MiFID II brought an overhaul that aimed to increase transparency, reduce costs for investors and clampdown on market misconduct in the financial industry. But is it having the desired impact?
When MiFID II came into force on 3 January 2018, it signalled an enormous piece of project work for those affected. So one year one how are firms getting on in implementing MiFID II and achieving compliance?
It hasn’t been simple…
“Firms are still grappling with around 30,000 pages of legislation and what needs to be implemented,” Emma Parnell, Learning Designer at Unicorn Training, concedes.
“With other pervasive regulation such as GDPR, the Senior Managers and Certification Regime and now the Fifth Money Laundering Directive all coming into force, that’s an awful lot of regulation, but not enough time to do it all. Firms have had to fight fires as they occur.
“We’ve seen the FCA let firms get on with it in the first year, but now the regulator is starting to peer in and ask how they are getting on and some firms are still having to say to they aren’t there yet.
As firms continue to make sense of it all, contention remains around whether MiFID II still has the potential to fully deliver on its objectives.
The FCA has already stated that as long as it can see genuine attempts from firms taking action to be compliant, it will work alongside them, rather than punish them
So what have been the biggest challenges for regulated firms in the first 12 months?
Best execution refers to the duty of an investment services firm executing orders on behalf of customers to ensure the best execution possible for each customer’s orders.
Regulators have consistently cited execution quality as fundamental to the integrity of the market, and under MiFID II firms now need to demonstrate they have taken all sufficient steps, rather than all reasonable steps, to obtain best execution.
Best execution has remained a big challenge for firms, many of which have struggled with the vast and complex requirements. Some firms have opted to stand on the sidelines until there is greater clarity from the regulator and broader implementation by their peers.
In a recent survey of 100 capital markets firms earlier this year across the UK and Europe, almost a third (29 per cent) cited best execution as their biggest MiFID II challenge.
Transparency (Trade and Transaction reporting)
MiFID II aims to achieve transparency through increased regulatory reporting, looking at what trades and transactions are taking place and matching them up.
But current analysis of MiFID II’s impact on transparency have been mixed. Conflicts have arisen between what is the best deal for the firm and for the client. Meanwhile, some clients need better information about how the firm they have hired is conducting business on their behalf, so if they aren’t satisfied they have enough information to complain.
The objectives of MiFID II can only be accomplished once the relevant data from trading venues are consistently complete and correct. With quality data it is possible to clearly see liquidity in the markets, providing comfort that markets are working adequately and the ability to conclude whether a market is stable or at risk.
But over the past year, it is clear firms are trying to get their head around this issue. In fact, back in October, the European Securities and Markets Authority (ESMA), the body that looks at the completeness and availability of transactions and trades, announced it was unsatisfied with the quality of data under MiFID II.
Where are we heading?
If one thing is for sure, it’s that under MiFID II, compliance is an evolving process not a one-off event. In the coming weeks, months and years MiFID II will remain an ongoing challenge for firms and strategic and operational flexibility will be needed if they are to flourish.
There remain a number of areas of uncertainty and still subject to debate. What remains for the regulation in a post-Brexit world? Will the regulator finally begin to crack down on non-compliance?
MiFID II absolutely has the potential to have a significant and positive impact on the industry in many ways. Collaborative partnerships, innovation and further guidance from regulators are critical to this impact becoming a reality.
The FCA has already stated that as long as it can see genuine attempts from firms taking action to be compliant, it will work alongside them, rather than punish them.
What can firms do?
The sorts of questions firms were asking themselves a year ago, they should be revisiting now, and the most pressing question of these remains ‘How are we training our staff?’
Like GDPR and SMCR, MiFID II is about changing cultures and affecting behaviours to bring about better outcomes for customers. Good systems will get you so far, but it’s people who will keep you compliant.
In autumn 2017, Unicorn Training launched their MiFID II overview and associated updates to CASS, CIOBS and transaction reporting to support firms and staff in understanding the key changes coming in and what their legislative expectations were.
However, there is evidence that although staff might have undertaken the necessary training a year ago, they have not continued to develop themselves.
For T&C, L&D, HR and/or compliance managers tasked with managing staff through the on-going MiFID II minefield, the key is being able to deploy content, monitor, report, automatically assign learning, send email reminders and create role-based pathways to deliver the right learning to the staff that need it.
It is about taking a campaign-based approach to learning where a MiFID II topic consists of a series of distinct activities that an individual can fit around their daily tasks when it suits.
For example, a short video to engage them, some microlearning modules focusing on a single outcome, contextual case studies and scenarios to practice applying knowledge in a life-like situation. Then give them a reminder of the key points as the only certainty is, if the learning isn’t applied quickly and regularly, it will be forgotten.
Also if your firm is not already a member of the IA, it could really help as they can support firms in identifying gaps, employing the right training and providing insight as to what other firms have done to be successful in the first 12 months.
As MiFID II continues to settle in and uncertainty fades, a more transparent, competitive and trustworthy industry should begin to emerge, with confidence in markets increasing and greater consumer protection.
It is going to take some time to get there, but positivity remains that this legislation will do the job it was brought in to do.