On 3 January 2018, the Markets in Financial Instruments Directive II (MiFID II) legislation came into force, with an aim to enhance transparency and investor protection within financial services. How has the sector taken to the new framework, one year on?
A focus on product governance
Andrew Bailey, chief executive of the FCA, said at a Treasury select committee meeting on 15 January 2019 that, so far, MiFID II has been centred on cost and charges, but is to now hone in on product governance and research rules, reports Rachel Addison for FT Adviser
The product governance part of the legislation is designed to ensure advisers are offering suitable solutions to clients – requiring product manufacturers and distributors, such as advisers, to identify their target markets. There were pre-existing requirements of this kind before MiFID II, but “they were narrower than the new rules in terms of the financial instruments they covered”, Addison writes.
While Bailey says that the FCA hasn’t yet taken any enforcement action against firms for failing to comply with MiFID II, there are concerns that only one in ten firms are abiding by the revised directive, according to Addison, who points to a previous Treasury select committee meeting in June 2018, where Bailey warned that the regulator would begin holding firms to account.
FT Adviser article
The effect on FX
MiFID II affects almost every corner of financial services, including the foreign exchange (FX) market, according to Valentina Kirilova, reporting for specialised FX research and advisory firm LeapRate.
Chris Hollands, head of European sales at TradingScreen, a US-based financial technology provider of trading services, tells LeapRate that MiFID II’s transparency objectives have been felt the most in the fixed income, over-the-counter derivatives and FX areas. Demand for execution management systems to show liquidity aggregation, more sophisticated analytics and access to a wider range of execution venues and trading protocols has become more apparent since the implementation of MiFID II.
Hollands adds that MiFID II has brought about a more transparent buy-side view of execution costs in the listed markets.
Vikas Srivastava, chief revenue officer at Integral, an institutional foreign exchange trading platform, says that because of stringent requirements for execution, transparency and reporting, many ‘players’ from the sector have switched to using cloud-based solutions to help meet the regulation.
He also says that firms are taking advantage of “the standardised reporting and methodology required by MiFID II to deliver and prove best execution for their clients”. He adds that firms are using MiFID II as an opportunity to differentiate themselves from competitors, rather than seeing compliance as a “box-ticking exercise”.
Advice for firms
There is still more work for firms to do to be fully MiFID II compliant in the areas of research unbundling, transaction reporting, costs and charges, marketing and product governance, and best execution, according to Bobby Johal, managing consultant at London-based advisory firm ACA Compliance, writing in Finextra
- Research unbundling, where research is priced and charged separately, has been a big focus for the FCA. Johal recommends that firms review their approaches in areas such as training, technology and governance. He advises educating employees on what constitutes substantive research to ensure that consistent evaluation of the research providers is happening. He suggests that firms that don’t currently have a technological solution to help in the evaluation of research should look into this, as this can “greatly assist firms to comply with record-keeping requirements”. And firms should establish regular research payment committees to analyse consumption and evaluation statistics.
- Firms should continue refining transaction reporting processes, according to Johal, by obtaining a sample of their reporting data from the FCA. Without reviewing the data sample, it’s hard to know for sure that the transaction reports are accurate and complete, says Johal, adding that it’s a requirement under MiFID II to do this. Firms should regularly review transaction reports rejected by the regulator and resubmit transactions that are thought to be genuinely reportable. From December 2019, under the Senior Managers and Certification Regime (SMCR), boards and senior managers are accountable for checking that they are receiving the right information about accuracy and completeness of transaction reports in order to identify emerging risks. So, it’s good for firms to get in the habit of doing this now.
- MiFID II requires firms to disclose customer costs and charges at the end of a year, how those costs have impacted the performance for their clients and also how these compare to forecasts, and an estimate of costs for the next year. Johal recommends using a template by organisations such as the Tax Incentivised Savings Association to help firms understand how they should calculate costs.
- Marketing materials also play an important part in MiFID II compliance, and Johal recommends reviewing these, looking at elements such as how performance is shown and font sizes of risk disclaimers. He says: “[These] need to be the same size as the font used throughout the main body of the presentation.”
- Regarding best execution obligations, Johal says that it’s “very likely that there will be further supervisory initiatives in this area over the course of 2019” and firms may want to review this area of business.
Johal’s observation that “compliance is very much a journey rather than a destination” rings true for this year-old legislation. However, it remains essential for firms to continue to identify areas of non-compliance to reduce the risk of facing fines of up to €5m.
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