In October 2022 several members of the European Parliament proposed amendments to MiFID II to, among other things, completely ban inducements in financial advisory services or execution services. On 5 May, the European Commission will publish its future strategy on retail investors (Retail Investment Strategy or RIS), which is expected to include the elimination of inducements. This has put the industry on edge.
This was discussed by the participants of the 26th edition of the FundsPeople Legal Debate. Alfredo Oñoro, Director of Regulatory Compliance at Cecabank, pointed out that, "as already emphasised in the reports drafted on this matter, the incentives, in their current configuration, much more restrictive than the original version following its revision, would be facilitating access to advice for customers who would not be able to access such advice under other models. If inducements are ultimately eliminated altogether, part of the advisory services will disappear and we will have to look for other formulas to cover marketing costs", he suggests. This would represent a change of model in the Spanish investment fund industry, which, in his opinion, "is a successful model that has not provoked problems".
In recent years, the various challenges faced by the industry, such as the crisis caused by the pandemic, together with the increased regulatory burden and the consequent adaptation to different standards, "have showcased the strength of the industry, which remains strong in terms of customer acceptance", he argues.
Elisa Ricón, CEO of Inverco, believes that if this total ban were to be implemented, it would limit the freedom of all participants in the sector: "Today, investors and financial institutions are free to choose which financial instruments they purchase or distribute, through which investment service and how they pay for this service (explicit or implicit payment model). This flexibility must increase, not decrease", she demanded.
Ricón defends the positive evolution of the Spanish industry, where, according to data from Inverco, the implicit payment system predominates, with a third of the sector in open architecture and two thirds of the assets in discretionary portfolio management (DPM) and advisory models. "In the pre-MiFID model, more than 90% was marketing and the rest was advisory or DPM. Distributors have made a huge effort to accommodate the services through which they deliver products to their customers and this has resulted in greater added value, without, moreover, increasing product costs, quite the contrary", she points out.
Liquidity in fixed-income
Another issue on which the Spanish regulator has focused on is the liquidity of fixed-income products. The new macroeconomic context, with central banks raising interest rates to control rising inflation, has prompted fund managers to adapt their offer. Thus, in recent months, the vast majority of funds that have been launched on the market invest in fixed-income, many of them with a specific yield objective defined for a specific time horizon.
Recently, the CNMV has launched for public consultation a proposal for a Technical Guide on reinforcing the transparency of CII with a specific yield objective and of fixed-income CII with a buy and hold strategy. The aim is to provide greater transparency to stakeholders.
Bárbara González, counsel at Linklaters, explains that this document "recognises obligations that were already effectively imposed in the last year on buy and hold funds, such as the obligation to advise on term and liquidity risk. It also includes certain non-controversial obligations, for example, the requirement to warn the customer that profitability may be negative taking into account inflation". On the other hand, another new feature that, in her opinion, may be "more complicated" for fund managers, is the obligation imposed to report the estimated return in terms of APR that can be expected from buy and hold funds, "something that may be difficult for them to calculate", she warned.
A view shared by Inverco's Ricón, who believes that any new development that implies greater transparency is fine, but the question remains whether investors actually understand all this information. However, "it would be beneficial if the warning on potential negative real returns as a result of inflation were applied to all instruments because, ultimately, inflation affects purchasing power", she says. She also recalls that one of the pitfalls is the alarming percentage of the population that does not know what compound interest rates and inflation are, and therefore such information could have an undesirable effect.
A point also made by Miguel Sánchez Monjo, partner at Cuatrecasas, who warned of "the possibility that overloading customers with information could lead them to decide against the product and contract another that may not necessarily be better for them, such as a deposit that is also illiquid".
Cecabank's Oñoro noted that "since the implementation of MiFID II, warnings have become widespread in the marketing of products. We will never oppose measures of this type that aim to provide information on risks, but they must be well designed to achieve their objective and not provoke a flight effect of those investors for whom the product might be a good fit in terms of their investment risk", he concludes.
Constant value
In this regard, ESMA launched a consultation a few months ago on the revision of the stress test methodology applicable to monetary funds. These future guidelines will have a limited effect in Spain due to the reduced range of products available, as this revision focuses on constant value funds, which are regulated within the monetary funds regulation, but which have not been approved in Spain.
Ricón explains that "these products do not value all their investments at market price, but at amortised cost, on the assumption that they will be paid at maturity and without factoring in all the fluctuations in interest rates. It results in very stable vehicles for investors because their net asset value does not fluctuate, but if all investors wanted to redeem all at once they would have to go to the market and apply the market valuation, which could lead to difficulties".
