Politicians are calling for MiFID to be extended to the area of closed-end funds. What needs to be taken into account?
The influence of the banking industry in lobbying should not be overlooked. Closed-end investments offer potentially high contribution margins. Additional obligations would entail follow-up costs and presumably additional liability risks, which market participants would certainly like to avoid.
What impact can MiFID have on the distribution of closed-end funds?
Investor and consumer protection would bring the issue of liability, and in particular the obligations in relation to mediation and advice, increasingly into the public eye. This, i.e. informing investors about liability options, would probably initially have a direct effect on intermediaries, advisors or distributors (exclusion of intermediaries who would not yet be licensed to distribute). A similar situation is already emerging with the implementation of the Insurance Mediation Directive.
Do you think that the distributors of closed-end funds are sufficiently informed about the issue of liability?
In my opinion, a resounding no! For distributors and intermediaries, the question of commission orientation or qualified risk and product assessment arises. The indemnity declarations of an initiator which are customary in “wholesale” are economically worthless in the event of the initiator’s insolvency – this is therefore a question of creditworthiness or loan collateral. Product testing, for example, involves IDW S4 expert opinions, including errors in content that are discovered later.
Why is it that, with such an existential issue, thousands of liability lawsuits are brought against distributors every year?
Distributors often do not have a systematic risk management system in place in-house. As a rule, liability reduction does not require a single measure, but rather a bundle of measures and designs. For example, it is of little use to the intermediary or advisor if only an “IDW S4 expert opinion” exists, because this does not imply any liability on the part of the auditor vis-à-vis the investor.
Is this issue not given enough attention, or even underestimated?
After liability cases, the parties involved have often become more sensitive. Not every distributor has its own competent analysts, its own press archive, qualified investigations into the transparency of advertising material to avoid suspicion of capital investment fraud. Often underestimated is the personal liability of sales or training managers towards intermediaries and consultants, but also the possibilities of recourse.
How can advisors and intermediaries of closed-end funds already prepare for a possible extension of MiFID?
Numerous “investment scandals”, such as Phoenix, FALK, VIP, etc., show that advisors and brokers, but also distributors, sometimes have considerable deficits – and this is already the case today. Here it is about the way of the profound plausibility checks of the profitability and prospectus statements etc…, the contract system and besides that about the VSHS protection. It is not without reason that VSH premiums are currently rising again, and it is becoming increasingly difficult, especially for the area of closed investments, to obtain insurance cover for the past or to further extend existing VSH cover to the necessary extent. What some distributors do not offer is systematic training and further training on the subject of minimising liability: this concerns a systematic way of working, one’s own company and intermediary organisation, but also instructions on how to deal with claims in order to safeguard one’s own existence – right up to asset protection.
And your conclusion?
The way I see it today, more or less, is that agents/advisors are often not fully aware of what they are selling and who they are relying on. After all, the initiator and others around him are trying to protect themselves and sell their products. How the intermediaries and advisors fare later is sometimes largely irrelevant to some of those involved in the sales structures. The advisors are very comprehensively liable when it comes to the compensation process and only then see that and where they have not sufficiently “provided for” because, as is well known, the “cobbler always wears the worst shoes himself.”
Dr. Fiala, thank you for the interview.
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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