Austria goes digital in preparation for Mifid 2

The Austrian market has entered a process of transformation which will change how products will be distributed to retail investors, as the implementation of the Markets in Financial Instruments Directive 2 (Mifid 2) directive looms.

According to Heike Arbter (pictured), president of the European Structured Products Association (Eusipa), chairwoman of the board of Zertifikate Forum Austria (Austrian trade body) and head of structured products at Raiffeisen Centrobank, the Austrian certificates market is currently occupied with two major topics: digitalisation and regulation.

The aim is to achieve a more efficient and simpler business and to make it more client friendly through digitalisation, according to Arbter. At the same time the market is working on the implementation of the Mifid 2 regulation which will establish a new set up between product distributors, advisors and end investors in the retail market, said Arbter.

As seen in other jurisdictions, the Austrian structured products retail market is also set to implement new ways to distribute and sell structured products with Arbter pointing that the market is moving from single product advisory toward portfolio construction advisory.

According to Arbter, the ZFA has not considered the 'SP Portfolio Optimizer' app launched by the Swiss Structured Products Association (SSPA) earlier in February, but there is a clear shift from relationship managers and investors to invest in and use structured products in an investment portfolio context.

“We see an upcoming trend to look at clients` portfolios holistically and we talk a lot with professionals about their strategies and tools,” said Arbter.

“Structured products with their various pay-out profiles can therefore be very useful and they might support various portfolio strategies. We are sure, that with the growing digital transformation there will be a lot of new digital tools at the disposal of advisors and investors.”

There is a positive outlook on the digitalization of the structured products industry, according to Arbter, because “this transformation will strengthen us and improve our position in the universe of investment”.

Arbter also said that the implementation of the Mifid 2 regulation is not seen as a challenge for the structured products market. “Due to the structure of our banking system and the high loyalty of customers we do not expect dramatic changes,” said Arbter. “To our knowledge there will be no ban on commissions in Austria. We see an increasing market volume, steady but sustainable, both in open interest as well as in trading turnover.”

As the market prepares for the upcoming Mifid 2 guidelines, the Financial Market Authority (FMA) is carrying out an investigation of the distribution practices of bail-in-eligible securities as part of its ongoing supervisory responsibilities.

According to an FMA spokesperson, the regulator is probing whether the risks embedded in structured products are explained adequately to end investors.

“FMA carried out a market analysis on the placement of bail-in eligible securities in 2016 and found that about €20bn of an overall of €80bn outstanding volume, were made by retail investors,” said the FMA official. “The result of the analysis showed that in 2016/2017 a volume of €20bn will have to be replaced [which is why] the FMA has put a focus on the distribution of bail-in eligible securities.”

This investigation is not part of the preparation for the implementation for the Mifid 2 or the minimum requirement for own funds and eligible liabilities (MREL) rules, according to the FMA spokesperson. “Mifid 2 will provide the FMA additional instruments for the supervision over the distribution of securities, which is welcomed by us very much,” he said. “With regard to MREL, if a security is in principal bail-in eligible, this does not mean yet that it is MREL eligible. There is therefore no connection with the MREL directive in this supervisory focus.”

The FMA’s investigation around bail-in provisions makes part of the transposition of the Bank Recovery and Resolution Directive – Directive 2014/59/EU (BRRD) in Austria which came into effect on January 1, 2016 and as part of a package of reforms designed to remove implicit government support and protection for creditors and investors in banks capital and debt instruments and other unsecured bank financial instruments, including retail investors.

The Austrian FMA released a statement last week highlighting that the ‘number of dubious providers in the Austrian financial market remains high’ and that against the background of the prevailing low interest environment ‘it has been increasingly frequently observed’ that investors ‘have fallen for unrealistically high promised returns in their search for returns’. In 2016, the FMA initiated a total of 162 investigations in relation to the combatting of unauthorised business (2015: 218) and concluded 204 investigations (2015: 254).

Earlier this year, the FMA published an ‘investor alert’ warning investors ‘to exercise particular caution in relation to high risk financial products’ such as binary options, contracts for difference (CfDs) and FX trading.

European Central Bank’s (ECB’s) 2016 Financial Stability Review found that losses arising from legal disputes and misconduct, collectively known as ‘conduct risk’, in Europe’s financial markets amounted to €71bn out of a total of €105bn, in other words, two thirds of operational risk was assigned to risks arising from misconduct and product governance.

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