MiFID II ‘practically impossible’ due to ‘lack of understanding’ of platforms: FECIF
The rise in popularity of funds platforms used by IFAs and intermediaries across Europe hasn’t been taken into consideration within the MiFID II implementation framework, according to the European Federation of Financial Intermediaries and Financial Advisers (FECIF).
The European Securities & Markets Authority (ESMA) has recently consulted the industry on ‘Product Oversight and Governance’ matters, in particular within the MiFID II implementation framework. And while welcoming the work being undertaken by EU body, FECIF said that it has concerns that a lack of understanding of the complex structure of platforms means that it is “practically impossible” to meet the deadlines and provide the information requested within the MiFID II structure and timeline.
FECIF said that it has “serious concerns” that the widespread distribution models in many European countries have not been taken into account and that timing issues could create regulatory arbitrage.
“Everyone needs a consistent approach which takes into account the existing variety of business models and their different characteristics,” said FECIF chairman, Johannes Muschik. “MiFID II defines the “target-market” which has to be taken into account by manufacturers of financial instruments within their product governance process. Distributors (including advisors and intermediaries) are obliged to gather all information about the target-market of each financial product that they intend to offer to their clients.
“There is also the concept of a “distribution strategy”. ESMA seems to have introduced a new definition for this, which was not the one intended in the level 1 (MiFID II) text, inferring that manufacturers also need to define “distribution strategies” and distributors need to gather all information about the distribution strategy of each financial product that they intend to offer to clients.
“ESMA is obviously assuming that there is always a direct relationship between manufacturers and distributors. However, this is not the case,” added Muschik.
FECIF points that in many European Member States the most common business models of cooperation between manufacturers and distributors are via “open-architecture” platforms, which often cooperate with thousands of different manufacturers and with hundreds or even thousands of distributors, all at the same time. Distributors contract with open-architecture platforms to become entitled to offer the whole range of financial instruments available on a platform, to their clients.
‘Lack of understanding’
“It seems apparent that the concept of “distribution strategy” introduced by ESMA will never work within the world of open-architecture,” Muschik added. “Manufacturers are simply physically unable to foresee or oversee the individual distribution strategies of so many distributors, who are usually totally unknown to them – as both parties are solely contracting with the platform and never have any direct interaction at all. This appears to show a lack of understanding of how the market works”.