Innovations in Identity

MiFID II – Coming Soon to a Regulator Near You

With the smashing success of the original MiFID, you knew there’d be a sequel. MiFID II promises to be just as exciting, and is coming soon — really soon — on January 3, 2018.

It’s not a movie, but for many EU compliance professionals, it’s a thriller. MiFID is short for Markets in Financial Instruments Directive and has wide-ranging impacts on numerous trading compliance activities. With the deadline looming and much to consider, Mark Steward, FCA executive director of enforcement strongly urges firms who have not already started preparing for the MiFID II deadline, “need to take action now.”

Smith & Williamson, a UK fund manager, in a survey found 73 percent of advisors did not have enough clarity to properly prepare their business in time for the deadline. If advisors from other countries, are in the same boat, it looks like there’ll be a lot of scrambling before the holidays to get things in order.

Some of the biggest concerns were outlined in a MiFID II post we published over a year ago. For example, the record-keeping requirement continues to be a stumbling block for compliance. While the specific requirement for recording calls has been relaxed, the need for systematic and thorough records is still required. Many firms have decided to just go ahead with call-recording anyways, to ensure accuracy and remove any possible doubts.

Another concern is around the conflict of interest rules. One aspect of these rules is the unbundling of research from transactions; once MiFID II takes effect, fund managers will have to directly pay for research, as opposed to combining the fee with trading commissions. This is deeply impacting the trading research industry in Europe, resulting in some firms having to absorb the cost, and others sharing access on platforms to split costs.

And, some firms might just decide to cut down on the research. According to Capital Access Group (CAG), in the UK “predicted payments for research could fall to just £90 million in 2018, a 55 percent decrease from the year before and the implementation of MiFID II.” This is bad news for analysts, as the number of positions “could also halve in the next 12 months and fall by two-thirds over the next three years.”

In a similar vein, cost disclosure rules is also causing some strife. MiFID II requires disclosure of all costs including advice and third-party payments. However, this is potentially problematic, as it’s difficult to parcel out overall costs to provide clients with the accurate total cost of ownership.

According to the latest KPMG Evolving Investment Management Regulation (EIMR) report, “The fund management industry has consistently expressed concerns that the presentation of costs could mislead investors into thinking they are less than they are and that the methodology for transaction costs will often give rise to negative or overly-inflated, and therefore misleading, figures.”

An additional requirement is the need for every trade to have a legal entity identifiers (LEIs); no LEI, no trade. The Legal Entity Identifier (LEI) is a unique 20-character, code to identify a legally distinct entity. Companies need to examine all client records for the LEI, improve their onboarding to include this data and verify the validation of the format and the content of the identifier provided by the client. If the client is an individual, use a natural person identifier, such as a passport or a national ID number.

This topic was recently (Oct. 9) highlighted by the European Securities and Markets Authority (ESMA), which notes, “ESMA expects market participants to take all necessary steps to ensure full compliance with the LEI requirements under MiFID II.” It went on to urge “reporting entities not to delay in addressing this important matter.”

That advice, not to delay, is good advice across the board for MiFID II compliance. With many other companies performing the same checks and finding gaps that need fixing, there are numerous possible bottlenecks to delay compliance. Companies might find themselves having to fulfill multiple requests for different vendors. Or, applications for new records might be backlogged in a queue.

With implementation about 10 weeks away, hopefully you’re well on your way to compliance. Remember, thrillers are only thrillers if you don’t know what is around the corner. By understanding potential pitfalls and taking action early to avoid them, you’ll avoid surprises.

The information in this blog is intended for public discussion and educational purposes only. It does not constitute legal advice.

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