Compliance and Regulatory Consulting
Local and global compliance expertise.Compliance and Regulatory Consulting
Duff & Phelps' Nick Bayley is a managing director in the Compliance and Regulatory Consulting practice and has partnered with Hedgeweek to provide a monthly blog series providing insight on this imminent regulatory change.
Prior to this, Nick was a Head of Department in the FCA's Markets Policy and International Division, FCA Senior Markets Advisor, and was responsible for the UK regulator’s MiFID II Policy Project.
It’s January 3, 2018. Hallelujah! Christmas has been and gone. The festive cheer over for another year. But there’s one more gift welcoming everyone as they head back to their offices: MiFID II has officially come into effect.
What now you ask? What should you focus in on as a matter of priority, as your funds business prepares for life under this new regime?
Regulators don’t like talking about regulatory forbearance but there has already been a certain amount of this with respect to MiFID II. That said, there are certain regulatory ‘hot button’ issues in the eyes of the regulators, such as transaction reporting and research unbundling that they will want to see firms progressing.
The regulator has been clear in stipulating that firms must have a plan in place and be working towards achieving compliance. Buyside firms have got to prioritise what they need to do and focus on the things that have the greatest impact.
If you have a lot of clients that you have not repapered, for example, and you haven’t changed your terms and conditions to be MiFID II compliant, or you’re not providing costs and charges disclosures in your marketing documents, it might be advisable to get this completed as soon as possible, otherwise you will potentially be running legal risk as well as regulatory risk.
For now, be pragmatic and apply the Pareto Principle. With relatively little effort, by focusing initially on 20 per cent of the highest priority items you should be able to achieve 80 percent of the outcomes and stay out of trouble with the regulator.
It will all have to be done eventually. There will be further time over the coming months to finish dotting the i’s and crossing the t’s. The regulator understands this.
Buyside firms should ensure that the research they are receiving is on the right basis. Pricing agreements will still need time to settle down but portfolio managers need to check that they are not receiving free research because it is one of the regulator’s hot button topics. The regulation is very clear that emails must be blocked if there is no research payment arrangement in place.
I suggest firms should turn the screws on those brokers who haven’t done this already. ‘I can’t receive this anymore. Come up with a sensible pricing arrangement now or I will have to turn it off’. Now may be the time to adopt a slightly less flexible stance with some of your counterparties.
On the transaction reporting side, I don’t think there’s much excuse if buyside firms haven’t done the work by now preparing for this, selecting their ARM, preparing their data and so on. They are asking for trouble if they’ve yet to do this and they should put it at the top of their priority list.
Record keeping is another high priority area that can yield some good progress in keeping with the Pareto Principle. Under MiFID II, there is a new obligation to record and retain telephone calls and electronic communications. If records aren’t kept properly, trying to retrieve calls or email communications will become the devil’s own job and manual work-rounds are likely to be pretty painful.
It is the investment firm’s discretion, within the rules, as to exactly which internal calls are recorded. The main point is that the firm needs to have a robust audit trail that can show how an investment decision was arrived at and that appropriate record-keeping arrangements, capable of being monitored, are in place.
Take a reasoned approach. Be thoughtful. Show that you’ve considered the new regulation and taken a systematic, rigorous approach to complying with it.
The same is also true of product governance. Investment firms will need to have a clear two-way dialogue with third party platforms and distribution partners to track whether or not their funds are being sold to the right investors in the right target markets.
Proportionality is everything in the product governance model: no one is expecting highly elaborate product governance arrangements for simple products. It’s when you get into complex structured products that the risks rise; as do the regulators’ expectations.
If you’ve sat down and had a good go at doing your target market analysis, you’ll probably have time to refine it later.
It might appear to be the dawn of a new age under MiFID II. But don’t feel overwhelmed. Focus on some of the key issues mentioned above and others you judge to be critical and
it will go a long way to achieving compliance. That is all the FCA can possibly expect at this early stage.
So take a deep breath. Pour yourself a coffee. And start applying the Pareto Principle with immediate effect.