The European Union’s Markets in Financial Instruments Directive II (Mifid II) comes into force on 3 January 2018. As Mifid II is a European Union (EU) directive, it would be easy for Asian firms to assume that the regional impact would be negligible.
But Mifid II contains some aspects that we foresee will affect many Asian firms with interests in Europe.
Direct impacts of Mifid II will depend very much on firms’ group structures and the locations of their clients. An Asian firm that is the branch of an EU firm will have different compliance requirements to an Asian business with no group connections within the EU.
Similarly, we expect that some EU member states will implement the requirements differently, so the approach taken by one member state may not be exactly replicated in the other member states.
Examples of the principal direct issues which firms may require advice on are the obligations regarding post-trade transaction reporting, or the obligation to trade certain instruments on EU exchanges.
One area that is likely to indirectly impact Asian fund houses in particular is Mifid II’s product governance requirements on fund houses’ existing distribution arrangements. It is particularly likely to affect large fund houses with international distribution arrangements into the EU.
We foresee that many of the product governance requirements will be contractually passed on to other financial institutions within the product design or distribution chain, even when they are located outside of Europe and do not directly sell products there. An example of this could be a European institution, subject to Mifid II, distributing products that were “manufactured”—to use the Mifid phrase—in Asia.
EU product distributors will have certain requirements to fulfil under Mifid II, such as to develop an appropriate distribution strategy, and define a “target market” for each product distributed. This would not be difficult if the distributor was working with EU based (and therefore Mifid II-compliant) product manufacturers. The distributor would probably seek information on the manufacturer’s Mifid II-compliant analysis and assessment, and use this as the basis for its own additional analysis.
But when the manufacturer is an Asian firm—say, an Asian fund house seeking to distribute its products in the EU—it is likely that the distributor will seek to contractually impose these kind of requirements on the Asian firm so it could comply with Mifid II itself.
These requirements are likely to go far beyond the usual need to provide up to date fund and marketing documents. But it is likely that Asian firms may well have to take a commercial view and comply with certain elements of Mifid II product governance in order to maintain their EU distribution network.
Pressure for Mifid could also come from Asian investors themselves. Increasingly, some investors see EU regulation’s focus on investor protection as a “gold standard”, and they may well require financial institutions in Asia to follow suit. It could be difficult for Asian fund houses to argue against procedures designed to help investors understand products and ensure a robust, investor-focused process in product design.
Furthermore, Asian firms that are part of global groups with some operations based in Europe may well conduct exercises to determine whether they need to adopt a group-wide Mifid II compliant process and framework, to minimise the risk of mistakes or divergent processes.
Finally, it is worth considering whether the Hong Kong regulator is likely to adopt similar requirements to those imposed in the EU. While the Securities and Futures Commission (SFC) clearly engages with the regulatory movements of the international financial services community, we think it unlikely that an “Asian Mifid” as complex and robust as the European requirements would be implemented in Hong Kong soon.
But the SFC will no doubt track the success of Mifid II closely and, as a regulator which holds investor protection as a key tenet of the financial services system in Hong Kong, it is likely to watch firms’ compliance with existing investor protection requirements. Voluntarily adopting policies and procedures that are at least inspired by Mifid II may not come amiss.
Paul Moloney is a partner at Eversheds Sutherland