MiFID Raises Surprisingly Basic Questions for Danish Regulator

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  • Denmark is struggling to define marketing under new rules
  • Unknowns are too many to count as deadline approaches fast

Residential and commercial buildings stand in Copenhagen.

Photographer: Freya Ingrid Morales/Bloomberg

The countdown to the January adoption of a new set of regulations for Europe’s financial markets has started. But in Denmark, it’s still raising some fundamental questions.

What constitutes marketing? Is putting an investment product on a web-based platform, along with hundreds of others, the same as actively selling it? How do you estimate cost? Does recommending a mortgage backed by a bond constitute investment advice?

These are some of the issues Denmark’s Financial Supervisory Authority is tussling with just weeks before a revision of Europe’s Markets in Financial Instruments Directive is to be implemented. In fact, the Copenhagen-based agency says MiFID II has triggered the most requests for clarification ever to the European authorities ultimately responsible for it. The answers could fundamentally reshape the industry.

“I tried to count Q&As on MiFID and I gave up,” Birgitte Holm, deputy director and the person responsible for MiFID at Denmark’s FSA, said in an interview in Copenhagen. “It’s in the hundreds and it will probably continue after Jan. 1.”

The agency plans to take a “pragmatic approach” in assessing compliance because of MiFID II’s complexity. Among the issues the FSA is still trying to resolve are these:

What is marketing?

“The key word here is marketing and how to define marketing and selling,” Holm said.

It seems straightforward but the problem is this: banks offer on their websites an array of investment products, with some lists topping 1,000. If the FSA concludes that listing products constitutes marketing, banks will have to provide full product and cost information for each. That’ll drive up expenses and probably lead banks to drop the products.

Denmark’s financial industry is urging the agency to consider a more limited definition of marketing so that doesn’t happen.

“We’re asking the Danish supervisory authority to define ‘marketed and recommended’ in a way that it does not limit consumers’ ability to invest in an investment fund of their own choosing,” said Anders Klinkby Madsen, director of investing at Finance Denmark, which represents the financial industry. Denmark should maintain its so-called open architecture, at least until the European Securities and Markets Authority says otherwise, he said.

Read more: Finnish $14 Billion Fund Manager to Trim Research Pool on MiFID

Holm says she takes the industry’s point. “If you sit in front of your adviser and he says, ‘You should buy this,’ then there’s no doubt that the rules kick in,” she said. “But if you go to the web bank and you find it in the basement, the interpretation is more unclear. Is that marketing/selling in legal terms?”

The agency is likely to decide that some products will be subject to full MiFID requirements. The issue is where to stop, Holm said.

“Products on the top of the list in the web bank should be linked to the rules on marketing and selling, because customers will have a tendency to buy these,” she said. “But where exactly to draw the line between which products should be linked to the rules and which should not is more difficult.”

What’s the cost?

Another question relates to charges and costs. Under MiFID II banks will have to tell customers in advance how much a trade will cost, both in absolute terms and as a percentage of the amount transacted. (They already have to say how much a transaction costs, but after the fact.) Arriving at a formula for calculating cost that the entire industry can use is proving difficult.

“It sounds very simple. It’s a cost. It’s four numbers,” Holm said. “But from a practical point of view, there is a lot of discussion about exactly how to design this and make sure that it’s comparable across producers and across products. There’s a lot of focus from both ESMA, our side and the industry.”

When a bond isn’t an investment

One issue that’s dogged Denmark in particular is whether a bank offering a particular mortgage is giving investment advice. That’s because of the country’s system for financing home loans: borrowers work through banks to sell bonds into the market to fund purchases. So if a lender suggests a 30-year loan with a fixed rate, is it also recommending a bond?

The FSA settled that question by deciding it’s advice only if borrowers directly hold the bond, which the vast majority don’t, Holm said.

“Questions like this arise every day all over Europe,” she said. “I could provide a list of maybe 100 for Denmark only and it’s only the most difficult, political ones that I see.”

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