The publication, on 24 May, by the European Commission of its proposal to amend the Markets in Financial Instruments Directive was the starting signal for the implementation of MiFID III, which will come into force at the end of 2025 or the beginning of 2026.
It is a very ambitious directive that puts all the focus on the protection of retail clients. This is reflected in multiple areas, such as i) reinforcing their protection in terms of investment decision-making; ii) requiring greater transparency in product costs; iii) increasing their involvement in capital markets; and iv) covering financial instruments, alternative investments and insurance distribution.
This text sets out new rules and standards and puts an end to months of intense debate and uncertainty over whether or not to maintain the current system of retrocession fees. This method, as we will see in this article, will undergo a very significant change and will have a major impact on the entities that provide investment services. But let’s not give you any spoilers and take it one step at a time.
Indeed, there have been months of “clashes” between two major currents of opinion that are very different from each other. To use a boxing analogy, in the red corner were those in favour of maintaining the current status quo, keeping the incentives as they are now. Their main argument was that eliminating them would entail the risk that less affluent clients would not be able to access financial advice services. And in the blue corner, the opponent argued just the opposite; the incentives have not been, and are not, understood by clients, they generate potential conflicts of interest between advisors and clients, and removing them would ensure that the recommendations are based on the suitability of the product for the client and not on the profits made by selling it.
The fight has been long and intense, and in the end a compromise seems to have been reached, but which in essence means that inducements will be more limited than under the current model. So, at first glance, it may appear that the retrocession fees are staying as they are and that there are no changes in this respect, but a very important nuance has been introduced. They will only be permitted if there is a pre-advisory service, i.e., in execution-only services, retrocession fees are prohibited.
In this scenario, a model that seems appropriate to us is to offer individualised and quality advice, always keeping clients at the heart of the service and offering them the most suitable products regardless of who the management firm is, so that the own product component in the portfolio never plays a predominant role. This would be a winning model. For this, we have to continue working, investing in the most talented teams with the best capabilities, so that they can always find the most suitable instruments for our clients that best meet their needs and expectations.
To summarise, with MiFID III the catalogue of services and their relationship with inducements/retrocession fees will be as follows:
- There will be no inducements in RTO and execution services. This ban has significant implications, as institutions will have to explicitly charge clients for the commercialisation service.
- In independent advisory and DPM, there will be no changes to the current model. Inducements prohibited.
- The non-independent advisory service will allow for the charging of incentives, with particular emphasis on the concept of “acting in the best interest of the client”, rather than the concept of “increasing the quality of service”. These new requirements will place a great burden on institutions to assess a wide range of products and always recommend the ones that are most suitable and cost-effective, i.e., those that offer value for money.
Finally, in the two years or so remaining until MiFID III, the key is to invest in the best professionals and the most advanced technology in order to be able to enjoy a complete range of financial products and thus create value for our clients, with a fully personalised advisory service adapted to their needs.
Published at Funds Society. 15.01.2024