The European Union’s second Markets in Financial Instruments Directive, more commonly known as MiFID II, is credit negative for Europe’s asset management industry as it will accentuate the move to cheaper passive funds, intensify competition and drive sector consolidation.
That’s according to a new report published by Moody’s Investors Service.
“The introduction of MiFID II will put pressure on asset managers’ profits by lowering their effective fee rate and increasing their costs,” says Marina Cremonese (pictured), a Vice President and Senior Analyst at Moody’s. “However, cost saving initiatives, new investment solutions and M&A will likely offset some of the negative effects, limiting their credit impact.”
Strict disclosure requirements for costs and charges will make it easier for investors, independent financial advisors and competitors to compare investment products. This improved cost transparency, as well as a ban on commission paid to financial advisers, will push down industry fees, intensify the move to passive and put industry profits under pressure.
As ETF trades now have to be reported, investors will be informed of full trading volumes and levels of liquidity. It will likely encourage greater use of ETFs by institutional investors including for security lending purposes.
MiFID II’s new product governance and product suitability rules are intended to ensure that the right investment solution is delivered to investors. As such, the regulations will also reinforce the trend to outcome-oriented investing, whereby asset managers help investors achieve their financial goals, be it generating retirement income, school fees, or a target total return.
MiFID II’s sweeping reforms to trading, product conception, governance, distribution, and reporting requirements will continue to bring substantial ongoing compliance expenses and research costs. The resulting squeeze in margins will drive consolidation among smaller players as they seek scale to help absorb these costs.
