MIFID II – The Big Brother of The Global Finance Industry

As of the 3^rd of January, MIFID II has set out to change the way retail investment firms operate. Guess what… it affects all of us. The Global Financial Crisis has created a global epidemic of trust issues sweeping the industry, so tighter regulations have been lurking round the corner for a while now.

The reforms involved in the MIFID II are so prominent that some small scale brokerage firms will have to close down due to their inability to meet the new standards. What is happening here is a full scale switch to transparency; this is good for you as a consumer and will create an even more competitive field for brokers as information previously under the radar will be exposed more than ever before.

The new regulations will be affecting execution immediately. While Brokers were once able to take “all reasonable steps” for providing the best conditions to clients they now must take “all sufficient steps”.  Although this may just seem like a play on words, we are looking at heavy requirements regarding full reporting on the broker expenses when executing a client’s order. Such costs include settlement fees, clearing and trading venue fees. Only the strong will remain.

OK, enough about brokers, let’s talk about you guys – the IB’s and Affiliates that will be affected by all of these regulations as outsider third parties. It’s crucial that you stay informed and understand these changes in order to optimize your business accordingly.

The plot however thickens; according to Article 24(9) of MIFID II: ‘investment firms breach their responsibilities when they pay or are paid a fee or commission, or are provided with any non-monetary benefit, in connection to the provision of an investment service, from a third party who is not a client.’

Now this comes into direct conflict with the way that most Partners earn their commission in current structures. Revenue sharing schemes have been long in place and are granted pretty much unconditionally, so long as clients are introduced. MIFID II is about to change all that. It seems that the only salvation is for IB’s and Affiliates to move to the good old CPA deal for a straight forward, keep your hands clean approach.

Don’t lose hope though; there is still a chance for you to keep earning your money the same way you know and love.  If you, as an Affiliate or more likely an IB, provide your clients with services beyond their trading experience, such as education and other enhancing qualities that do not come into conflict with compliance, well congratulations you are good to go.

How things will play out practically is still unknown, as all of this is still fresh and will take Brokers some time to ease into the new changes. The same goes for IBs and Affiliates. However this is no reason to sit around and wait for the changes to come. With this information in mind, Partners have to make an important choice. Will you make your business more enhancing to clients, if not already, or face the stern demands?