It is difficult to keep track of all the different regulatory changes Photo: Kama71 Source:

MiFID II: Cutting through the regulatory jungle

Author: Andreas Holzapfel, in-house counsel Universal Investment

Better investor protection and greater transparency - those are the main objectives of the European financial markets directive MiFID II (Markets in Financial Instruments Directive). Its rules have been mandatory for securities trading since 3 January 2018. The 7000 pages rulebook spells our extensive changes for the financial market. Yet even today, more than four months in, some important practical implementation issues are not entirely clear. Andreas Holzapfel, in-house counsel at Universal-Investment, discusses open questions.

Andreas Holzapfel, in-house counsel Universal-Investment Photo: Manjit Jari Source: Universal-Investment
  1. Discrepancies between the national target market concept and the European MiFID templates

There exist, for instance, different standards for the delivery of MiFID relevant data to distributors. This relates specifically to information on the funds’ target markets that must be defined under MiFID. In practice, reconciling the European MiFID templates (EMT) with the specifications implemented by WM-Datenservice (German target market concept) has proven problematic: the WM data fields allow multiple entry of investment horizon information (e.g. medium-term and long-term), for instance, whereas only one - minimum - investment horizon can be entered in the EMT which automatically comprises all longer periods. By now, WM-Datenservice has adjusted mapping accordingly to ensure that the longer investment horizons are automatically included. A “medium term” investment horizon in EMT for instance will be translated into “medium and long-term” at WM-Datenservice. To aggravate the situation, investment horizons of exactly five years could not be specified at all in the EMT until now since “medium-term” is defined as shorter and “long-term” as longer than five years. Any future entry of a five year investment horizon in the EMT will be translated in “medium term” at WM-Datenservice in accordance with the German target market concept.

Mapping in the “knowledge and experience” category has also been improved. Until recently, the lowest value in an unbroken ascending chain was to be relevant for the first three categories (“basic, informed and advanced knowledge” and “experience”). It was unclear, however” whether the fourth category (“client well versed and experienced with highly specialised financial products – expert investor”) should be included in the unbroken ascending chain. Since not all investment companies made entries into this field, this idea has now been abandoned. Translated into the WM data fields, the field “client with specific financial knowledge and/or experience with highly specialised financial products” would only be relevant if information has indeed been entered into that field.

Following these adjustments in April 2018, crucial initial problems have been mitigated. Still, the industry association Bundesverband Investment und Asset Management (BVI) is lobbying for greater harmonisation of practical requirements.

There exist different standards for the delivery of MiFID-relevant data to distributors

Andreas Holzapfel ,
in-house counsel Universal-Investment

2) SRI requirements

In some instances, distributors requested investment companies to determine the funds‘ target markets based on the Summary Risk Indicator (SRI) of the so-called PRIIPs regulation instead of the already well-established Synthetic Risk and Reward Indicator (SRRI) in accordance with UCITs regulation. The main difference is that the SRI is calculated from two components: the market and the credit risk. The request from the distributors results mainly from the fact that both ratios can be entered in parallel in EMT whereas WM-Datenservice only provides room for one ratio.

In preparation for MiFID II, Universal-Investment decided to exclusively use the SRRI for determining the target market. However Universal-Investment will calculate the PRIIPs SRI ratio on request for funds that are part of insurance products.

3) PRIIPS regulation - an outlook

The rules of the PRIIPs regulation have become effective at the same time as MiFID II. They require the preparation of new key information documents for all packaged investment products (PRIIPs KIDs) (which also includes fund-based life or pension insurance products). While capital administration companies will only have to comply with the PRIIPs regulation from 2020 in theory, they are by now deeply involved in this topic as these rules apply to fund-based insurance products. Where requested, Universal-Investment already provides the data required for the preparation of the PRIIPs-KIDs based on the “EPT” (European PRIIPs Template) and „CEPT“ (Comfort European PRIIPs Template) data templates that have been agreed between the fund and insurance industry players in the „European Working Group“.

Initial industry-wide experiences with the new requirements have shown major shortcomings as to the plausibility of various data, however. This applies particularly to the calculation of transaction costs and the performance scenarios. On both counts, correct application of the instructions sometimes results in misleading investor information so that attempts are being made at the European level to eliminate these shortcomings. For this reason in particular, the German fund industry aims at extending the transition period for capital administration companies to the end of 2021 and applying the “tried and tested” UCITs KIID for mutual funds until that time. Universal-Investment will support this process going forward by cooperating in the relevant BVI committees. 

Author: Andreas Holzapfel, in-house counsel Universal Investment
Date of issue: 5/30/2018