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Miffed about MiFID? Read on!
Most of the financial firms that have to obey the European Union's second Markets in Financial Instruments Directive view it as an albatross. There are, however, ways to mitigate its effects.
For many in the financial services industry, MiFID II has been a
very long time coming. Back in 2007, when the original MiFID came
into effect, policy-makers were already envisaging a review of
the legislation but few could have predicted the veritable
tsunami of legislation we now have before us.
MiFID II’s complex and multi-faceted nature derives from it being
the intended solution to many different problems. It contains
measures to deal with systemic risk because of the financial
crisis that surfaced in 2008; rules to prevent market instability
of the kind that became evident in the 2010 ‘Flash Crash’; and
the expansion of an equity-like transparency regime into bond and
derivative markets.
Alongside these come the EU-wide adoption of many of the UK's
conduct-of-business rules, a desire to address certain conflicts
of interest that have become politically visible, and the desire
of regulators to improve the data they use to combat market
abuse.
Perhaps because of its size and complexity, and in part the length of time it took to finalise the law, many firms have put off their MiFID II planning and preparation until the last possible moment. That moment will soon be upon them.
Feeling the effects
Complexity is not the only factor that has made firms apprehensive about the implementation of MiFID II. The directive will bring about significant changes in business practices for the organisations that have to obey it. Its effects on MiFID investment firms, collective portfolio management firms and firms that undertake individual portfolio management will differ markedly from each other.
Portfolio managers, for example, will find that MiFID II transforms the way they manage the receipt and use of research. It will also bring about important changes in areas such as client reporting, product governance and recordkeeping.
An interdealer broker, on the other hand, is likely to find itself having to become one of the new breed of platform, an Organised Trading Facility (OTF). This means a "variation of permission application" that is likely to entail quite a lot of work.
Perhaps having relied on a 'patchwork' approach to implementation so far, and perhaps having identified issues as they arose and having tried to fix them on the hoof, many firms now appreciate the amount of work they have to put in if they are to be ready for January 2018.
All vendors great and small
Having spotted their opportunity, many service providers have jumped onto the MiFID II bandwagon and are offering to help financial firms in the run-up to the deadline. Some offer expertise in just one area of technology or compliance, while others provide end-to-end ‘solutions’ to the MiFID II conundrum.
Here we must sound a note of caution. The more a firm simply delegates its responsibility to third-party providers, the smaller the genuine understanding and control it will have over its processes and the harder it may find it to be flexible in the face of unforseen problems.
Unseen opportunities
All market participants have a never-ending need to identify and manage their risks, collate their data, streamline their software/hardware and respond to shifts in the market and indeed in regulation. Each firm ought to have a precise understanding of the ways in which each new rule affects, the better to build a robust operating model and compliance regime for the future.
Although the countdown to MiFID II is ticking very loudly, firms should also beware of the risks they might be running if they take a short-term approach. Rather than focus on achieving compliance with the minimum effort, firms should also reflect on what they can achieve along the way. By preparing for MiFID II in a holistic, strategic way, while looking for other things that are "coming down the track," they can achieve more than mere readiness.
For example, the UK's Financial Conduct Authority will consult the public shortly about the manner in which it should roll out the new senior managers’ regime (SM&CR) to all regulated firms. This is likely to cause deep organisational and governance-related changes in many firms and may revolutionise reporting lines, spans of control, management information flows and even remuneration structures.
Therefore, at a time when MiFID II is rightly at the top of the list of regulatory changes that most firms want to make, they also have the opportunity to align their operational models and practices and put themselves in a better position to deal with other problems in future.
For example, by improving data management practices and improving the accuracy and consistency of internal and external reporting between firms and their clients, brokers and service providers, firms can comply with MiFID II but also create an environment of greater openness, transparency and accountability.
Silver linings
Nobody doubts that MiFID II is a major commercial, administrative and financial millstone around the financial sector's neck but, for better or worse, this is the new world in which we must live and not even 'Brexit' is going to save us from it.
To have the best chance of adapting to the changes it will bring
in a successful way, firms should change their perspective on it.
They should not treat it as just another compliance-related
headache but rather as an opportunity to analyse and learn more
about the way they do business, their clients and the things in
life that make a real difference.
A thoughtful, holistic response to a regulatory challenge such as
MiFID II can lead to substantive commercial benefits. Firms that
examine their business processes carefully and invest in the
right technological capabilities in areas - such as
recordkeeping, communication with clients and execution-quality
monitoring - with an eye to the future can make themselves more
efficient and generate more revenue than otherwise.
WealthBriefing is holding a MiFID II conference in London on 24 May. For more details, and to find out how to register, click here.
* Nick Bayley, the managing director of regulatory consulting at Duff & Phelps, can be reached on +44 20 7089 4933.