October 17 2016

Introduction

The Financial Services industry in Europe is facing radical new changes to the way its business is regulated. The recasting of the Markets in Financial Instruments Directive, known as MiFID II, represents the biggest shake-up of regulatory legislation in the European financial sector for over a decade. Far-reaching new rules aim to strengthen investor protection, prevent market abuse, increase transparency and re-establish consumer trust. However, meaningful engagement with the Directive has been slow. The scale, complexity and number of new regulations has resulted in a delayed response across the industry - and for firms based in the UK this has been compounded further by the result of the recent EU referendum. In this article we take an at-a-glance look at MiFID II and address some common misconceptions regarding the impact of the Brexit vote.

What is MiFID II?

  • MiFID II is the second casting of the Markets in Financial Instruments Directive, a cornerstone for the regulation of European investment services in Europe.
  • The Directive is issued by the European Commission and is due to come into force in January 2018.
  • The aim of the new legislation is to overhaul, strengthen and extend the existing regulatory system for financial markets in the EU.

Who Will Be Affected by MIFID II?

  • MiFID II will impact upon firms and trading venues that deal in the provision of financial instruments and services within the EU.
    For example:
    • Investment firms
    • Credit institutions
    • Portfolio managers
    • Broker-dealers
    • Stock brokers
    • Corporate finance companies
    • Market operators
    • Central counterparties
    • Data service providers
  • Global reach: MiFID II also introduces new regulations for investment service providers and counterparties based outside of the EU. Known as ‘Third Countries’, entities based outside of the European bloc will be required to demonstrate regulatory equivalence and some may even be required to establish a branch and become licensed for business within an EU member state.

The Key Objectives of MiFID II

  • Mitigate risk; to create a stable, responsible and transparent financial system
  • Provide robust levels of investor protection
  • Increase competition within EU financial markets
  • Standardise EU regulation to create a level playing field
  • Update and strengthen supervisory and enforcement powers
  • Safeguard market quality and trustworthiness
  • Introduce a new category of trading venue: the organised trading facility, or OTF
  • Introduce standardised conduct obligations to promote good governance
  • Enhance monitoring to identify breaches, disorderly trading and market abuse; this includes the mandatory recording and retention of all communications made with the intention to trade or supply a service
  • Increase transparency
  • Regulatory Equivalence for ‘Third Country’ entities operating within the EU

Common Misconceptions About MiFID II

  • "Brexit means that MiFID II will not apply to firms based in the UK"
    There is a common misconception that because the UK has voted to leave the EU, MiFID II will no longer apply. For several reasons, this is not the case:
    • Timing - MiFID II is due to come into effect on 3rd January 2018. It is highly unlikely that the UK will have officially left the EU by then and so UK-based firms will still be bound by EU laws and regulations.
    • Third Country Equivalence – even if the UK has left the EU before MiFID II becomes effective, the scope of MiFID II extends to businesses based outside the bloc that wish to trade with entities within the EU. This means that if UK firms wish to continue to trade with or provide services to European entities they must be able to demonstrate regulatory equivalence with MiFID II.
    • The official FCA position – the financial regulatory body in the UK, the FCA, has made it clear that the UK is firmly committed to meeting the January 2018 implementation date for the Directive and that it expects all firms to continue to abide by their obligations under UK law - including those derived from EU law - and to continue with implementation plans for any legislation that is still to come into effect, regardless of Brexit.
    • Our G20 commitments - included within MiFID II are provisions that, in tandem with the European Market Infrastructure Regulation (EMIR), are intended to address the G20’s commitment to reform the derivatives market in the wake of the financial crisis of 2008. As a member of the G20, the UK dismissed tackling these reforms in isolation, choosing instead to adopt a European-wide policy – a decision which it is highly likely to uphold post-Brexit.
  • "We already record our calls so we’ve got it covered"
    A common mistake many firms make is believing that simply recording their calls will meet their MiFID II recording obligations. It doesn’t! MiFID II goes much further than simply recording calls and obliges firms to record all forms of communication where there is an intention to instigate a trade or provide a service- regardless of whether the call actually results in a trade or the provision of a service or not. This includes telephony (fixed and mobile), email, SMS messages, chat services and face-to-face meeting content (although there is currently no mandatory requirement for voice recording in face-to-face meetings – minutes will suffice – firms should consider the many benefits of recording voice, video and presentation material in meetings). In addition, MiFID II stipulates that recordings and meeting documentation must be stored in a robust, secure and easily searchable format for a minimum of five years. At the very least firms should be conducting an immediate root-and-branch review of recording procedures, policies, and storage facilities in order to ensure their business will be ready to meet the new compliance obligations.
  • "We outsource our compliance and/or recording liability to an external vendor, so it doesn’t affect us"
    For many firms, outsourcing compliance and/or the provision of IT services to an external vendor can be a convenient and cost effective strategy for managing complex regulatory requirements. Minimising the need for costly in-house training and infrastructure, the outsourced approach does offer attractive benefits, particularly for the smaller outfits that value agility. However, all firms should be aware that outsourcing compliance or recording services does not defer the responsibility for meeting compliance obligations. Regardless of the size of the organisation, it remains the firm’s responsibility to instruct third-party vendors of what services they require – particularly when it comes to complex regulations like MiFID II – and to ensure that those services are being adequately provided. After all, in the worse-case scenario it will be the firms that are left facing sanctions from the FCA, not the third party service vendors.

In Conclusion

All firms should be aware that MiFID II will soon be upon us and that a positive engagement with the Directive is now required in order to ensure compliance with the incoming regulations. The responsibility for ensuring that the business is compliant ultimately lies with the firm – regardless of whether compliance or IT liabilities are outsourced to external service providers. As a priority, all firms should consider an immediate root-and-branch review of their current communications recording, analysis and retention solutions as well as reviewing their compliance and risk management policies. It is highly unlikely that existing measures will meet the stringent compliance requirements set out by MiFID II, so it is vital for firms to obtain a full understanding of their current position in order to map out any required changes to policies or infrastructure. In addition, firms based in the UK must also be aware that the result of the EU referendum in no way diminishes the degree to which they must adhere to MiFID II. The financial regulatory body in the UK, the FCA, has made it clear that UK firms will be expected to maintain their current course to becoming MiFID II compliant by January 2018. If anything, UK firms could find themselves subjected to even greater levels of scrutiny as a result of Brexit; trading as a Third Country within the EU means that the UK will now have to prove regulatory equivalence and the complexity of that process is yet to be discovered. For further advice about MiFID II contact Weston Digital Technologies today and discover how your business can meet its new compliance obligations.

MiFID II - An Opportunity


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