Firm but fair
04 Oct 2017
As the advent of MiFID II looms, the UK’s FCA has taken a stance of pragmatism, but there are still some failings the regulator will not abide
Image: Shutterstock
In case you’ve missed it, the second Markets in Financial Instruments Directive (MiFID II) is careering towards us at an unrelenting pace. In the UK, the Financial Conduct Authority (FCA) is not only preparing for the challenge of implementation and the influx of data it will bring, it is also laying the groundwork to manage those firms that don’t quite meet the 3 January go-date.
In a speech at the Association for Financial Markets in Europe European Compliance and Legal Conference 2017 in London on 20 September, Mark Steward, director of enforcement and market oversight at the FCA, suggested that the regulator is willing to accept a softer roll-out of MiFID II, saying: “We have no intention of taking enforcement action against firms for not meeting all requirements straight away.”
In the speech, Steward suggested that the regulation is set to improve the FCA’s view of the market, simply through increased data capture.
The FCA currently receives around 20 million transaction reports daily, Steward said, but this figure is likely to increase to 30 to 35 million come January. However, he welcomed the influx of data, saying it will “be a powerful tool that will provide substantial regulatory benefit in the public interest”.
Linda Gibson, director of regulatory change and compliance risk at BNY Mellon’s Pershing, suggests that the main point here is about the FCA getting better quality information. An incredible amount of additional data is going to have to be collected, stored and reported to the regulator.
Gibson agrees that the FCA is taking a pragmatic view to MiFID II implementation, but notes that there are two particular areas the regulator has previously called out, “where it is really looking for firms to be on point”. One of these is the need for any additional permissions a firm will need before 3 January, and one is the legal entity identifiers (LEIs) that will be required for transaction reporting.
The FCA has suggested that firms conducting investment business without the required regulatory permissions could face civil, regulatory and even criminal consequences. Despite this, figures show that a significant number of firms did not file their permissions paperwork before the applications deadline of 3 July this year. Equally, there is some possibility, Gibson says, of the FCA prioritising applications from firms that find themselves under the scope of MiFID for the first time, meaning the potential of additional backlog for other applications.
At the AFME conference, Steward addressed the issue of permissions and the 3 July deadline for applications, saying: “Many firms have managed to meet this deadline, and some have not. Those firms really need to take action now.”
On the issue of LEIs and transaction reporting, Steward said: “All legal entities and individuals acting in a business capacity who are clients of firms subject to MiFID II transaction reporting obligations and firms themselves must have [an] LEI if they wish to carry out transactions from 3 January 2018. Firms must ensure these clients have an LEI before effecting transactions covered by MiFID II on their behalf.”
Gibson particularly stresses: “I don’t think there will be any leeway there.”
She adds: “The FCA is going to be very firm here because, as we know, at a European level, if you don’t have an LEI and you are required to have one, you won’t be able to trade. The regulator will be to-the-letter on LEI collection, which really reflects on the transaction reporting element.”
It is also worth noting that the FCA’s transaction reporting test systems have been up and running for more than two months, and firms should be focused on their testing and overall readiness.
Gibson suggests that this will be a “litmus test” as to whether firms have taken the right approach to MiFID II more generally, proving whether they’re prioritising their requirements appropriately. Because transaction reports will be on a T+1 basis, the first set are due to be with the FCA on 4 January 2017.
She warns: “The FCA has high expectations of firms already subject to transaction reporting rules—their projects must cover what is required for the uptick of transactions under MiFID II.”
Although Steward reinforced the FCA’s position that it will not “take a strict liability approach” to MiFID II enforcement, given the “size, complexity and magnitude of the changes that are required”, his speech did also clarify that those firms that have not made sufficient effort to comply may not be shown the same mercy.
He said: “Many firms have been working well to prepare for next year and they should feel assured and confident that they can continue to work with us to meet the starting line.”
“At the same time, we cannot create a floor for compliance below the required MiFID II standards and so our disposition is likely to be different where firms have made no real or genuine attempt to be ready or where key obligations are deliberately flouted.”
