Mark De Ste Croix MCSI, head of compliance & legal at Raymond James Investment Services, on preparing for the Markets in Financial Instruments Directive
As the 3 January 2018 deadline for implementation of the updated Markets in Financial Instruments Directive (MiFID II) looms increasingly large for wealth management firms, the FCA has become quite vocal about its expectations. Perhaps surprisingly, those expectations seem to have a very real air of reasonableness and an approach that looks to be collaborative, helpful and practical. However, and there's always a 'however' when it comes to regulation, any firm living in the hope that MiFID II is being watered down, deferred or otherwise is going to be disappointed.
The author has attended various meetings where senior FCA staff have talked refreshingly and directly about their approach to supervision and enforcement around MiFID II in 2018. Perhaps it is worth noting a couple of the published comments by Mark Steward, FCA director of enforcement and market oversight, which sum the position up well:
"We have no intention of taking enforcement action against firms for not meeting all requirements straight away where there is evidence they have taken sufficient steps to meet the new obligations by the start date."
" The FCA will act proportionately, when deciding whether to take enforcement action against firms covered by MiFID II, which have not transitioned in time for 3 January 2018."
This looks entirely reasonable but there are also some very clear caveats. First, firms must be able to evidence they have taken action and made a reasonable effort to comply in time. For larger firms this may come in the form of formal projects with all the accompanying documentation. For smaller firms this may consist of gap analysis work, 'working papers' and communications with other firms they interact with and/or will use for implementation. Second, and ideally, there should be evidence of a structured and methodical approach to the work done. Last, what resources, proportionate to the size and resources of the firm, have been allocated to the implementation work?
It also seems likely that the FCA will concentrate on what firms have done with regard to the 'big ticket' items. It seems unlikely that firms will be given much leeway if they have complied with a raft of more detailed requirements but failed on more significant changes, eg, a discretionary manager pleading on the basis that the frequency of client valuations has increased but failing to transaction report is unlikely to get much of a hearing.
So what are the 'big ticket' items? While there is nothing written down to this effect, it seems reasonably safe to identify a top five for wealth managers:
1. Transaction reporting
2. Reporting to clients – valuations, 10% drop for discretionary fund managers (DFMs)
3. Disclosure of costs and charges – point of service and ongoing
4. Best execution
5. Record-keeping, including telephone and electronic communications
It could be argued that product governance should also be included but much of this requires cooperation between firms, and given the apparent slow progress across the sector on standardisation, the detail and practicalities look set to develop over an extended period of time in any event. Last, if the FCA comes knocking in 2018, firms should be clear in their own minds what their MiFID II implementation story is and be ready to articulate their current state and evidence how and when they are going to achieve full compliance.
Views expressed in this article are those of the author alone and do not necessarily represent the views of the CISI.