The European Union’s Market in Financial Instruments Directive II (MiFID II) appears to be the latest Damoclean Sword to be conjured by the UK’s “doom and gloom” school of wealth management analysts.
Due to come into force on 3 January 2018 MiFID II will provide the latest catalyst for a major restructuring of the UK wealth management sector, not least through its impact on costs and profitability.
Costs will rise and profitability will fall. This, in turn, will precipitate a significant increase in merger and acquisition (M&A) activity as loss making or poorly performing firms opt to exit the sector. The sector consolidation, that analysts have long forecast, will become a reality.
Many analysts and commentators, for example, were quick to point out that Rathbones’ recent opportunistic “offer” for Smith & Williamson was partly prompted by MiFID II and other regulatory considerations. And Rathbones is one of the profitable UK wealth management firms.
The same analysts and commentators could also point out that according to research conducted by Compeer, a London-based research and consultancy firm, around 40 percent of UK wealth management firms are either unprofitable or generate profit margins of less than 10 percent.
These are, however, very occluded views and ignore at least two important factors.
The first is that if MiFID II really is such a potent force many of the changes that it is meant to have precipitated should have come into force already.
After all it is not as if the UK wealth management sector was completely unaware of its imminent introduction. Its implementation has been postponed on at least one occasion, for example.
The reality is that firms active in the UK wealth management sector have had some time to get to grips with MiFID II, work out its implications and make the necessary arrangements.
Of course firms could have miscalculated or adopted an ostrich head in the sand approach. Alternatively, unlike analysts and commentators they could all be eternal optimists.
But if their owners and managers had worked out they would find it difficult to survive, or make an appropriate return in a post-MiFID II environment the likelihood is that would have taken steps to exit the sector already.
Few, with the obvious exception of C. Hoare & Co. who did cite the likely impact of increased regulation, have done so.
So how prepared are UK firms for MiFID II?
According to a survey conducted by Teleware, a UK communication technology business, 28 percent of firms sampled are unsure whether or not they will be ready on time. But most firms have invested in the necessary infrastructure.
Bigger businesses appear to be struggling most, according to TeleWare, with 38 percent of firms with more than 500 employees facing this predicament. Smaller firms, i.e. those with between one and nine employees, are fully confident, however, that they will have everything in place by 3 January.
Another factor to suggest that MiFID II might not have such a big influence on profitability is that according to Compeer data UK firms have managed to control costs quite successfully in recent years, i.e. the very time they should have been investing in the infrastructure and systems necessary to comply with the directive.
Indeed, for many firms generating additional revenues may have provided just as big a problem over this period.
Of course, it could be argued that the time spent on preparing for MiFID and other regulatory initiatives may have diverted management’s time and effort from this particular side of the equation.
Deliberate policy, hubris or plain managerial indolence and incompetence could provide more compelling reasons, however.
The reality is that even relatively affluent UK savers still hold a surprisingly large proportion of their savings in cash, rather than other financial assets. Just look at the volumes held in cash compared to investment ISAs, for example.
MiFID II and other regulatory initiatives may be a pain. But if they help persuade the investing public that UK wealth management firms can be trusted, or change behaviour for the better then the potential long-term gains may outweigh short-term costs.