MiFID II finally comes into force – but is there more to be done?
The latest version of the Markets in Financial Instruments Directive – or MiFID 2 for short – came into force on January 3rd.
The sprawling piece of legislation is designed to make European markets more transparent and efficient, while restoring investor confidence in financial institutions after the global economic crisis in 2008.
Compliance with MiFID II has been a considerable undertaking for many businesses. A Thomson Reuters survey in September 2017 predicted compliance costs would rise 28 per cent over the next 12 months and remain at this level for three years.
Firms claiming to have the most knowledge about MiFID II forecast they would spend an average of $158 million (£112 million) on compliance within the first year of implementation.
Did businesses meet the deadline?
Clearly, the introduction of MiFID II is just the beginning of many firms’ compliance journey.
A Timico survey released less than 30 days before the deadline found that 39 per cent of financial institutions weren’t sure whether or not they were compliant with the directive. Only eight per cent confirmed staff were fully aware of the changes and had received appropriate compliance training.
The good news for British firms is that the Financial Conduct Authority (FCA) appears to be taking a reasonable approach to potential non-compliance.
In September, director of enforcement and market oversight at the FCA Mark Steward said the organisation intends to “act proportionately” and will not take a strict liability approach.
“We have no intention of taking enforcement action against firms for not meeting all requirements straight away where there is evidence they have taken sufficient steps to meet the new obligations by the start date,” he added.
The ongoing burden of compliance
Nearly a month has passed since the initial scramble to comply with MiFID II. Optimas data estimates the total cost for meeting the directive’s obligations has been €2.5 billion (£2.2 billion) so far, with a further €700 million required annually to maintain compliance over the next five years.
Where will this money go? It’s difficult to say, particularly as not all elements of the directive have yet been implemented.
A central policy, which would temporarily bar large amounts of stocks from being transacted in ‘dark pools’, was delayed.
Dark pools are private venues where prices are only revealed after a transaction is completed – MiFID II will attempt to shift these trades back into the public domain for better transparency.
However, the European Securities and Markets Authority said trading venues had failed to provide complete data in order for the changes to go ahead. This has left many organisations in the dark about how the rules will affect their operation once they are introduced later in the year.
The key challenges so far
Organisations are already identifying some of the key challenges they expect to face in the coming months.
The biggest hurdle for many investment managers is the new client reporting requirements. Nearly 50 per cent of respondents to a Northern Trust survey said the complexities of disclosing transaction costs would be an ongoing obstacle.
Money Marketing reported that investors might be paying as much as three times more in transaction charges than they thought. Previously, these fees could be bundled in with the ongoing costs figure of a fund, but now transaction costs must be listed separately.
“We knew [Mifid II] was going to be a shock to people. IFAs now have to go back to their clients and say, in reality, they have always been charged as high as two or three per cent instead of one,” said SCM Direct partner Gina Miller.
However, despite the challenges, two-thirds of respondents in the Thomson Reuters survey believe MiFID II will benefit their organisation overall. This figures rises to 75 per cent for businesses that were the most knowledgeable about the directive.
Businesses preparing for a MiFID II future
The consensus from many businesses is that the MiFID II implementation date was just the beginning of a long-running compliance obligation.
In fact, two-thirds of investment managers believed 2018 would demand more of their time for regulatory issues than in 2017. This is despite the fact that many organisations should have completed a large amount of preparations for MiFID II and the GDPR last year.
“Whilst it’s surprising the effort spent by the industry on regulatory compliance is expected to increase, MiFID II will require ongoing efforts for the duration of 2018,” said Robert Angel, head of regulatory solutions at Northern Trust.
Other areas of compliance that the Northern Trust research highlighted as challenges this year were inducements and research requirements (20 per cent) and large-scale updates to client documentation (15 per cent).
It is perhaps not a shock, therefore, that MiFID job adverts quadrupled in the year to November. With €700 million a year being spent on complying with the directive until 2023, we can expect demand for MiFID II skills to remain high for the rest of this year and beyond.
If you would like to discuss your MiFID II compliance requirements, please speak to one of our consultants today.