MiFID II is proving to be a significant game-changer for the European Financial Sector. Significant, because of the wide-ranging implications for different types of financial firms and for a broad scope of activities. A game-changer, as it prompts financial market actors to fundamentally reassess the client-segments they want to cover and further to re-design their offer to service these segments in a compliant and effective manner. It is important to note that, while it is clear that MiFID II will require resources for its implementation, firms should also reflect on the opportunities opened by this new regulatory framework. In our analysis, we will focus on the impacts on Luxembourg Fund Managers, and their Service Providers, notably Depositary Banks.
MiFID II, a regulation with significant impacts
In 2014, the EU Markets in Financial Instruments II Directive (MiFID II 2014/65/EU) and the Markets in Financial Instruments Regulation (MiFIR 600/2014) were adopted.
While the new regime is scheduled to go live in January 2017, in an uncommon move, the European Securities and Markets Agency (ESMA) stated in it’s European Parliament hearing in November 2015, that it considers this “calendar … unfeasible” and expects significant delays. This ESMA statement points towards the complexity in applying MiFID II as well as the far-reaching impacts of the directive. A fact also reflected by the over 100 implementing measures, encompas- sing thousands of pages, drafted by EU regulators. And there is more expected in 2016…
The evolution towards MiFID II reflects the paradigm shift in financial regulation post the 2008 Financial Crisis and endeavors to tackle short-comings of the original directive. MiFID II clearly broadens the regulatory scope and will transform Business as well as Operating Models because it takes a transversal approach, covers many more functions within a given organization and encompasses more activities along the value chain.
Another layer of complexity is added by the need to align MiFID II with other financial regulations in order to ensure a congruent and efficient implementation.
With total EU-wide estimated implementation costs ranging from EUR 500 to EUR 700 million plus ongoing annual costs between EUR 300 and EUR 500 million, the Luxembourg Financial Sector that is tilted towards Service Providers, is bound to feel the change.
MiFID II is applicable, to various extends, to Investment Firms, Market Operators and Data Reporting Service Providers.
Even though ManCos are mainly regulated under the UCITS and AIFM Directives, ManCos with extended scope as well as entities holding delegated functions or are appointed by ManCos are covered. And, increasingly, ManCos remain responsible for delegated and appointed activities.
Fund Service Providers, like for example the Depositaries and Fund Administrators, are definitively touched by this new directive since they must ensure that their activities are compliant and further that the services they offer enhance the compliance of their clients.