What should firms be doing in the final months before the updated Markets in Financial Instruments Directive (MiFID II) is implemented?
Firms should begin to implement the parts of MiFID II that they can, or make sure they are ready for the implementation date of 3 January 2018. For instance, in the retail space the main issues are around transaction reporting, costs and charges, product governance, best execution and information reported to clients.
Firms need to be checking what research they get, examining what transaction data will look like and considering any rewrites to their execution-only policy. Very little of a firm’s activity is not touched in some way by MiFID II.
In general, though, you should be worried if you think your peer group is much further advanced with MiFID II implementation. Firms should be able to demonstrate that they have good project plans in place with a high level of senior management engagement. If you haven’t, then you are likely to be challenged by the FCA.
How will transaction reporting requirements change?
Transaction reporting is one of a number of major projects but compared to other issues, such as costs and charges, good progress has been made. There are an additional 65 data fields to be reported and the scope of what needs to be reported has widened.
While we are still seeking clarification on certain issues, firms can start implementation work now. For instance, start populating certain data fields to make sure they have all the information required on decision-makers – both at a client level and within the firm.
What will the introduction of legal entity identifiers (LEIs) mean for investors and investment managers?
It means all investors who are deemed legal entities will have to obtain unique codes; otherwise investment firms will not be able to undertake investment activity on their behalf or submit a valid transaction report.
Broadly, each LEI costs around £120 to obtain and £70 to renew for legal entities applying directly to the UK issuer; additional charges may be levied if an investment firm obtains the LEI on behalf of the legal entity.
Legal entities include companies, charities and trusts other than bare trusts. For some, like charities, it will be relatively easy to be issued with an LEI. For others, such as some trusts, there may be more hoops to jump through.
"There are elements in MiFID II where it requires firms to make a judgment"
The problem is there has been little education on the matter, with the obligation falling on the legal entity to obtain the code.
Also, no one knows how many LEIs there are. We just don’t know how many applications issuing organisations will have to process.
Legal entities should consider applying as early as possible to ensure they have an LEI by the due date. There may come a point in the process where a cut-off point is introduced because a logjam has built up.
About the expert
Ian Cornwall is director of regulation at the Wealth Management Association, a representative body for the investment community. He is a chartered accountant and chartered wealth manager with almost 30 years’ experience as a risk and compliance professional.
If this happens, discretionary managers for non-registered legal entities will be unable to take a decision to trade come January 2018, while advisory managers, who have an ongoing responsibility to the suitability and composition of a client’s portfolio, won’t be able to fulfil contractual obligations as investment firms will be unable to submit a valid transaction report.
Some of the text in MiFID II has yet to be agreed by the European Securities and Markets Authority (ESMA). How is this likely to play out?
It is frustrating, but there are areas in MiFID II that we do know and firms need to be able to address these issues now rather than sit back and wait for the complete picture. When ESMA releases new information, firms will just have to revisit it.
Are we also still waiting on some low-cost vendors in certain areas to come to market to allow firms to achieve their cost objectives in terms of buying data and best execution?
Yes, firms should ensure they are aware of all data vendor offerings in respect of product data and categorisation of financial instruments to meet best execution reporting.
What should firms do in cases where it is unclear how to implement the new regulations?
There are elements in MiFID II where it requires firms themselves to make a judgment. Firms shouldn’t be afraid of making these judgments as long as they document why they have taken that course of action. In this regard, flexibility in the rules will be beneficial to firms.
The CISI will be running a monthly series of live webcasts on MiFID II, chaired by Frank Reardon, Chartered FCSI, of JM Finn, a member of The Review Editorial Panel and chairman of the CISI Operations Forum. He will lead a panel of CISI experts to take questions from a live audience.
This article was originally published in the Q3 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.