Far from being over, MiFID II is in its infancy. Wealth management firms are still only part way through a long journey towards a destination which is still being defined.
Principles or pragmatism?
While the first year under MiFID II passed by relatively quietly from a disciplinary perspective, there are now strong signs that the honeymoon period is over and the regulator is taking the gloves off. In the first half of 2019 the FCA imposed 14 different fines totalling almost £320m, five times more than for the whole of 2018.1
While fines dent the balance sheet, the real impact of a penalty is the reputational damage it inflicts. Given that the financial services sector continues to have a trust issue with the general public, this is a risk not only for the firms fined, but for the industry as a whole.
At the same time, rigid insistence on compliance is likely to affect smaller, potentially more agile and client-friendly firms disproportionately. This is partly because they have fewer resources to address regulatory issues in the first place, and partly because they are more likely to struggle to absorb the financial impact of a fine. Ultimately, the regulations may have the opposite effect to what was intended, increasing the power and dominance of larger firms to create an oligopoly. As a result, the FCA may find itself caught between consistency and a necessary pragmatism.
It’s all about the data
Fundamentally, MiFID II is all about the data: how you manage it, how you manipulate it and how you store it. To ensure complete transparency, everything needs to be backed up with evidence in the form of data of some kind.
The FCA itself has stated that firms failing to demonstrate compliance with costs and charges disclosure often lay the blame on the difficulty of getting the required data from third parties. As a result, firms show reluctance to implement technology upgrades to support information disclosure to clients, as they aren’t confident about the accuracy and delivery of such data.2
Similarly, with transaction reporting, assessing the eligibility of the transaction itself is just the beginning. Firms then have to determine which of the 65 fields need to be populated and ensure all that data is both available and accurate.
Ultimately, that means more automation and less human intervention at every stage. Once again, smaller firms are more vulnerable in this area, as data accuracy requires huge resource and they are less able to benefit from efficiencies of scale.
RegTech promises much in terms of an answer, but it can only be as good as the human expertise employed to build it.
Taming the MiFID II beast
With this in mind, we are collaborating with both clients and industry partners to continue to develop innovative solutions to the challenges presented by MiFID II.
One example is our project in partnership with Altus, which aims to develop a more agile and efficient approach to ensuring full regulatory compliance and adapting to new regulation. The fact that the FCA handbook is machine-readable makes it possible to map our capabilities and link these electronically to the handbook itself. Any changes will then be automatically flagged and assessed, so that we can anticipate the impact and act accordingly, for ourselves and our clients.
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