Public confidence in financial institutions is what forms the foundation of a sustainable financial market and a functioning social economy. In order to maintain confidence, market participants have become accustomed to an increasingly heavy regulatory burden, while the ability to adapt to new legal requirements has become a strong competitive factor for them. Fortunately, higher capital requirements, strengthened monitoring functions, extensive reporting and enhanced money laundering rules can reduce risk and bolster confidence in global financial systems.
In order to maintain confidence, market participants have become accustomed to a heavy regulatory burden
MiFID II has received a lot of attention as one of the more customer-orientated regulations across European financial markets. It aims to improve transparency and strengthen customer protection in securities trading, and is targeted primarily at companies that provide advice and conduct trading in financial instruments. This includes the private banking market.
Among other things, the EU directive enhances the reporting requirements for products, fees and commissions that arise from customer relationships. As such, advisors and providers are required to give more justification for the products and services they sell.
This has led to extensive system adaptations and administrative investments for providers of financial services. In the short term, few are pleased. But from a long-term perspective, it provides a more level playing field in customer relationships while also improving confidence in the sector. In other words, increased transparency is in the industry’s own best interest, and therefore is a considerable benefit to private banking, where trust is the product itself.
As part of the stricter reporting requirements, advisors and product providers must do more to clearly justify the suitability of financial products. Essentially, they are obliged to ensure that the instruments they recommend fit an investor’s profile and that they always act in the customer’s best interests. Clearer documentation and monitoring should therefore reinforce pre-existing processes and procedures related to Know Your Customer, reporting and investment advice.
The reasoning behind greater customer protection is based on the complexity of the securities market, where the customer occasionally risks being at a disadvantage in terms of knowledge. Private individuals have a wealth of financial instruments, savings forms or asset types to choose from, while an increasingly multifaceted environment introduces new risks and new opportunities. This means that a great deal of trust and responsibility rests with the advisor.
If MiFID II achieves the desired effect, it should benefit all private banking providers that offer a high degree of independence and transparency in product selection, broad investment knowledge and greater flexibility in portfolio management. Carnegie Private Banking welcomes this transparency as it fits well with what tailor-made wealth advisory should be all about.
Personal finance is one of the most important things we do. Our dreams, security and opportunities for the future all rely on it. It is about the people giving thought to housing, pensions, travel, children and grandchildren, rather than hedge funds or stock index bonds. This is where financial advisors play an important role in translating the customer’s unique wishes and needs into well-founded and managed solutions and investments.
MiFID II also stipulates new requirements for how customer fees should be reported separately. This aims to give the customer a better understanding of the underlying costs that drive the overall pricing. It also aids comparability between providers and makes visible any commissions from third parties.
It is not unreasonable to assume that this will entail some price pressure in the marketplace, but there will always be a greater level of acceptance for providers that deliver clear value. Fortunately, greater transparency surrounding costs and fees is also expected to stimulate the quality of products and services in the market. Confidence, therefore, should not be built simply on having a knowledge advantage, but must be earned based on the customer’s experience of the products and services provided to them. Indeed, this is what creates sustainable customer relationships in the long term.
New rules are often met with strong resistance, but the actual spirit of reinforced legal requirements should not meet any objections. It remains to be seen how well the outcome tallies with the aims, but for all serious market participants, MiFID II is set to be a significant boon to long-term customer relationships.