There are many issues with Mifid II that have been trodden over time and again in the months and years leading up to its implementation, but with the regulation going live on 3 January (‘Happy Mifid Day’ as it became known in the office) it is time to sit back and brace for impact.
The 10% rule has been among one of the most contentious aspects of the EU directive, obligating firms to tell clients if the value of their portfolio falls by 10% on the very same day.
The European Securities and Market Association (ESMA) says firms can easily report the fall in value to clients in one day. As long as the valuation is conducted at 6am it says “this approach would give firms 11 hours in which to report to clients during working hours”.
It adds that “adopting one fixed valuation point for each day would also avoid multiple reports being triggered during volatile market periods”, so we can safely assume it has thought of some of the practical issues.
But aside from the practical implications of the reporting requirement, the rule threatens to push back on on-going attempts to prevent the much bigger problem of short-termism among retail investors.
Buy high, sell low
The rule may, in fact, result in more of the quick-selling that, in theory, could push markets down.
It is a fear raised by Andrew Merricks, investment director of Skerritts Wealth Management.
“What have we always been told about investing for growth? It’s for the medium to longer term, surely? Wasn’t there a bit of disquiet recently about the move towards short-termism that was being seen as a negative trait in modern investors?” he says.
“We’re often told that it is foolish to try to time markets and that the most common mistake that retail investors make is to buy high and sell low. This is precisely the likely outcome of the new directives.
“I’m all for transparency, but I’m at a total loss to see how this rule can benefit investors in the long run.”
For professional investors who can perhaps look past any short-term volatility, the reports should be of little concern but, as Seven Investment Management (7IM) says, “many private investors have had an unfortunate tendency to buy high and sell low, and this could exacerbate the issue”.
“We don’t think it will force professional investors into short-term thinking, but we think some private investors may be alarmed,” a 7IM spokesperson says.
The firm has devised a system where its own discretionary clients will be informed of any fall in value on the same day by letter, but it will pass responsibility on to the adviser of any clients accessing services via the platform.
Paul Young of adviser support network Zero, wrote on Mifid II late last year that “picking holes in this is relatively easy”.
He raised three key questions about the regulation’s rule, including the potential of panic selling as a result.
“Because the requirement to notify only applies to part of a client’s portfolio, such as the DFM-run element, it could give a misleading message about the client’s overall position. If the client’s total portfolio goes down by 10% there is no requirement to notify,” he says.
“If the portfolio goes down by 9% on 31 December and 9% on 1 January, straddling two reporting periods, presumably no notification is required?” Young adds.
The importance of holding out
Ultimately, as 7IM’s Peter Sleep notes, a bounce after a market fall is the most reliable long-term phenomenon out there and it is important investors do not forget this, or are taught that sticking it out in the investment world is often the best course of action, if not the most emotionally tricky.
Whether Mifid’s 10% rule helps or hinders in getting that message out to a wider retail base remains to be seen, but it is far from the progress needed at a moment when market volatility could shock and surprise.
While transparency should be applauded, forcing too much information on investors could eventually backfire.