Has your firm met the FCA’s deadline of 3 July to apply for MiFID II authorization? With a raft of new requirements to meet, this forthcoming regulation is piling on the pressure for risk managers.
Indeed the new version of the Markets in Financial Instruments Directive has been billed as the biggest regulation challenge of recent times. So there is not a moment to be lost in evaluating whether current systems are fit for purpose and whether data management to meet enhanced reporting requirements is being taken seriously.
With an implementation deadline of 3 January 2018, the regulator has warned that those who are not authorized face civil, regulatory or criminal charges.
The regulation, which was more than seven years in the making, will regulate the market in shares, bonds, collective investment schemes and derivatives across Europe. Any firm wanting to trade in these products must be authorized by the FCA, based on its ability to comply with MiFID II, which should result in:
- Greater market transparency – clearer costs of trading
- A reduction in market data cost
- Safer and more structured marketplaces
- Compliant trading behavior within markets
Increased powers for regulators
For risk managers, a key message to get across to colleagues is that MiFID II brings heightened regulatory powers. The regulator will have the power to ban products and will also ban advisers or portfolio managers accepting or retaining payments/inducements.
Transparency around charging is central and asset managers will no longer be able to bundle in the sums they pay investment banks and brokers for research and execution. This is going to mean new pricing structures to ensure a compliant new regime. Further, research must now be paid for by the manager or clearly passed on as an extra cost to the client. Where advice is being given, clients must be supplied with aggregated information about costs and charges.
Defining the type of advice
While greater transparency is at the heart of the new regulation, risk managers working in advisory firms should also ensure that where clients are offered advice, this must be independent and expert.
The regulation introduces a new definition for independent advice, meaning there is a need to undertake a ‘comprehensive analysis’ of the market that is ‘sufficiently diverse’. Brokers, for example, that have cut back on the investment houses they work with may need to revisit the strategy for this – are relationships too cosy and is independence being jeopardized?
Then there is also the much talked-about requirement on recording calls. The regulator had stated all firms needed to record telephone and email communications that relate to “the reception, transmission and execution of orders or dealing on own account” and that these must be held for at least five years.
However, the recording requirement did provoke considerable anxiety among smaller firms, since some would have needed to invest in new recording software. In response, it appears the FCA has slightly relaxed its stance and in response to lobbying and has agreed that written notes can be kept, although more guidance is expected in this area.
Risk managers will also need to monitor training. MiFID II now extends to those providing information on investment products and not just those giving advice. Now all must also show appropriate knowledge, competence and take a relevant qualification.
As its name suggests, MiFID II is a large step up from MiFID I. If you look at the reporting requirements, there are now 65 data fields needed to comply – compared to just 25 under MiFID I.
This is onerous regulation and will almost certainly result in significant costs to meet these new standards. But many would agree the investment industry should do more to improve transparency. With less than six months to go, there is little risk managers can do other than, as the saying goes, suck it up.