MiFID II has significantly changed retail banking. Advisors are currently required to disclose the prospective costs of securities transactions in detail, including fees and commissions. This enhances transparency and potentially increases competition, leading to lower fees. At the same time, however, the requirements for the advisory process have also increased.
Put simply, the world of investments has experienced a shift in the burden of proof. As in the past, customers must estimate their own attitude towards risk. Now, however, the advisor must check whether the customer’s risk tolerance is appropriate, and ensure that the financial product in question suits his client’s profile. The advisor must analyse not only his client’s financial experience, investment aims and horizon, but also his overall financial situation. This includes calculating his individual ability to take risks. This does not just mean comparing income and expenses. Every aspect that influences the customer’s financial situation and his ability to sustain potential losses, even a pay-tv subscription or the child’s mobile phone contract. Financial advice also includes a suitability record, with reference to which the advisor is held responsible for the products he has recommended and their consistency with the clients’ life situation, plans, experiences and financial context.
With suitability records, prospectuses and product information leaflets, customers have plenty of information readily available to them. Yet, “the more the better” is not necessarily true.
Behavioural economists call this the “curse of knowledge” or “information overload”. Gerald Spindler (2011) analysed investors’ protection laws and showed that private customers often feel intimidated rather than informed by detailed explanations. The quantity of information overstrains customers, who find it difficult to evaluate quality and likely face emotional barriers when looking into investment projects. MiFID II could have the same effect.
Too much effort
In marketing research, the concept “transaction inconvenience” plays an important role for online shopping. Melek Erdil (2018) collected several studies that mention complicated and cumbersome purchasing processes as a reason why customers abandon online purchases. It is likely that the same applies to banking business. If building an investment portfolio is made more difficult or tedious by MiFID II, it is possible that ceteris paribus more customers stop short of completing the process.
In light of these phenomena, it is to be expected that MiFID II has a rather discouraging influence on investors, who might miss out on the advantages of forward-looking retirement plans. In this light, one may say that MiFID II adds short-term inconveniences to financial planning, and while the advisory process emphasises possible losses, the underestimated long-term gains further recede in the background.
MiFID II was certainly well-intentioned. Private individuals do not behave like investment experts. This is why customers should be protected when making investments. Apart from disclosure requirements concerning fees and commissions, however, it is not evident that the new rules meet this goal. Additional disclosure obligations and additional documentation do not guarantee better advice and could easily scare – rather than educate — customers.
The stronger the off-putting effect, the higher the risk that MiFID II is doing consumer protection a disservice by reducing the number of consumers. More is not always better – especially when it comes to regulation.
Benedikt Schmal studied dual business administration in Braunschweig and is a trained banker. He then studied economics at the Free University of Berlin. Alexander Fink is a post-doc at the Institute for Economic Policy at Leipzig University and a senior fellow at the Institute for Research on Economic and Fiscal Issues. Anna-Maria Köhnke is a student at the University of Manchester and founder of the Diversifying Economics Network, focused on improving BAME and gender balance in the economics profession.