Assessing the impact of MiFID

With the November deadline for the implementation of MiFID (the European ­Markets Financials Instruments Directive) looming, discussions between senior representatives of the major Italian banking groups at the third annual PWM conference in Milan were ­dedicated to evaluating the impact of the new legislation on the distribution of investment products. Of particular concern was that much of the directive was unclear to market participants, with differences relating to how it should be interpreted in practice. At the event, which took place in mid October and was sponsored by BNP Paribas Investment Partners, Franco Baronio, general director of the retail area at Banco Popolare, said there are two certainties with regards to MiFID: “The first is that the legislation will modify the structure of the whole industry; the other is the deep ­uncertainty over how we will have to implement it.” Mr Baronio believes that, in the short term, the negative effects will overcome the positive ones – both for industry players and investors. “Excessive information can be as detrimental as lack of information,” he said, referring to the required ­suitability and appropriateness tests on clients. This can negatively impact the efficiency of the system. Reference was also made by the panellists to the inducement rule, which imposes strict limits on the incentives that banks or financial advisers can receive in respect of the services they provide to their clients. In the fund industry, the asset ­manager remunerates the distributor indirectly for the service that the client receives from the adviser through the so-called retrocession fee. This model is thought to align the interest of the client with that of the intermediary because the retrocession – being a fixed percentage of the total wealth managed for the client – is positively correlated with market performance. The fees the distributor earns increase with the investment appreciation. The principle introduced by MiFID, according to which a remuneration ­lasting over time has to be associated with the delivery of a service, will force distributors to refine their process of delivering advice to clients. Dario Prunotto, general director of UniCredit private banking, highlighted the fact that the split of distributors’ total revenue in Italy is quite peculiar, especially when compared with other European markets. While 30 per cent of fees are sourced from sales activities of funds and securities, the large majority – 70 per cent – are represented by recurring fees or trail commissions. This is linked mainly to the huge popularity of GPFs (Italian fund of funds-style ­private banking products), which are set up to manage even limited wealth. In Germany, for example, the split is exactly opposite – strongly biased towards sales transactions – although both profitability for ­distributor and total cost for the client are similar to those in the Italian ­market. “It is clear that legislation which impacts mainly on the recurring fees will affect Italian distributors more than the Germans,” explained Mr Prunotto. “I don’t think that charging clients upfront for advice would a big step ­forward,” said Mr Prunotto, adding that it is important to gain a competitive advantage once the legislation has been approved, and to rely on the ­professionalism of advisers. If the short-term scenario paints an uphill struggle, opportunities are expected to arise in the longer term. This is in view of the emphasis the directive places on advice to clients. In fact, the long-lasting crisis of ­confidence affecting the Italian funds industry, which has deepened during the past two years, has highlighted the ­difference in performance between the traditional banks and promotori ­networks, traditionally more advice- oriented. In 2006, the net outflows of funds distributed through banks were E19bn, compared with the inflows of E7bn realised by the promotori ­networks. In the first 9 months of this year, the figures were E32bn of ­outflows and E1bn of inflows ­respectively, according to data from mutual fund body Assogestioni. “Financial promotori networks ­provide a higher level of advice to clients than the banking channel,” said Mr Baronio. “Perhaps in this there is a key of hope; that the virtuous circle which will hopefully start between the advice required by law and the general improvement of the financial education of Italian investors will allow a remix of the clients’ portfolios.” Mr Prunotto was keen to add that UniCredit private banking may be an exception to the rule, the bank having collected E2bn last year, “although this year we did not do as well”.