of services, that are not valid improvements: Merely offering the investor a KIID (Central Investorinformation) is not reckoned by the FSA as being quality improvements, as this is basically just living up to regulation. The guidelines in this report would have been much appreciated at an earlier stage.
Setting a value and a price for something like service that is as fluffy as love and religion, is close to impossible. Investors’ preferences are inhomogeneous, and likewise are their benefits of a given service. The current MiFID II implementation on inducements seems to be causing more problems than envisioned.
The market forces are a much more viable way of setting the correct price of improved investor services. Why not set the markets free, by letting the investor pay only the price equaling the benefit he experiences? And finally, and most importantly – release the investor for paying for services, that he hasn’t even asked for.
Jens Lohfert Jørgensen, Manager
Jens Lohfert Jørgensen has been working in the financial sector since 1983. He has extensive experience and knowledge of investment and asset management, as well as a profound understanding of financial instruments, allocation, operations, trading processes, pricing, administration, cost structures, and the complexity of contract negotiations in asset management.
Jens has strong execution competencies and optimization experience of operational processes within investment functions.
Read more about Jens and our other consultants here.