Investment advisers subject to the Markets in Financial Instruments Directive II (MiFID II) must ensure they have correctly categorized local public authorities and municipalities as retail clients.
MiFID II obliges local authorities and municipalities to opt up to being treated as professional investors. This could restrict local authorities and municipalities from investing into certain firms. The rules come following a number of high-profile mis-selling cases involving local authorities and complex financial products.
“I doubt many local authorities will opt into being a professional investor because it would not give them the same protections as they would be entitled to as retail investors. As such, fund managers will need to treat many of these allocators as retail clients unless they decide to opt up,” said Shane Kelleher, partner in the Financial Regulation Group at William Fry, an international law firm in Dublin, speaking at the GAIM Ops Conference in Dublin.
One fund manager said this presented challenges for certain fund managers, particularly firms running Alternative Investment Funds as mandated under the EU’s Alternative Investment Fund Managers Directive (AIFMD). AIFMs are not permitted to market or solicit to investors which are not accredited under MiFID. In addition to some family office structures and high-net-worth-individuals, this will now also include local authorities. However, Kelleher said it would be unlikely if local public sector pension plans were designated as retail investors under MiFID II.
Other challenges within MiFID II include the on-going issue around the prohibition on using equity commissions to pay for sell-side investment research. Fund managers at GAIM Ops identified this as their single biggest concern about MiFID II. “A big risk is if fund managers are deprived of quality investment research and performance suffers, and this would ultimately hurt investors, which would be contrary to the whole purpose of MiFID II,” said Kelleher.
German bank Berenberg predicted UK asset managers could see up to 20% to 30% of their profits wiped out if the £1 billion to £1.5 billion annual spend on investment research was incorporated into the P&L. Most managers, however, expect management fees to increase, or for firms to create fully- paid research payment accounts.
“This would entail managers agreeing with investors a research budget and setting up a research payment account. There are a number of operational issues that have yet to be resolved. These include agreeing with a diverse range of investors the precise sum total of the research spend, for example. These are issues that still lack clarity,” said Kelleher.