They have both been branded a waste of time, an unnecessary burden and a threat to the UK’s financial services industry. There have also been calls to dismantle or rethink both. And both are inextricably bound up with the European Union.
While Brexit is a manifestation of democracy and MiFID II a product of regulation imposed from above, they both represent a significant challenge and concern for UK financial advisers.
These political and regulatory earthquakes are also intertwined to the extent that Brexit could result in an unravelling of the controversial EU-wide regulation. Only this month the European Securities and Markets Authority called for a review of the “MiFID II framework” in light of Brexit in changes that would amount to stricter rules for non-EU firms.
Meanwhile, some Brexiteers see the UK’s imminent departure from the EU as an opportunity to liberate the country from what they regard as onerous bureaucratic regulations. And a recent report from the Institute of Economic Affairs, a free market think tank, calls for the UK to review MiFID II rules post-Brexit to reduce the regulatory burden on firms and improve market liquidity.
Any lessening of MiFID II burdens would be welcomed by a large portion of the UK financial advice sector. A recent CoreData Research report underlines the sheer scale of adviser concern over the new rules. In fact, our research shows financial advisers consider MiFID II even more of a challenge than Brexit.
Our study, which surveyed nearly 1,000 UK financial advisers, found while volatile markets tops the list of challenges for advice businesses, MiFID II is deemed the second-biggest challenge. This is followed by Brexit, macroeconomic and geopolitical risks, GDPR and cybersecurity.
The fact that advisers participating in our study consider MiFID II more of a challenge than Brexit, macroeconomic risks and the much-maligned GDPR says all you need to know about the degree of unease. While Brexit throws up an array of concerns for the financial services industry, not least the potential loss of passporting rights, a multitude of macroeconomic menaces also loom large. These include Trump-led trade wars, fears of a global economic slowdown and a coordinated tightening of monetary policy from central banks around the world. Viewed in this wider context, we can see that concerns around MiFID II are uppermost in the minds of advisers.
While the regulation is still in its early days, the CoreData study shows a significant proportion of advisers think MiFID II has thus far been detrimental. Nearly half of respondents say the regulation has resulted in market disruption. And more believe it has had a negative rather than positive initial impact on the advice industry.
Going forward, more advisers agree than disagree the regulation will result in both a drop in adviser numbers — echoing what happened in the run up and aftermath of the RDR — and higher advice fees.
Perhaps more alarming still is the finding that slightly more than half of advisers think the regulation has been a waste of time and money with a similar proportion saying it amounts to an unnecessary burden. Furthermore, the advice community is struggling to understand the wider rationale underpinning the regulation – a third of advisers do not think MiFID II is a sensible package of reforms that will improve industry standards.
A significant portion of advisers clearly feel they have devoted a disproportionately large amount of time, money and resources preparing for and implementing a complex set of rules that will ultimately be of little benefit to investors or the industry at large.
Looking at the rules themselves, some requirements are perceived as particularly onerous. Advisers tell us the most challenging aspect of MiFID II is the disclosure of aggregated costs and charges. This is followed by writing suitability reports, recording client conversations and reporting when a portfolio has dropped 10% or more.
These rules are likely creating difficulties for advisers not only on behalf of their inherent complexity but due to confusion around their interpretation and practical implementation. In this sense, the industry would benefit from clearer guidelines and direction.
More positively, advisers point to increased market transparency, improved investor confidence and trust and enhanced investor protections as the main benefits of MiFID II. Encouragingly, these top perceived benefits all relate to positive investor outcomes, indicating that client needs are front and centre of mind.
Elsewhere, our research shows advisers have struggled with MiFID II implementation. Almost a third of respondents say implementation required a lot of work and the same proportion say it was harder than expected. However, the findings also suggest the headache of implementation could have been alleviated by better planning and preparation. Asked what they would have done differently in terms of MiFID II implementation, seven in 10 advisers say they would have started to prepare earlier and a quarter say in hindsight they would have drawn up a better strategic plan.
Hindsight is a wonderful thing, as they say, and no doubt the UK Government wishes it would have started preparing earlier for Brexit.
Brexit and MiFID II are clearly causing a lot of disquiet and anxiety for a substantial number of advisers and the wider financial services industry. What is initially surprising is that advisers taking part in our study are more worried about MiFID II than Brexit.
But this is perhaps not so surprising when we consider the regulatory strain advisers have been under over the last few years. With RDR, MiFID II, GDPR and PRIPPs, long-suffering UK advisers have been swept along in a regulatory tidal wave that shows no sign of slowing. Regulatory overload is damaging because it results in talented people leaving the industry and makes it harder for those who remain to engage with clients.
Meanwhile, those wishing to remain in the EU may be feeling equally disengaged. Barring an unlikely second vote, Brexit looks like a foregone conclusion. But whether this takes the form of a no deal, a bad deal or an amicable deal, it at least raises the prospect of a MiFID II revision or rethink. So for those industry Remainers — and I imagine there are many — the dark cloud of Brexit may yet offer something of a silver lining.