6 December 2017

MiFID II - the final furlong

With under a month left until the implementation of MiFID II, we are seeing mixed progress towards compliance.

As we enter the final furlong, some firms seem to be completing the first hurdle as they progress through the gap analysis stage. Meanwhile, others have demonstrated strong progress towards implementing solutions and now have the finish line in sight. No matter what stage you are at, we thought it would be useful to share some of our key observations:

  • Documenting product governance remains a challenge in the way that firms ascertain the correct target market, and what could potentially be the metrics for ensuring appropriate management information (MI) is in place to monitor the performance of distributors. We’ve seen regulatory communications to firms on this point, so it is an area of concern for the FCA;
  • Disclosure of ex-ante cost and charges is proving difficult for a number of firms, who are, together with trade bodies and associations, trying to decipher what ex-ante cost disclosures will look like and what will be the necessary frequency to disclose such information. Firms need to conclude their stance on how they will itemise their ex-ante costs and charges to allow testing in December;
  • Understanding the relevant Transaction Reporting universe. Firms are still grappling with what is reportable under MiFIR where the underlying asset to an instrument is traded on a trading venue. Work is still ongoing for many firms as the final draft Regulatory Technical Standards (RTS) for derivative trading obligations was only published on 28 September 2017, although we are seeing that many are close to concluding their approach in this particular area;
  • Some firms are still working on client categorisation, and in particular understanding how to categorise local public authorities who do not have the permissions or the operational infrastructure to deal with retail clients. The handling of overseas local authorities who invest in the UK is also proving a complication for some firms;
  • Research unbundling has proved to be an important issue for fund managers, execution brokers and research providers. It is important that a firms’ stance on this is resolved in good time before the implementation of MiFID II. The new requirements on Research Payment Accounts (RPAs) are highlighting new considerations for firms that try to move away from or convert existing Commission Sharing Agreements (CSAs), set a research budget, or allocate research costs proportionately between their products.

With any large or small scale project, the practical implementation and working through all of the regulatory implications alongside the business model impacts is always the most difficult aspect of regulatory change. It requires solid planning, but most importantly the implications on systems and controls, as well as policies and procedures, must be clearly identified, understood and tested. With most new requirements, staff training is important for ensuring long-term positive results.

If you are not yet in your final furlong, there is still time to achieve MiFID II compliance before January and the next few weeks are critical as we approach the home straight. If you would like to discuss any aspects of your MiFID II programme, please do not hesitate to contact us.

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