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How AI will help asset managers win in the era of regulatory change

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31 Jan 2020
Quick Read

This January marks the two-year anniversary of the implementation of MiFID II. So far, the FCA has been guarded in its statements on the impact of the regulation on the industry; it has, however, spoken openly about the improvements to investment industry which have been caused as a result of its implementation. Two such improvements include increased transparency and value for the end investor and the removal of conflicts of interest along the investment process. This blog looks at the reaction to MiFID II from industry leaders, associations and lobbyists and assesses what strategies the leading firms are implementing to stay ahead in this era of regulatory change.

  • Key takeaways from Substantive Research's Unbundling Uncovered conference
  • View from the German and French Ministry of Finance
  • Innovate to win in today's environment

“MiFID II has caused unintended consequences for the market.”

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The verdict so far on MiFID II

Industry bodies and lobbyists have been animated in their response to MiFID II; a position paper published last summer by the German Ministry of Finance highlighted “great discontent” among the industry participants about the “burdensome” nature of the regulation, the implementation costs and the short timeframes that had been imposed.

Business leaders and C-suite executives at Substantive Research’s Unbundling Uncovered conference last year were also proactive in communicating their views on the consequences, both intended and unintended, of MiFID II on the financial services industry.

Unbundling Uncovered conference takeaways

The day brought together 420 delegates from the buy and sell-side to discuss regulatory arbitrage, investment process in a highly regulated market, research valuation and budgeting, innovation among the research providers, corporate access and best-practice research procurement. Two years down the line from its implementation, the buyside is no longer content to simply achieve compliance with MiFID II; they are looking to do this well, and in a way that enables greater budgeting efficiency and investment performance.

Research providers were vocal about the pricing pressure and increased competition that has emerged since January 2018 and active debates about what constitutes “fair value” for research for the buy and sell-side were had. Concerns in particular surrounded the pressure on small to mid-cap brokerages imposed by the cost and operational complexity of complying with the regulation and the subsequent trend towards monopolisation of the research market.

However, despite the challenges that have been imposed by MiFID II, both the buy and sell side were unanimous in their opinion that there are still opportunities to capitalise on in this turbulent regulatory environment. The firms that will succeed are those that are willing to pursue new and innovative strategies to drive transparency across their enterprises.

Looking ahead to further regulatory turbulence

Prior to making any significant adjustments to their existing MiFID II compliance solutions, most of the business leaders in the financial services industry will be awaiting the FCA’s review of the MiFID II regulations scheduled for July 2020. Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA), made a keynote speech in Frankfurt in November 2019 in which he stated that there were “areas where improvements may need to be considered”. Following this keynote speech, several large trade associations across Europe including the Association for Financial Markets in Europe, the French Association of Financial Markets, and the German Federal Association of Securities Trading Firms, collaborated on a paper published by the European Forum of Securities Associations (EFSA), which called on ESMA to prioritise those aspects of the upcoming review of MiFID II that have caused “unintended consequences for the market”.

The AMF recently published a report named “Reviving research in the wake of MiFID II” in which they laid out clear objectives and priorities for the review in July, including detailed guidance such as addressing the inducement risk represented by low pricing, the need to define good practice in sponsored research, relax rules on trials and corporate access, and indicated a desire to remove independent research from the rules completely. The recommendations in the report suggest that MiFID II is here to stay, but steps need to be taken to mitigate the unintended side effects. One thing is for sure: regulation of the financial services industry will continue to be challenging, stringent and hard to predict in the months and years to come.

Innovate to win in today’s environment

In our discussions with business leaders and executives across the financial services industry, there is a clear evolution in strategies emerging in response to the increasingly stringent regulatory environment. Buy and sell-side alike have been forced to innovate in the areas of greatest opportunity, readdress the importance of quality of service and establish methods to qualitatively evaluate expert knowledge and expertise.

MiFID II has had consequences, both intended and unintended, but the firms that are thriving are those that are looking not only to comply, but also to evolve, innovate and win in today’s increasingly competitive and pressurised environment.

AI-driven data capture for a superior enterprise

According to a research survey carried out by Avaloq on the financial services industry, 48% of the executives think that in today’s market, AI technologies have the biggest impact on “ensuring compliance under changing regulations”.  In future, 34% of the executives see AI as being crucial to enabling “open and collaborative platforms” and driving operational change across the business.

AI-driven data capture technology is essential to minimise the cost and risk of compliance requirements in today’s increasingly stringent and turbulent regulatory environment. As we progress into the next decade, we will see AI technology being deployed to enable a more collaborative, open and data-driven enterprise. Those firms that are proactively managing the challenge of regulatory change today and embracing the benefits to the entire enterprise that AI technology presents, will be the ones to emerge on top in tomorrow’s marketplace.


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