Executives Warn MiFID Has Firms Caught Like ‘Deer in Headlights’By
Upcoming rules increasingly being discussed on earnings calls
Transcripts show various levels of MiFID II preparedness
German brokerage executive Reinhard Loose said the firm’s been “struggling.” Jeffrey Solomon of boutique investment house Cowen Inc. likened his clients to “deer in the headlights.” And Hargreaves Lansdown chief Chris Hill spoke of a “huge amount of change” to the way he does business.
They were all talking about MiFID II, the overhaul of financial-services regulation that’s cropping up in more and more company earnings calls as the Jan. 3 start date approaches. The new European Union rules were discussed on 50 calls since BlackRock Inc. reported results on July 17, up from 17 mentions in May and June and just 10 in the final five months of last year.
Executives are not only increasingly preoccupied with MiFID II; they’re also often unprepared for a regime that could change everything from what platforms they trade on to how they field research. A survey in June showed most asset managers were behind schedule in implementing the revised Markets in Financial Instruments Directive, while there have been various calls to delay the rules’ introduction.
“It’s fair to say the level of preparedness is generally not high,” said Alistair Haig, who teaches financial markets at University of Edinburgh Business School and previously worked at investment firms Baillie Gifford & Co. and Kames Capital. “How well prepared would we expect an industry to be for a regulation on a very complex area?”
Some financial companies are more advanced with their planning for the new regulations: Barely a day goes by without some investment bank or other’s proposed MiFID II research fees coming to light.
Smaller companies, though, often have fewer resources to tackle the scope of the new rules which, among other things, require them to report more data and potentially hire lawyers to ensure compliance. A frequent complaint in earnings calls is that EU regulators have been slow to respond to queries about the rulebook.
“I’m still talking to clients and they look like a deer in the headlights,” Cowen President Solomon said on an Aug. 3 conference call to discuss his company’s latest earnings. He was responding to a question from an analyst about preparations for MiFID II. “A lot of our clients in Europe don’t have any clarity from their primary regulators” on implementing the rules, he said.
“The regulators are going to have to provide” more detail on the requirement that research is paid for separately from trading commissions, Michael Roberge, co-CEO of MFS Investment, said on an Aug. 10 earnings call for parent company Sun Life Financial Inc. While he didn’t expect the rule to be “materially detrimental to the industry,” he acknowledged that “as we sit here today,” it’s “not clear exactly what, how the research costs will actually get paid.”
“We’re going on sales calls and cold calling people to talk about these things, and they look at us like we have three eyes,” said Jeff Sprecher, CEO of Intercontinental Exchange Inc., the Atlanta-based marketplace operator whose members will be affected by the new rules if they operate in Europe. The combination of MiFID II and Brexit will result in market uncertainty lasting “many years,” he said on an Aug. 3 conference call.
“I would like a little more clarity myself,’’ was co-Chairman and CEO Ronald Kruszewski’s response to an analyst’s MiFID question on the Stifel Financial Corp. call last month.
Loose, the chief financial officer of German personal-finance adviser MLP AG, told analysts on Aug. 10 that, “to be quite honest, we’re struggling at the moment” with the burden of additional regulation. Five days later, Hargreaves Lansdown CEO Hill, whose firm oversees about $100 billion, highlighted the challenges of putting new technology in place.
The challenge is all the greater because MiFID II will be implemented all in one go at the start of next year, with no adjustment period, several executives complained.
“Any time you have a change of this magnitude, where you just sort of flip a switch, we would expect the potential for disruption to be pretty high,” Jonathan Pruzan, New York-based CFO of Morgan Stanley, said on his firm’s July 19 call. “I’ll tell you, it’s going to be very hard to estimate what the impact of this is.”