Financial industry struggles with MiFID II compliance
29 Nov 2023
According to Qomply, the financial industry is struggling with MiFID II compliance. The company cites evidence which suggests that 50 per cent of firms are still not compliant. Qomply’s newly-appointed Sophia Fulugunya, director of transaction reporting, explains more
Image: Qomply
There is growing speculation about the onset of MiFID III — a reworked transaction reporting regime adapted from 2018’s original incarnation. The financial industry has come to accept that reporting daily transactions has become a stalemate in trading operations. With transaction reporting changes on the horizon, it’s no surprise that technology firms are investing in their innovation.
The recent appointment of Sophia Fulugunya as director of transaction reporting for regulatory technology firm Qomply signals a new era of combining regulatory expertise with advanced technology that will mitigate regulatory risks for firms.
Fulugunya’s professional background includes a six-year tenure at the UK Financial Conduct Authority (FCA), where she specialised in MiFID II transaction reporting and instrument reference data regimes. During her time at the FCA, Fulugunya played a pivotal role in the markets reporting team (MRT), where she reviewed more than 400 notifications of errors and omissions from a diverse range of firms, including major investment banks and smaller entities. Her responsibilities extended beyond error reviews, encompassing in-depth analysis to ensure the accuracy of transaction reports. She also assisted investment firms with onboarding to the FCA’s market data processor (MDP).
As the industry murmurs about MiFID III, a crucial question arises: Do firms truly understand the requirements of the current MiFID regime?
Fulugunya observes: “In preparation for the MiFID II go-live, many firms rushed to simply produce transaction reports and worried about their accuracy later downstream.
Some firms even assumed that an intermediary was conducting accuracy checks and took their hands off the wheel.”
As the FCA increased their scrutiny of data quality and contacted firms, many were left with daunting remediation exercises to correct historic mistakes. Almost six years on, firms are discovering issues stemming back to 2018 as they face challenges such as issues with static data, related to unreachable clients. Additionally, approved reporting mechanisms (ARM) may charge punitive fees, costing larger firms upwards of £200,000 just to submit reports, not accounting for other resources spent on error remediation.
“In contrast, firms who kept their eye on the ball and ran adequate testing before go-live, and have since conducted rigorous accuracy and reconciliation tests post MiFID II, are sitting comfortably,” affirms Fulugunya.
“Simple maths tells us that proactively reconciling records under the current regime, and establishing appropriate systems and processes to streamline the transition, saves valuable resources that can be redirected to more profitable areas of the business,” she adds.
FCA data, released earlier this year, revealed concerning compliance rates with the key regulatory obligation to reconcile. Alarmingly, in 2022, less than half of UK MiFID investment firms had requested data extracts from the regulator’s MDP, indicating a significant lapse in compliance. Market participants have experienced FCA outreach to this effect, leaving smaller firms scrambling for solutions, often filled by technology.
In addition to emphasising the importance of reconciliations, the FCA’s MarketWatch 74 publication underscores a concerning trend: fewer than 50 per cent of firms (343) that requested data extracts in the same year have followed through with submitting errors and omissions notifications to the FCA. It is crucial to note that notifying the regulator of errors within a firm’s reports is a requirement outlined in the relevant regulatory technical standards (RTS). The challenges lie in the fact that firms often struggle in this area, particularly when trying to determine what constitutes ‘material’ errors.
While the regulation doesn’t explicitly prescribe what qualifies as ‘material’, industry knowledge indicates that the regulator has proactively engaged with firms on various issues, such as late reporting, inaccurate data (including tags falling outside of the mandated 65 fields), and instances of both underreporting and overreporting.
To navigate this, it’s essential to consider if reports need to be cancelled or amended, if changes need to be made to systems or controls, and lastly, if an issue requires escalation to relevant committees.
If the answer to any of these is ‘yes’, a notification should be promptly submitted once the necessary information is known. This proactive approach ensures that firms fulfil their regulatory obligations and maintain transparency with the regulator, ultimately contributing to a more robust and compliant reporting framework.
If firms have not yet cleaned up their reporting quality, then it’s only a matter of time before the regulator comes knocking. “Firms often contact us when they have received a nudge from the FCA’s MRT regarding errors and omissions in their transaction reporting,” says Fulugunya.
“Thorough reconciliation is key to avoiding unnecessary regulatory attention, preventing the potential uncovering of issues in other areas of the business.”
The monitoring of firms, and their data quality, certainly continues with momentum across jurisdictions as regulators take enforcement action related to misreporting. Over the summer, the US financial market regulators imposed fines totalling more than US$50 million for reporting failures by some key investment firms.
In the UK, there is evidence to suggest that the FCA has issued several Section 166 notices in this space — one of the enforcement tools in the regulator’s toolbox that compels firms to engage in external oversight of their regulatory obligations.
Most firms dread receiving a Section 166, as it means not only engaging with formalised external expertise but is also seen as a significant first step towards formalised enforcement action that could lead to fines or a risk to business continuity.
Fulugunya summarises this call for action when she says: “I have had the privilege of observing transaction reporting at various quality levels during my time at the UK regulator and in a specialist consultancy firm.
“Regulations governing trade and transaction reporting are inherently complex and, from my experience, many firms are still grappling to fully comprehend the requirements. This complexity has been heightened by recent reporting changes, such as those stemming from Brexit and the upcoming EMIR Refit. Nevertheless, it’s crucial to note that regulators will continue to closely monitor firms’ compliance with the current regime and their ability to effectively implement these changes.”
