There is still no uniform European investor protection as envisaged by MiFID II, according to research conducted by Ronald Janssen of Ortec Finance and Tom Loonen of the Free University of Amsterdam in a survey of 25 European private banks. Their research shows that private banks in Europe have different approaches to the concept of Know Your Customer (KYC) and use different levels of detail in implementing it. Also, that none of the banks has a fully digitalised process.
In Luxembourg, Bâloise, CA Indosuez Wealth Management and Quintet Private Bank participated in the survey.
European private banks appear to assess their clients’ maximum loss capacity differently, for example, and in many cases do not include investments at other banks when determining the risk that a client can bear.
In conclusion, the researchers speak of large differences between banks and between countries and: a worrying outcome. “In all sincerity, our hypothesis was that there would be differences,” said Loonen, professor who teaches about the “effectiveness of regulation at investment firms” at the Free University in Amsterdam. “They have turned out to be true, and that is worrying as far as we are concerned. What MiFID II aims for, namely horizontal harmonisation in investor protection, is not happening now. Based on the regulations, it should not matter in which European member state and with which bank you invest, but de facto it does matter.”
Loonen mentioned the great diversity in the way banks approach the “ability to bear losses” as one of the three most striking outcomes of the study. “A large number of private banks determine this loss capacity on the basis of the maximum loss that an investment portfolio can suffer, while other banks look at all of a client’s assets. In addition, some banks opt for a quantitative approach, while others take a qualitative one.”
Updating KYC information
Another striking conclusion is the different time frames used by banks to update KYC information. A remarkable proportion of private banks do so annually, but there are also banks that do so once every three years or only if a client has undergone significant changes.
Loonen emphasised that there is no hard legal provision about this period, but that the European regulator ESMA does recommend between the lines that this be done regularly. “The more up-to-date this information is, the better you can tailor the advice to the needs and objectives of a client.”
And then there is the digitisation, or rather lack thereof, in the processes of European private banks. Not a single private bank involved in the survey uses a fully digital process for obtaining information in the context of KYC. Loonen: “The importance of the advisor still appears to be immense. Of course, an advisor’s opinion and professional judgement may be desirable, but I find it a striking result. There are big steps to be made there, also because everyone knows that the costs of making your processes manageable and the regulatory costs are so high that you would have to move towards a large degree of digitalisation.”
Spreading of assets
In the context of the expectation that the very wealthy will spread their investments more across different banks now that they are increasingly charging negative interest rates above a certain bank balance, another finding of the study is interesting. Only a small proportion of European private banks appear to take the investments of other banks into account when assessing the risk of an individual client.
“The need for a broader inventory is indeed greater in the context of current developments,” said Janssen, managing director of Ortect Finance. “The question is whether you can determine suitability properly if you only look at the investments at one bank.”
The Netherlands
The researcher also mentions the large differences between countries, where the Netherlands on average is good at specifying the investment objectives of customers. Establishing, monitoring; other countries are lagging behind somewhat in this respect.
What he said he had also noticed is that many processes at banks are still product-driven. “In the case of an advised portfolio, advice and a profile are built around that portfolio, but there is no broader perspective. In the Netherlands, too, this has been implemented to a very limited extent. They often have financial planning services, but do not make them available to everyone.”
“Or they don’t proactively use the resulting information as KYC information,” Loonen continued. “This is an unusual development in terms of cost efficiency, because such a plan costs a lot of time and money.”
According to the researchers, many private banks are still at the beginning of the integration of the investment department and financial planning department. The moment when the customer will notice this lies even further in the future.