Gibson says: “The FCA has said that, as always, it intends to act proportionately in its approach.”
If a firm doesn’t manage to get every part of its MiFID II project ready for 3 January, as long as the permissions part is complete and the LEIs are in place, it may be given some leeway if not all requirements are met—if it has a credible project plan in place to evidence that sufficient steps have been taken. This plan should “document the firm’s logic and the assumptions they’ve made”, Gibson says.
“If a firm is not compliant in a certain area, it can’t just be because the requirement was overlooked. It would have to demonstrate that compliance has been thought through and measures agreed with oversight from a senior level.”
A firm but understanding approach from the FCA is doubtless intended to encourage those firms in the scope of MiFID that have been striving to meet the compliance deadline, and most firms fall into this category.
But, according to a survey from TeleWare, there is still a significant percentage of affected firms that are not prepared for the fast-approaching finish line.
The communications technology business surveyed 100 senior decision makers at financial services firms, and found that some 47 percent admitted better education is required on the details of what MiFID II requires of them.
Only 42 percent said people in their firms are “aware of MiFID II and are familiar with the requirements”.
While 4 percent said that only those directly affected are familiar with the requirements, a worryingly high 7 percent said employees are “not aware of MiFID II and are not familiar with the requirement”.
Perhaps even more concerningly, this statistic gets worse among larger firms. Among respondents from firms with 500 employees or more, 19 percent admitted that the correct people are not aware of or familiar with their MiFID II requirements. This fell to 5 percent among respondents from firms with between 250 and 500 employees, to 9 percent among firms with 100 and 249 employees, and to 5 percent among firms with 50 to 99 employees.
While there may be a case for more information required, it is unlikely that claiming uncertainty around the requirements will be a suitable reason for non-compliance to MiFID II, come January.
Gibson says: “It would be very hard to make a case pleading ignorance, especially since there has been a year’s delay in implementation.”
Indeed, she points out, the day after the UK’s Brexit vote, the FCA announced it would be continuing with MiFID II implementation, and barely a day goes by without the regulation appearing in trade press.
Gibson concludes: “It would question the effectiveness of that firm’s whole risk, compliance and legal support. A complete lack of awareness would not be a valid enough reason for non-compliance.”
In a speech at the Association for Financial Markets in Europe European Compliance and Legal Conference 2017 in London on 20 September, Mark Steward, director of enforcement and market oversight at the FCA, suggested that the regulator is willing to accept a softer roll-out of MiFID II, saying: “We have no intention of taking enforcement action against firms for not meeting all requirements straight away.”
In the speech, Steward suggested that the regulation is set to improve the FCA’s view of the market, simply through increased data capture.
The FCA currently receives around 20 million transaction reports daily, Steward said, but this figure is likely to increase to 30 to 35 million come January. However, he welcomed the influx of data, saying it will “be a powerful tool that will provide substantial regulatory benefit in the public interest”.
Linda Gibson, director of regulatory change and compliance risk at BNY Mellon’s Pershing, suggests that the main point here is about the FCA getting better quality information. An incredible amount of additional data is going to have to be collected, stored and reported to the regulator.
Gibson agrees that the FCA is taking a pragmatic view to MiFID II implementation, but notes that there are two particular areas the regulator has previously called out, “where it is really looking for firms to be on point”. One of these is the need for any additional permissions a firm will need before 3 January, and one is the legal entity identifiers (LEIs) that will be required for transaction reporting.
The FCA has suggested that firms conducting investment business without the required regulatory permissions could face civil, regulatory and even criminal consequences. Despite this, figures show that a significant number of firms did not file their permissions paperwork before the applications deadline of 3 July this year. Equally, there is some possibility, Gibson says, of the FCA prioritising applications from firms that find themselves under the scope of MiFID for the first time, meaning the potential of additional backlog for other applications.
At the AFME conference, Steward addressed the issue of permissions and the 3 July deadline for applications, saying: “Many firms have managed to meet this deadline, and some have not. Those firms really need to take action now.”
