Regulatory Insights: MIFID II

One month on…What have we learnt so far and what should we be focusing on…

 “It is not even the beginning of the end but it is, perhaps, the end of the beginning” – Winston Churchill

FSTP Blog, MiFID II, Regulatory StormAs Storm Eleanor battled away in the UK in the early hours of January 3rd, the Financial Markets opened to a more sedate start. The dawn of MiFID II came in on more of a gentle breeze. After over a decade in the works and a reported 1.5 million paragraphs of new rules the financial world did not come to a grinding halt.

So that begs the question, are you still feeling miffed about MiFID II, much ado about nothing? A month on since go live and many clients are still wondering whether they did enough to prepare and more importantly what else they still need to be focusing on. So, forget about disbanding those working groups, project teams and SMEs and returning to business as usual, MiFID II is the new BAU!

Much has been done to prepare for MiFID II but much is still left to do. Firms must continue to refine, systematise and focus on how MiFID II can help you position many of the requirements with your clients. Let’s not forget that among the regulatory melee much is positive for your clients, think cost and charges, increased transparency and unbundling. Whilst it will take time to fully implement, these changes are fundamental to improving and developing your ongoing client relationships.

With that in mind, lets consider some key areas that require further focus: 

1.Transaction Reporting

Characterised by how to report certain transactions, the number of new fields (just 65!) to be populated and which trades to report, this was an area of major scrutiny leading into January 3rd, particularly with the backdrop of the £34.5 million FCA fine dished out to Bank of America Merrill Lynch in Oct 17 for failing to report transactions.

Whilst most firms just about got there via their Automated Reporting Mechanisms (ARMs), transaction reporting is far from “job done”. It will require constant tweaking to ensure you are reporting everything you are meant to. It’s not cheap to get right but it’s vital that you do. Firms need to put in place arrangements so that transaction reports are accurate and complete and that the reporting is aligned to your changing business patterns and trading activities.

2. Research

Initially somewhat mis-considered the main facet of MiFID II, the so-called unbundling of research remains ambiguous and open to interpretation. Designed to ensure direct payment for research outside of execution commissions, it remains likely to be the biggest shake up to how research is provided and consumed that the industry has ever seen. So far, many brokers and investment banks have created separate paid packages for managers to receive research reports from their analysts and direct access to them.

However, it has now emerged that content produced by sales traders taking orders for clients or offering them advice, such as highlighting market trends, could also be classified as research. Investment managers will therefore need to continue to look at the context as research is consumed to truly determine if it is covered by MiFID II rules or not – watch this space!

3. Best Execution

Sufficient steps but what are sufficient steps I hear you say?! Whilst the FCA will no doubt be keenly observing the changes made to execution policies, the introduction of the requirement to publish top five venues brings an additional layer of focus. How this ties in with the underlying policies will be closely monitored.

4. Brexit

Whilst Brexit continues to dominate the political and economic climate of Europe, rumours are already circulating about how this will play out with MiFID II. The two are deeply intertwined and when the UK formally exits it would be expected that the MiFID II rule set will initially be kept but for how long and what will need to change? As unfathomably as it may sound perhaps a MiFID II.2.

For MiFID II to truly deliver on its ambitions to create a level playing field with consistent rules for all European jurisdictions delivering a sustainable Third Country Regime to ensure efficient capital flows between the UK and EU27 is vital.

5. Knowledge and Competency

As part of MiFID II firms with employees that provide advice or information about financial instruments, investment services or ancillary services to clients must demonstrate minimum standards of knowledge and competence to fulfil their obligations. Firms must therefore ensure that such staff have the necessary knowledge and competence to perform their roles.

Many firms are still grappling with this assessment of competence of information providers. Who is in scope? Well that is part of the thorny subject, who is speaking to clients even if only on occasional basis?

In Wealth, this could be your desk assistants, team secretaries, portfolio assistants who may all be in direct contact with clients and giving them information about prices, valuations, charges, provide generic market or sector views. What about your Research teams – do they ever attend meetings with clients to provide market, sector or stock views on a non-advised basis? Most of the firms we are speaking to are including Research teams. Most of these staff members have never been included in formal T&C Schemes before.

In Asset Management, sales teams, client services, broker servicing staff and Portfolio Managers (the really sensitive aspect of K&C). How do you tell a Portfolio Manager of 20 years plus who hasn’t got a formal qualification that they need to be assessed as competent?

FSTP have been listening to the concerns and issues of firms and have developed a range of solutions to help you. These solutions are not one size fits all and can be tailored to work with within your business.

We have workshops to cover Wealth and Asset Management to meet the ESMA requirements and can provide advanced K&C assessments for more seasoned, professional staff. We can even help you build a Knowledge & Competency framework to cover these people going forward and in readiness for Certification under SMCR.

You can contact us via with any questions or issues you are facing with your MiFID II implementation and a member of the team will come back to you shortly.

Matthew Fotherby

FSTP Associate