Mifid II came into force in January 2018, setting out courses of action to improve product information, transparency, fee disclosure, unbundle research and tighten up investor protection.
The legislation’s main focus was the investment management industry, but two years on, the directive has had a detrimental effect on financial advisers, forcing them to raise their prices or sell up altogether.
Data from M&A specialist Imas showed that, in every discrete quarter since Q4 2018, there have been more than 50 deals done in the investment advice sector, mostly within the £5m to £25m deal range.
Mifid II has therefore added to the numbers of advisers selling up, widening the advice gap.
Giles Dunning, partner and merger & acquisition specialist at Stephens Scown, suggested Mifid II was just another nail in the coffin for some advisers.
He said: “Businesses I’ve acted for have invariably cited the rising costs of compliance as a factor in their reasons for selling.
“Mifid II has certainly been a major factor but I would see it as part of a 'perfect storm' with other burdens such as the general data protection regulation, and the rising costs of professional indemnity insurance also pushing firms to consider a sale, together with the continued appetite for acquisition being shown by consolidators.”
When asked whether Mifid has had a positive effect on firms and clients, he said: “The jury appears to be out, with mixed responses from the profession since its implementation in 2018.
“The time and resource necessary to comply with the requirements undoubtedly come at a cost much of which will have been by absorbed smaller firms who will already be subject to tighter margins.”
According to Keith Richards, chief executive of the Personal Finance Society, Mifid has pushed the price of regulated advice up.
Mr Richards said: “Mifid II has unintentionally increased the cost of regulated financial advice. Advisers have struggled with inconsistencies when getting data from platforms as part of cost and charges disclosure under Mifid II.
“As a result, the Mifid II requirements have taken more time to adhere to and therefore cost more than some advisers may have originally expected. Financial advisers have also had to worry about whether they comply or fall foul.”
Mr Richards added that the shrinking marketplace and rising costs could not be in consumers’ favour.
“Many advisers warned Mifid II would force them to increase their minimum client portfolio requirements, leading to fewer clients being able to access financial advice. Undoubtedly the advice gap continues to increase as a result of Mifid II", he said.
According to FCA data, published in 2019, the number of new adviser clients decreased by 1.2 per cent from 2017 to 2018, to 501,012. The number of clients ending their advice relationship rose 21 per cent year-on-year, to 157,669.
Mr Richards said it was “essential the regulator looks at ways to reduce the cost and increase access to financial advice to better serve the public”.
These include reviewing unnecessary bureaucracy, overcompliance, including consumer documentation of little value, PI cover and the Financial Services Compensation Scheme levy.
He also warned the heightened costs would “make unregulated scammers all the more attractive to the unsuspecting public”.
This is because Mifid II and similar regulatory pressures have worked to lower the cost of mass-scale advice or guidance, while pushing up the price of tailored, independent advice, according to Derek Bradley, founder of Panacea Adviser.
FCA data showed that from 2017 to 2018, revenue from initial advice charges has increased £107m (6 per cent) to £1.9bn, while revenue from ongoing charges has increased by £542m (19 per cent) to £3.4bn.
Mr Bradley said pricing pressures brought about by regulations such as Mifid II have benefited those companies that could leverage economies of scale and lower their prices, but have been detrimental to those who are much smaller.
This also has a knock-on effect on the consumer, because some advisers will have to put their own prices up, “which cannot be good for the end user”.
He said: “When a consumer is able to obtain lower prices from an adviser, is it possible that other consumers will have to pay more for the same input from another adviser firm as a result? Is this bad for consumers?
“The asymmetric exercise of consumer power will lead to consumer detriment through raising other consumers’ advice charges.
“While a large and powerful firm or distribution channel improves its own terms of advice supply by exercising its market power in getting cost reductions, the terms of its lesser resourced competitors can deteriorate sufficiently so as to increase the average price of advice.”
simoney.kyriakou@ft.com
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