On the issue of LEIs and transaction reporting, Steward said: “All legal entities and individuals acting in a business capacity who are clients of firms subject to MiFID II transaction reporting obligations and firms themselves must have [an] LEI if they wish to carry out transactions from 3 January 2018. Firms must ensure these clients have an LEI before effecting transactions covered by MiFID II on their behalf.”
Gibson particularly stresses: “I don’t think there will be any leeway there.”
She adds: “The FCA is going to be very firm here because, as we know, at a European level, if you don’t have an LEI and you are required to have one, you won’t be able to trade. The regulator will be to-the-letter on LEI collection, which really reflects on the transaction reporting element.”
It is also worth noting that the FCA’s transaction reporting test systems have been up and running for more than two months, and firms should be focused on their testing and overall readiness.
Gibson suggests that this will be a “litmus test” as to whether firms have taken the right approach to MiFID II more generally, proving whether they’re prioritising their requirements appropriately. Because transaction reports will be on a T+1 basis, the first set are due to be with the FCA on 4 January 2017.
She warns: “The FCA has high expectations of firms already subject to transaction reporting rules—their projects must cover what is required for the uptick of transactions under MiFID II.”
Although Steward reinforced the FCA’s position that it will not “take a strict liability approach” to MiFID II enforcement, given the “size, complexity and magnitude of the changes that are required”, his speech did also clarify that those firms that have not made sufficient effort to comply may not be shown the same mercy.
He said: “Many firms have been working well to prepare for next year and they should feel assured and confident that they can continue to work with us to meet the starting line.”
“At the same time, we cannot create a floor for compliance below the required MiFID II standards and so our disposition is likely to be different where firms have made no real or genuine attempt to be ready or where key obligations are deliberately flouted.”
Gibson says: “The FCA has said that, as always, it intends to act proportionately in its approach.”
If a firm doesn’t manage to get every part of its MiFID II project ready for 3 January, as long as the permissions part is complete and the LEIs are in place, it may be given some leeway if not all requirements are met—if it has a credible project plan in place to evidence that sufficient steps have been taken. This plan should “document the firm’s logic and the assumptions they’ve made”, Gibson says.
“If a firm is not compliant in a certain area, it can’t just be because the requirement was overlooked. It would have to demonstrate that compliance has been thought through and measures agreed with oversight from a senior level.”
A firm but understanding approach from the FCA is doubtless intended to encourage those firms in the scope of MiFID that have been striving to meet the compliance deadline, and most firms fall into this category.
But, according to a survey from TeleWare, there is still a significant percentage of affected firms that are not prepared for the fast-approaching finish line.
The communications technology business surveyed 100 senior decision makers at financial services firms, and found that some 47 percent admitted better education is required on the details of what MiFID II requires of them.
Only 42 percent said people in their firms are “aware of MiFID II and are familiar with the requirements”.
While 4 percent said that only those directly affected are familiar with the requirements, a worryingly high 7 percent said employees are “not aware of MiFID II and are not familiar with the requirement”.
Perhaps even more concerningly, this statistic gets worse among larger firms. Among respondents from firms with 500 employees or more, 19 percent admitted that the correct people are not aware of or familiar with their MiFID II requirements. This fell to 5 percent among respondents from firms with between 250 and 500 employees, to 9 percent among firms with 100 and 249 employees, and to 5 percent among firms with 50 to 99 employees.
While there may be a case for more information required, it is unlikely that claiming uncertainty around the requirements will be a suitable reason for non-compliance to MiFID II, come January.
Gibson says: “It would be very hard to make a case pleading ignorance, especially since there has been a year’s delay in implementation.”
Indeed, she points out, the day after the UK’s Brexit vote, the FCA announced it would be continuing with MiFID II implementation, and barely a day goes by without the regulation appearing in trade press.
Gibson concludes: “It would question the effectiveness of that firm’s whole risk, compliance and legal support. A complete lack of awareness would not be a valid enough reason for non-compliance.”
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