We recently had a few meetings with clients who in short told us that their once legitimate, legal and rather profitable business became redundant with the introduction of new regulation, the Markets in Financial Instruments Directive II (“MiFID II”).
The business model was simple, working fine for many years and well known to the regulators across the EU. The clients were introducing business to banks, mostly for private banking solutions, and were receiving in return retrocessions (also known as commissions, inducements, kickbacks or rebates) for as long as the business remained with the bank. The payment was usually a fixed percentage of the revenues the bank was earning from the introduced business.
Of course, everyone is working towards greater transparency and to protect the end-client from hidden costs and/or arrangements, hence MiFID II has been designed, and we all know it will be beneficial to the greater investor community. However, a number of legitimate practises under MiFID I will face extinction in their current model.
MiFID II, which came into force on 3 January 2018, is very explicit on inducements given by financial institutions to introducers of business. Without going into details, MiFID II prohibits financial institutions from paying or receiving inducements, unless certain conditions apply. These conditions concentrate mainly, but not exclusively, on whether the recipient of such inducements enhances the quality of the service the end-client receives.
By nature, a pure introduction does not add value, and certainly not on a recurring basis, and as such the clients have been receiving letters from different banks informing them that as of 1 January 2018 no commission will be payable for clients introduced, in line with MiFID II.
Firstly, he was in denial. He started considering different solutions that would, at least in theory, assist him in maintaining his business in its current format, without losing the retrocessions. He explored setting up offshore solutions, renaming retrocessions to marketing, research or training fees. Through his explorations he understood that MiFID II is watertight and that there are no viable long-term solutions that entail the receipt of inducements.
The decision had to be bigger and aligned with both the letter and the spirit of the new law. As such, the client followed the below steps in designing a long-lasting solution:
So, what has the client achieved?
The client has managed to move from a dying model to a viable, robust and long-lasting business solution. Furthermore, through this, he created a platform by which he can better service his clients and explore further revenues from his strong and existing relationships:
Is this a universal solution?
Absolutely not. This solution is not only difficult to implement and manage, it is also expensive. It is suitable only to people that have a sizable client base as well as the ambition and commitment of creating an investment firm for servicing their clients.
Luckily, having a limited scope licence without holding clients’ funds reduces the capital strain as well as the compliance and operational requirements, making it possible for medium size investment firms to be financially viable.Back to Articles Back to B2B Lateral Thinking Solutions
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
B2B Lateral Thinking Solutions
B2B Lateral Thinking Solutions is a boutique consultancy operating from Cyprus and servicing private, corporate and institutional clients. Our team of dedicated, passionate and highly qualified professionals assists numerous clients across the EU, Russia and CIS countries. Lateral thinking is not only a name. Lateral thinking defines how we approach problems and our work ethic. We partner up with our clients to uncover solutions through indirect avenues and by employing creative thinking.
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