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MiFID: Will the Wealth Management Community be Ready?

Neil Craddock

Citisoft

13 January 2006

The answer of course, is that there is no choice but to be ready – MiFID is a mandatory regulatory change, but the results of a recent survey by the MiFID Joint Working Group make for some disturbing reading. • Only 20 per cent of firms have a MiFID compliance framework in place; • Only 20 per cent of firms have a technology strategy in place for compliance with trading obligations under MiFID; and • Only 44 per cent of firms have set aside budget for the above. The results continue down to lower levels of granularity, but the message remains clear. We have a lot more work to do to be ready for the introduction of MiFID. Will MiFID affect my firm - do I need to be worried about it? According to Hector Sants of the FSA “The introduction of MiFID will affect most FSA-regulated firms carrying on investment business, whether or not that business falls within MiFID’s scope.” This means that the impact will be felt across the vast majority of firms: brokers; fund managers; wealth managers and private banks; exchanges and market data vendors. Why has MiFID come about? The goal of MiFID is to ensure that investors and intermediaries can transact freely with clients in other European Economic Areas (which include Norway, Switzerland and Liechtenstein in addition to the EU Member States) on the same terms and conditions as business transacted in their home country. On first reading this sounds like a great idea – this would appear to open up the potential client base for UK managers’ existing products and services to a much wider audience. However, the downside of this is that our EEA competitors will also no doubt be thinking the same thing and eyeing up opportunities to market their products and services to clients currently managed by UK wealth managers and private banks. Depending on their jurisdiction they may be able to offer these services on more favourable terms than we can. Why isn’t MiFID being taken more seriously? There are a variety of possible reasons for this: • It is still a long way from implementation – 1st November 2007 • The date has already slipped by six months – the expectation may be for another slippage in the implementation date. It is easy to be sympathetic to this view, as the perception is that the UK is better prepared than other EEA countries • The legislation is still not finalised – the final measures for UK implementation of the Directive are not due until 31st January 2007, although there are some interim deliverable e.g. Level 2 measures at the end of January 2006 What should I be doing now? Unfortunately, there is no hard and fast rule, the impact of MiFID will vary according the nature of your firm’s business, i.e. type of clients, and the products and services offered to those clients. Based on the current uncertainty, many people will play a waiting game. However, we need to be sure that we allow ourselves sufficient time and resources to react to the changes when the details are finalised. It is often difficult to convince senior management to secure budget and resource when there are no hard facts available, but there is enough information available now for firms to conduct an impact analysis and to begin to plan for MiFID. Areas of likely impact include: • Business strategy – current and future products and services. If costs are likely to be prohibitive it may be appropriate to prepare an exit strategy • Best execution and post trade transparency – how will we provide the data required and publish it? • Client classification (this will be different from the current FSA regime) • Suitability and appropriateness of investment products – likely to have the greatest impact on execution only business due to the rules regarding ‘complex instruments’ • Outsourced relationships - in terms of selection and supervision of service providers, there may not be any ‘grandfathering’ provisions • Likely IT and systems impacts of the above – find out what your market data and systems vendors are doing about MiFID. Where and how will you store all of the extra data needed? How will you uniquely identify all instruments (including commodities, OTC derivatives, FX etc.)? There is still time for us to prepare, but the time for procrastination has now passed.