The inevitability of change underscores the need for a sustainable reporting regime with meaningful data points. Firms that have not yet addressed reporting quality should take heed as the regulatory landscape continues to evolve.
As the industry braces for forthcoming changes, firms that take note of these warnings will be better positioned to successfully navigate the evolving transaction reporting landscape.
The recent appointment of Sophia Fulugunya as director of transaction reporting for regulatory technology firm Qomply signals a new era of combining regulatory expertise with advanced technology that will mitigate regulatory risks for firms.
Fulugunya’s professional background includes a six-year tenure at the UK Financial Conduct Authority (FCA), where she specialised in MiFID II transaction reporting and instrument reference data regimes. During her time at the FCA, Fulugunya played a pivotal role in the markets reporting team (MRT), where she reviewed more than 400 notifications of errors and omissions from a diverse range of firms, including major investment banks and smaller entities. Her responsibilities extended beyond error reviews, encompassing in-depth analysis to ensure the accuracy of transaction reports. She also assisted investment firms with onboarding to the FCA’s market data processor (MDP).
As the industry murmurs about MiFID III, a crucial question arises: Do firms truly understand the requirements of the current MiFID regime?
Fulugunya observes: “In preparation for the MiFID II go-live, many firms rushed to simply produce transaction reports and worried about their accuracy later downstream.
Some firms even assumed that an intermediary was conducting accuracy checks and took their hands off the wheel.”
As the FCA increased their scrutiny of data quality and contacted firms, many were left with daunting remediation exercises to correct historic mistakes. Almost six years on, firms are discovering issues stemming back to 2018 as they face challenges such as issues with static data, related to unreachable clients. Additionally, approved reporting mechanisms (ARM) may charge punitive fees, costing larger firms upwards of £200,000 just to submit reports, not accounting for other resources spent on error remediation.
“In contrast, firms who kept their eye on the ball and ran adequate testing before go-live, and have since conducted rigorous accuracy and reconciliation tests post MiFID II, are sitting comfortably,” affirms Fulugunya.
“Simple maths tells us that proactively reconciling records under the current regime, and establishing appropriate systems and processes to streamline the transition, saves valuable resources that can be redirected to more profitable areas of the business,” she adds.
FCA data, released earlier this year, revealed concerning compliance rates with the key regulatory obligation to reconcile. Alarmingly, in 2022, less than half of UK MiFID investment firms had requested data extracts from the regulator’s MDP, indicating a significant lapse in compliance. Market participants have experienced FCA outreach to this effect, leaving smaller firms scrambling for solutions, often filled by technology.
In addition to emphasising the importance of reconciliations, the FCA’s MarketWatch 74 publication underscores a concerning trend: fewer than 50 per cent of firms (343) that requested data extracts in the same year have followed through with submitting errors and omissions notifications to the FCA. It is crucial to note that notifying the regulator of errors within a firm’s reports is a requirement outlined in the relevant regulatory technical standards (RTS). The challenges lie in the fact that firms often struggle in this area, particularly when trying to determine what constitutes ‘material’ errors.
While the regulation doesn’t explicitly prescribe what qualifies as ‘material’, industry knowledge indicates that the regulator has proactively engaged with firms on various issues, such as late reporting, inaccurate data (including tags falling outside of the mandated 65 fields), and instances of both underreporting and overreporting.
To navigate this, it’s essential to consider if reports need to be cancelled or amended, if changes need to be made to systems or controls, and lastly, if an issue requires escalation to relevant committees.
If the answer to any of these is ‘yes’, a notification should be promptly submitted once the necessary information is known. This proactive approach ensures that firms fulfil their regulatory obligations and maintain transparency with the regulator, ultimately contributing to a more robust and compliant reporting framework.
If firms have not yet cleaned up their reporting quality, then it’s only a matter of time before the regulator comes knocking. “Firms often contact us when they have received a nudge from the FCA’s MRT regarding errors and omissions in their transaction reporting,” says Fulugunya.
“Thorough reconciliation is key to avoiding unnecessary regulatory attention, preventing the potential uncovering of issues in other areas of the business.”
The monitoring of firms, and their data quality, certainly continues with momentum across jurisdictions as regulators take enforcement action related to misreporting. Over the summer, the US financial market regulators imposed fines totalling more than US$50 million for reporting failures by some key investment firms.
In the UK, there is evidence to suggest that the FCA has issued several Section 166 notices in this space — one of the enforcement tools in the regulator’s toolbox that compels firms to engage in external oversight of their regulatory obligations.
Most firms dread receiving a Section 166, as it means not only engaging with formalised external expertise but is also seen as a significant first step towards formalised enforcement action that could lead to fines or a risk to business continuity.
Fulugunya summarises this call for action when she says: “I have had the privilege of observing transaction reporting at various quality levels during my time at the UK regulator and in a specialist consultancy firm.
“Regulations governing trade and transaction reporting are inherently complex and, from my experience, many firms are still grappling to fully comprehend the requirements. This complexity has been heightened by recent reporting changes, such as those stemming from Brexit and the upcoming EMIR Refit. Nevertheless, it’s crucial to note that regulators will continue to closely monitor firms’ compliance with the current regime and their ability to effectively implement these changes.”
The inevitability of change underscores the need for a sustainable reporting regime with meaningful data points. Firms that have not yet addressed reporting quality should take heed as the regulatory landscape continues to evolve.
As the industry braces for forthcoming changes, firms that take note of these warnings will be better positioned to successfully navigate the evolving transaction reporting landscape.
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