Tier1 Blog

Unintended Consequences: Conflicting Regulations, SEC and MiFID II Requirements

The recent response from the U.S. Securities and Exchange Commission (SEC) regarding MiFID II requirements has put the buy side in an increasingly decisive position as they work to comply with the terms. The changes, however, come with unintended consequences.

The SEC recently gave Wall Street firms an extension to comply with European regulations, moving the deadline back from mid-2020, as reported by Reuters. While this extension is accommodating, time is still ticking for market participants who have already begun to transform their business models to support the new MiFID II requirements.

Investment firms are moving more and more toward a situation where they will be paying from profit and losses (P&L) instead of using client money. This isn’t necessarily due to firms seeing unjust value in using client money, but more likely a reaction to conflicting regulations across regions and requirements. Inconsistent regulations across regions have forced firms to dip into P&L to pay for research services instead of paying out of expenses of the fund. Investment firms, particularly the large and global, cannot be seen as treating clients differently based on their location. These changes have reverberated across the industry and are potentially doing more harm than good.

According to estimates by Integrity Research in March 2019, 112 asset managers are currently absorbing research costs.

Firms have had to consolidate resources, increase cost-cutting measures, and change to more passive investment strategies, which has increased compliance and staffing costs. Despite the new financial rules, the buy side has waded through a new European society of low interest rates, eating at the institution’s profits. In the end, margin compression and declining commission pools for research services are becoming the by-product.

One of the other trends we have discussed in a previous blog is asset managers increasingly making the shift to source their own corporate access. The sell side provided this service at a price, but the buy side is now originating more and going direct to secure meetings with corporate executives. They are transferring what was once an external spend, outsourced to their research providers, to an internal cost by staffing teams of experienced people to procure the access they need.

Regulatory changes and conflicting policies across regions are creating this unintended shift in the market. Conflicting views on the eligibility of payment for corporate access is at the center of the debate. In turn, investment managers are expected to adhere to certain governance procedures within their interactions, and clients are also putting more pressure on their managers to create positive results while reducing the costs for active management. These factors, and more, have contributed toward a technology transformation within the buy-side community to enhance their controls, returns and performance through process improvements and efficiencies driven by technology.

The latter is at the epicenter of  the industry developing a more collaborative environment among market participants. With new regulatory rules certainly on the horizon, the consequences will only add to the myriad of structural and regulatory issues that firms are facing.  Embarking on this journey requires a sound and well-thought-out digital transformation strategy. At Tier1 Financial Solutions, we are helping firms address these obstacles head-on by being both a flexible and collaborative technology partner. 

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