Mifid II seen affecting Asia fund approval process

Product governance rules under Mifid II are likely to affect the operations of Asian product producers, but most firms remain unprepared for the changes to come, say experts.
Mifid II seen affecting Asia fund approval process

Asian investment firms fall outside of the remit of Europe's new Mifid II regime but to ensure greater consistency across global operations and to keep bigger Asian clients happy, they may have no choice but to adapt to the looming new rules, industry and legal experts believe.

Mifid II—the European Union's second Markets in Financial Instruments Directive—comes into force on January 3 and aims to foster greater cross-border competition in financial services across the region, whilst better protecting consumers. But the reverberations look set to be felt far beyond Europe.

Take the requirements around product governance, in particular on product design and distribution.

“We foresee that, in practice, many of the requirements in these areas will be contractually passed on to other financial institutions within the design or distribution chain—even where such institutions are located outside of Europe and do not directly sell products into Europe,” Paul Moloney, partner in the investment funds and asset management team at Eversheds Sutherland, told AsianInvestor.

Hong Kong-based Moloney cited the example of a European institution subject to Mifid II that distributed products manufactured in Asia. The EU distributor will have certain requirements to fulfil under Mifid II such as developing an appropriate distribution strategy and defining a “target market” for each product distributed (see box).

Key guidelines for Mifid II product governance requirements by the European Securities and Market Authority:
  • Firms that manufacture financial products shall specify, as part of the product approval process, a target market of end clients for whose needs, characteristics and objectives the product is intended as well as a distribution strategy consistent with the identified target market.
  • Firms need to provide product information, including target market and distribution strategy, to distributors.
  • Distributors need to understand features of investment products they offer or recommend and, using information obtained from manufacturers and information on their own clients, identify the target market of clients to whom products and services are intended.

In order to do that it is likely that a distributor will seek certain information from the product manufacturer such as its Mifid II analysis and assessment so that the distributor can perform its own additional analysis, Moloney said.

“In such a scenario it is likely that the distributor will seek to impose the requirement on the manufacturer, through contract, to perform the relevant Mifid II analysis (or a similar-level analysis) and provide the information it needs in order to assist with its own Mifid II compliance,” he said.

While there is no direct requirement on Asian manufacturers to comply with Mifid II, it seems likely that such requests will need to be considered commercially and Mifid II-like analysis and information-sharing protocols might need to be established, especially if the manufacturer hopes to maintain strong distribution networks into the EU. As a result, thinks Moloney, Asia-based firms may have to consider voluntarily adopting some of the Mifid II requirements, especially those around product governance.

Some legal and industry observers believes that in cases where Asian firms are part of global groups, with some operations based in Europe, it is likely that they will consider whether they should simply adopt Mifid II-compliant processes and frameworks across all group entities, so as to ensure consistency and minimise the issue of different processes within the same firm globally.

As AsianInvestor has already reported, Mifid II is expected to have a knock-on effect on the way long-only fund houses in Asia pay for research.

State of unpreparedness

However, a July survey of Asia-Pacific super funds and asset managers suggests many are still ill-prepared. The survey released by Shoreline, a Singapore-based asset and wealth management consultancy, showed uncertainty persisting among asset managers and owners with just over five months to go to the January 3 Mifid deadline.

Dublin-based Adrian Whelan, senior vice president of Brown Brothers Harriman, a financial firm with operations in investor services in Asia, has the same impression. “Depending on how complex or broad-based their activities are, I would say that very few firms are fully operationally ready,” he told AsianInvestor.

It’s understandable, he noted: "there is a great challenge because in many areas how to apply these rules remains slightly unclear. It's difficult to put in place an operational or commercial change when the application of the rules has not been fully agreed on."

But adapt they must.

Shoreline director Craig Plane said that based on discussions with large global and non-European investment managers, he expects between 40% and 60% of them to apply Mifid II rules globally in the short term, with that proportion expected to rise over time.

Pressure to adhere to Mifid II rules might also come from Asian investors, according to Eversheds Sutherland’s Maloney.

Given the focus of Mifid II on investor protection, investors outside Europe with strong bargaining power may well push financial institutions in Asia to follow suit, he said. “It would be difficult to argue against procedures which are designed to help investors understand products and ensure a robust, investor-focused process in product design.”

To hear from industry experts discussing the latest trends around the evolving role of the Asset management COO function, AsianInvestor is staging its inaugural COO Forum at the American Club Hong Kong on Friday October 13. For further details, visit the website.

We have a limited number of complimentary seats available for Asset Management COO’s interested to attend. Please register on our website or contact Terry Rayner on +852 3175 1963 or [email protected]For banks, tech providers and consultants there are limited number of  sponsorship positions or tickets available please contact Terry Rayner to discuss further.

¬ Haymarket Media Limited. All rights reserved.