More than nine months on from its taking effect, what must the wealth management sector continue to do about one of the largest regulatory changes to hit European financial services in years?

Already one of those familiar acronyms littering the wealth management sector, MiFID II is now more than nine months’ old, and the wealth management sector is feeling the impact. So how well or not has the industry coped and what does it need to still do to deal with its effects? (See previous articles about the directive and its effects here and here.)

Matt Smith, chief executive of SteelEye, a compliance tech and data analytics firm, sets out his views. The editors are sure debate will continue on what MiFID II’s impact is and how to adapt. As ever, the editors do not necessarily agree with all the views of outside contributors but are pleased to share such insights and invite responses. Email tom.burroughes@wealthbriefing.com

With the aim to make a more transparent marketplace and cultivate better investor protection, MiFID II swept into European financial markets in January 2018. As our understanding of the effects of the regulation on markets and the industry begin to deepen and its impact felt, it is becoming clear that smaller financial institutions such as wealth managers and family offices still have some way to go to ensure that their houses are in order to deal with the growing challenges of MiFID II and other regulatory compliance.

In anticipation of MiFID II’s roll-out, many wealth management firms and family offices had misjudged the weight of the regulation’s impact on their firms and, as a result, failed to prepare adequately. A recent survey by CoreData found that seven in 10 respondents claimed, in hindsight, that they wish they had prepared for the regulation much earlier.

For some, it wasn’t entirely clear just what elements of the 1.7 million paragraphs of rules were applicable to them. Where managers were aware of obligations, it was often the case that it was unclear just how much these changes would challenge them operationally and resource wise. The same study found that almost one-third of those surveyed said implementing the regulation had been harder than expected, compared with just 15 per cent who said it was straightforward.

Among other smaller firms there is the belief that the cost of complying was disproportionate with the cost of not doing so. With global estimates putting the spend on compliance at around $2.1 billion, coupled with attitudes in the industry that the Financial Conduct Authority has had little interest so far in fining even the largest of players for non-compliance, having only issued a mere eight notices to firms failing to comply, it’s hardly surprising that smaller wealth managers and family offices have been unwilling, or afraid to invest time and money heavily into MiFID II.

However, it is just as vital for smaller firms such as wealth managers and family offices to take complying with MiFID II seriously, as it is for the larger, more equipped firms, as 70 per cent of those obligated under the regulation are small- and medium-sized enterprises – and those obligations are significant. 

In attempts to increase transparency, MiFID II brings in a host of changes to disclosure requirements. Wealth managers must send fund managers frequent, detailed reports on who is buying their funds. They are also obligated to inform their clients about the ongoing performance of their portfolios. 

Amongst the host of other requirements, changes to cost and charges means that information about fees is required to be broken down piece by piece, and then aggregated to illustrate to customers the cumulative cost of their investments both in cash and percentage terms. This has been seen as a huge task for managers, as aggregating and collecting all the data sources is a complex and time-consuming mission. 

In addition, “Best Execution” requires firms to disclose their top five execution venues for all classes of financial instruments, in both qualitative and quantitative formats (RTS27 & RTS28). Already this has proved a significant task – with many managers confused and unsure of exactly what and how to report with accuracy.

An area of particular challenge for wealth managers has been transaction reporting under MiFID II. The European Securities and Markets Authority has already stated that data quality in these reports has been poor so far, with the FCA Markets Reporting team already issuing advice illustrating a number of key recurring reporting issues that they have found.  

As time passes since MiFID II’s implementation and the FCA begins to take note of the sustained criticism of its role so far, it is only a matter of time until the FCA begins to crack down on firms failing to comply properly and with accuracy. In fact, as recently as June, the UK regulator issued a statement stating their commitment to begin holding to account those who were non-compliant. In anticipation of this, wealth managers and family offices would do well to take a proper look at their existing practices, and make the necessary changes to ensure that they are capable of complying fully with MiFID II for the future.

Complying with MiFID II can also actually bring a number of benefits for wealth managers and family offices. Through incorporating improved data storage systems, cleaning and processing data, firms can unlock their previously dormant data – this works to establish patterns and trends in their business, enabling them to innovate, improve efficiencies and improve their product offerings.

Although investing in compliance for MiFID II may seem a huge burden and expense, given the lack of regulatory response so far, wealth managers must look to the long term. Investing in the right resources to handle their obligations will make complying with MiFID II much easier, and less daunting. It will also allow wealth managers and family offices to benefit from the insights it brings so that they can optimise their business and capitalise on the opportunities it presents.