REGULATORY MiFID III – How Regulatory Bodies Can Improve On MiFID II
It has now been two years since MiFID II was first implemented, and its impact on investors and the markets more generally is gradually becoming clearer.
With this clarity comes a greater understanding of how some of the more complex aspects of MiFID II could be improved upon in future regulatory standards. We’ll look at a few such potential improvements here.
A – perhaps the – central tenet of MiFID II was and continues to be market transparency. Transparency, the argument goes, is key to protecting and encouraging investors while keeping asset managers honest and accountable.
This is undoubtedly a positive and necessary goal. However, since its implementation, many have questioned MiFID II’s effectiveness at generating genuine market transparency.
True, asset managers have been providing investors with more frequent and detailed reports on costs and charges. But an excess of data is not necessarily conducive to a greater understanding on the part of investors.
It seems that future regulations should place a greater emphasis not on volume of data, but rather clarity of data. High volumes of reports are all well and good, but if these reports lack sufficient clarity, the investors will not feel their benefit and true transparency will not be achieved.
Part of this process should include financial education. If investors aren’t equipped to fully comprehend and digest the information contained within these reports, the market will not be truly transparent.
We must remember that MiFID II’s transparency measures were intended to benefit and protect investors; if they are left in the dark by huge volumes of complex data which they are not equipped to understand, this goal simply will not be reached.
One of the most successful elements of MiFID II has been the unbundling of execution and research costs. The FCA’s official review found that ‘following MiFID II, most asset managers have chosen to pay for research from their own revenues, instead of using their clients’ funds’.
This, in turn, has led to more discerning decisions being made by the buy-side when it comes to paying for research. However, this has meant that the revenue generated for the provision of research has fallen significantly.
To resolve this, it would make sense that any future versions of MiFID outline some form of democratised guidelines with regards to the pricing of data.
It is hard to argue against the fact that MiFID II’s aim was a noble one. The protection of investors by way of increased transparency is integral to encouraging future investments. But equally, it cannot be denied that MiFID II has fallen short of some of its aims, at least in its current iteration.
It has, however, provided a solid groundwork to be built upon by future regulatory guidelines. If some of these suggested changes are implemented, we will move one step closer to true market transparency.