FIS Blog

How Wealth Managers and Private Banks Can Make Sense of MiFID II


Suman Garhwal | Wednesday, April 26, 2017

How Wealth Managers and Private Banks Can Make Sense of MiFID II

MiFID II was published back in 2011, and in the six years since, we’ve all read many articles and held many conversations about it. But I’ve found that even years later – and less than one year before the implementation deadline – many wealth managers are still overwhelmed by the vast scope of the requirements.

It could be a massive exercise to identio0-fy the requirements and gaps that requirements highlight in a firm’s business processes. However, firms can also only open a lot of opportunities – if they are strategic about their approach.

I recommend focusing on three points: inducement, suitability and appropriateness, and governance.

Inducement

Wealth managers and private banks must document how they are providing and meeting clients’ objectives and how the advice is provided. First, they should create a policy on the methods of documenting advice that is provided via various means, whether that’s in-house tracking or third-party tools.

Second, they need to assess the liability and implications of using these methods. For example, under MiFID II, investment firms that are not portfolio management firms or independent advisers may not:

  • Pay or be paid any fee or commission
  • Provide or be provided with any non-monetary benefit in connection with an investment service or an ancillary service to or by any party except the client or a person on behalf of the client, unless the payment or benefit enhances the quality of relevant service to the client

If juggling all of those considerations wasn’t enough, firms will also need to run a risk assessment of the probability of errors from using third-party recording tools, as well as the costs associated with compliance with data protection regulations.

Suitability and appropriateness

Where a firm provides advice or discretionary management services, it should have sufficient information to demonstrate the suitability of the advice and risk appetite of the client. But how do you achieve that?

One important step involves staff. Do they have sufficient experience? Industry certifications are also helpful. If there are gaps in your staff’s knowledge or certifications, you’ll want to either run training internally or outsource it to a third-part provider that can fill those gaps. Firms should also periodically check on staff training and certification requirements to ensure ongoing compliance.

Process plays an important role too. Firms will need a detailed process for collecting information on client profiles around investment objectives, the purpose of investment, their ability to bear loss, etc. Then they’ll need to periodically analyze client accounts to validate the suitability of advice against their portfolio performance and make tweaks based on results.

Technology can help manage the data collection and analysis. Consider investing in an intelligent client onboarding solution for brokerage/non-brokerage accounts that performs upfront suitability and compliance checks. Such a system will help you capture a client’s account registration type, their knowledge of your firm’s products, their relative risk tolerance and their investment objective. It should also give you a good view of their financial situation and their ability to understand and assume risk, which can be then mapped to your product portfolio.

Governance

Investment firms are also looking at corporate governance, for they have to comply with the corporate governance directives of the EU, such as a non-executive directorship. They have not figured out what those governance arrangements will be. But governance should be both product- and process-related. Establishing consistent, efficient and effective supervisory practices on target market assessment is another important next step.

Firms that are still working on their MiFID II strategy face the danger of trying to boil the ocean. But if you take it step by step and bring together both internal and external expertise, you can make sense of the complexity of MiFID II.

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Tagged in: Broker-dealer, Commercial and Investment Banking, Compliance, Institutional and Wholesale, MIFD II