Danish banks are all but fidgeting with impatience. No later than April 1 they are obliged to give prior notification to all customers with managed portfolios.
However, what exactly they are to write in the letters is not yet clear. Authorities have not yet published a final interpretation of the basis for the new price changes that will come in the wake of the EU directive Mifid II. With the regulations taking effect on July 1, banks are in a tight spot if they are to notify clients three months prior as pledged.
"All things equal, a little more clarity would make this project easier. We are under considerable pressure, but we are working on different scenarios and preparing ourselves as much as possible for when a final clarification is published," says Ole Madsen, CCO at Spar Nord, to FWAM.
In Denmark, the part of Mifid II that affects regulations on commission payments in relation to portfolio management agreements takes effect on June 1, not on Jan. 1, 2018, as it does in the rest of the EU, when Mifid II in its entirety also takes effect.
Difficult to price products
It is still not clear what the banks are allowed to receive in commissions from mutual funds when providing services, but the changes will undeniably lead to price changes for clients with portfolio management agreements.
"Until we are certain what we are able and allowed to pay banks for clients with proxy agreements, it is difficult for banks to price products for their clients," says Lars Bo Bertram, CEO at Bankinvest and vice-chairman at the Danish Investment Fund Association (IFB).
"This legislation was made for the private clients' sake. It is supposed to provide more transparency, but we don't want to end up in a situation where time constraints force the banks to rush their clients through, resulting in a bad experience for both bank and client," he adds.
Historically, mutual funds have paid banks to perform tasks such as client consultancy, money laundering checks, and risk assessment of clients.
This is still the custom when a client contacts the bank and receives consultancy on investments in one or more investment funds. But if the client has a proxy agreement the situation will be different, starting July 1. From then on, banks will no longer be able to receive payment from mutual funds for several of the tasks that the bank undertakes for the mutual fund.
It is uncertain how exactly this is to be distributed in times to come. The next move is now up to the Danish Financial Supervisory Authority (FSA), which discloses to FWAM that the interpreted legislations are expected to be published later this month.
It is clear, however, that the new regulations will force banks to either collect payment from clients or shoulder the expenses themselves.
"We can pay to safeguard against money laundering, but we can no longer pay for e.g. sales or direct business with clients. So right now, we have no idea how much the banks are allowed to receive from us for services that are undertaken for proxy holders, Bertram explains.
"This uncertainty is of significance if the banks want to maintain earnings, because it depends on the price changes that they notify clients of," he explains.
The other issue is that if payment comes from mutual funds, then it is exempt from VAT, but if the banks are to levy from clients as a direct charge, it is subject to VAT.
"So if you were to originally receive 100 basis points in charges, that will be 125 basis points for the client to pay. The more you collect directly from clients, the more expensive the entire setup will be, because tax authorities will be involved," says Bertram.
VAT at clients' own expense
With low interest rates and the subsequently pressured market yield, either banks or clients will be hit financially when the 25 percent VAT is added, says the mutual fund CEO.
"If a 25 percent VAT is added, then somebody has to cover those expenses. Either clients, who will then see their yields diminished, or the bank, which will earn less," says Bertram.
Mutual funds will technically still be able to pay banks for services, but because the payment, according to IFB, is included in the scope of Mifid II, banks risk being forced to forward the money to the client.
"This puts the bank in a terrible position, because how are they supposed to divide the money among their clients? Furthermore, the money paid to clients will be subject to taxation because it will mostly be capital income, for example available capital, and thus taxable income," says Bertram.
"There are so many unknown quantities right now, and not much time," he concludes.
English Edit: Marie Honoré