I’m not quite the enthusiast for the European Union I once was. I’m as exasperated as any other UK tax payer at some of the things it spends our money on. But I am frustrated at the lack of serious debate on some of the issues involved, especially with that all-important referendum on Britain’s membership due in the next two years.
An example is MiFID II, and if that means nothing to you, I’m not surprised. It’s had very little coverage in the mainstream UK media. In short, MiFID II will replace the original Markets in Financial Instruments Directive, which was introduced in 2007. Fundamentally, it will provide much greater protection for consumers. Fund management companies will need to be much more transparent; in particular they will have to report all fees and expenses, including a best estimate of underlying transaction costs.
The fund industry doesn’t much like MiFID II. Realistically, it knows that reform is inevitable, so until now, Europe’s fund industry trade bodies, led by Britain’s Investment Association, have focused their efforts on watering down the legislation. Now that a framework agreement is in place, the industry has shifted its strategy to one of constant delaying tactics.
For the last few months the fund industry spin machine has been in overdrive. Hardly a day goes by without someone whingeing in the trade press about the proposed reforms and the impact they’re going to have. There’ve been complaints, for example, that the requirement to separate research costs from other expenses will lead to less research, fewer specialist funds and therefore less choice for the consumer. The truth is that there’s too much choice as it is. And if fund houses really are worried about cutting their research budgets, it surely makes more sense to rein in on fund manager pay, which in recent years has risen exponentially.
The bad news for consumers is that the delaying strategy seems to be working. The Financial Conduct Authority, which has shown a singular lack of urgency on the issue of investor protection, is apparently pressing to push back MiFID II’s implementation. Along with the French and German regulators, the FCA is saying that firms won’t have enough time to comply with the new rules, and it now looks highly unlikely that the legislation will come into force, as is currently planned, in January 2017.
The fact is that fund management companies should have made charges transparent years ago, without being made to. Now that the policy makers are finally catching up with them, they’re putting every obstacle in the way and making out that implementing the reforms will take far longer and be far more expensive and disruptive than it actually will.
The bottom line is, fund houses know that, once consumers can easily work out how much they’re paying to invest in the high-fee, actively managed funds the industry wants us to sell them, they will increasingly seek lower-cost, passively managed alternatives. The longer these firms are able to keep charges opaque, the longer they’ll continue to make large profits at consumers’ expense.
It’s a very similar story in the United States. The US fund industry, fearing a huge shift towards passive investing, is lobbying hard to water down and delay the proposed fiduciary standard, which will force companies to put their clients’ best interests ahead of their own.
There is, though, one big difference between the UK and US when it comes to investor protection. In the States, there is a growing political consensus that Wall Street has become too powerful. In the UK, the political establishment is, by comparison, almost reverential in its attitude to the City of London. The priority is not to protect consumers; it’s to protect “our” financial services industry, not least from the EU.
Whatever your stance on Europe, don’t be fooled by the industry spin — MiFID II is a major advance for investors, which deserves our support. For once, those meddling Brussels bureaucrats are trying to do us a favour.