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The slow burn of MiFID II implementation - not over yet


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Summary: New European rules on financial markets came into force today, but full implementation is likely to take a considerable length of time. Daniel Csefalvay looks at the issues raised by MiFID II, and what firms should do to avoid unwanted attention from the regulator.

MiFID II and legal uncertainties 

MiFID II introduced some of the most far-reaching and fundamental changes to the way financial markets and investment firms operate. The nature, scale and complexity of the subject-matter covered by the legislation, coupled with the overwhelming volume and complexity of the regime itself, has led to persisting legal uncertainties on certain key issues. It has also resulted in practical difficulties in implementation, particularly the design of IT systems to handle the increased data management and new reporting obligations. 

In September 2017, the FCA acknowledged these challenges and outlined an approach to the enforcement of MiFID II obligations which would be "proportionate" rather than based on strict liability. While this principle of apparent regulatory forbearance is welcome, it would be risky for firms to place undue reliance on it. 

What should firms consider? 

Some firms have been engaged in vast MiFID II implementation projects over several years. Others have been slower or less proactive in preparing for the commencement. Accordingly, the level of compliance across the industry is varied and the FCA has acknowledged this. 

In order to help mitigate the risk of FCA attention, all firms need to understand the status of their MiFID II projects, determine what gaps still exist and then undertake further implementation work to achieve full compliance. For some firms, due to their current level of compliance, this will mean continuing with full MiFID II implementation without respite until the relevant gaps have been closed. 

When doing this, firms should consider the following: 

  • Scoping and application issues: firms must be comfortable that all relevant provisions of MiFID II have been considered in the context of the business they undertake. Internal decisions on the application or non-application of obligations under MiFID II need to be evidenced, as does the implementation plan to give effect to those decisions. 
  • Where compliance with an obligation is open to alternative interpretations - and there are many examples in MiFID II - firms should ensure they have a documented, reasonably defensible position to justify the approach they have taken to the regulator. In such cases, the FCA is less likely to take action against a firm. 
  • To the extent that such matters are not appropriately documented, firms should take action without delay. The FCA has indicated on many occasions that the absence of documentation and appropriate audit trails of decision-making and subsequent implementation can lead to a presumption of non-compliance by the firm. 
  • Regulatory and industry developments: the MiFID II regime will continue to evolve. The European Securities and Markets Authority (ESMA) is to publish further Level 3 guidance on a range of issues shortly. In addition, the industry's approach to costs and charges disclosure and compliance with the mandatory trading obligation for derivatives are likely to be subject to change. 
  • Firms need to ensure that their approach takes these developments into account and that, where required, appropriate changes are made to the relevant MiFID II compliance arrangements. These may include policies, procedures, IT systems and client-facing documentation. The nature of such changes could be significant, particularly where a 'correct' interpretation becomes clear, but the firm had, justifiably taken a different stance on that particular issue. 
  • Monitoring of systems and outsourcing: firms must carry out ongoing monitoring and assessment of IT systems and reporting mechanisms to ensure performance meets obligations under MiFID II. Likewise, outsourced service arrangements need to be effectively supervised by the outsourcing firm. 
  • The assessment of these arrangements will be particularly important in the context of transaction reporting, transparency obligations, record-keeping and the product governance regime. The FCA has often stressed the central role that transaction reporting data plays in its fight against market abuse. It is likely that there will be less tolerance for obvious failings in the area than in some of the other aspects of MiFID II. For example, in relation to the application of the product governance rules to vanilla private side capital raisings, technical difficulties in approach may not necessarily undermine the regulatory objectives of the regime in such a clear way. 

MiFID II has already imposed an immense burden on the financial services industry. Nevertheless, firms will need to continue to devote significant resource to implementation and to consult external advisors in order to avoid regulatory scrutiny and, in a worst case scenario, potential enforcement action. 

To find out more about the knock on effects from MiFID II and other financial regulation, download a copy of our 2018 Emerging Themes report. 


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