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MIFID 2: the end of open design ?

The distribution of financial products has enjoyed a real Big Bang in Europe since the start of the new year, with the entry into force of the revised directive 2014/65/CE on Financial Markets, called MIFID 2. With a duty to provide much more information to the end client (in terms of both quantity and quality), how are independent financial management advisers and other management agencies going to cope with the extra collection and management of financial information and at the same time retain their competitive positions?

Insurers and banking operators are already considering reducing their recruitment of external managers for their own products. In this context, independent financial management advisers have to prove at all costs to everyone (end clients included) that they can use the MIFID 2 directive to improve their level of financial advice instead of enduring it. We should remember in this regard that open design, the distribution model which allows private individuals to purchase products issued by other financial institutions through their independent financial management advisers, has already been in decline year by year since 2011 (Source: Not defined).

Information for the end client - the first challenge for independent financial management advisers

The entry into force of MIFID 2 involves very far-reaching legislative developments. It requires an obligatory overhaul of design products relating to information systems (IS) of financial brokers. The new parameters must be taken into account before the authorisation of a financial service for an end client, and other information must be investigated:

  • Including the end client’s financial situation, his or her solvency, and a definition of the ultimate objectives.
  • Information, detailed item by item or collated, on the costs and expenses of products and services. Information together with a simulation of their impact on the end performance of the financial instrument.
  • Dialogue regarding the independent or non-independent nature of the proposed financial service: is it directly or indirectly conceived by the company which is giving advice?
  • At the time of the implementation of a service: information for the end client on other platforms used (cost, risk, etc.) and all service providers commissioned.
  • Etc.

The collection, processing, and retranscription of financial data in an intelligible form has therefore become a crucial logistical challenge for independent financial management advisers. Without a back office which is capable of rapidly collecting and supplying the information which each end client can now demand pursuant to MIFID 2, several independent advisers risk losing the trust of financial and investment banks or market operators. The front office (the application which the end client uses) is therefore merely the tip of the iceberg.

How can operators still innovate?

The overhaul of their information systems will allow independent financial management advisers to continue with their current active innovation with regard to the distribution of financial products. Its necessity involves some new obligations imposed on them with the entry into force of MIFID 2. Those obligations mean an extra measure of comprehensiveness and speed in the processing of their generated data:

  • The evaluation and adequacy of the financial instrument/target market defined by the producer of this instrument.
  • The definition by independent financial management advisers of their own target market, including the evaluation of the producer of the instrument issued.
  • The periodic review of products and their development with regard to the specified target market.
  • The periodic analysis of the target market/distribution strategy.

From the information available to the end client in advance and the distribution of the financial product to information requested later by this said client, MIFID 2 poses a major logistical challenge. This is why players in the banking and insurance industry are facing a challenge.

10/03/2018

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