The financial crisis from 2008 onwards revealed many gaps in MiFID I, which has been the cornerstone of financial services regulation in the EU since its adoption in 2007.
Although it cannot be solely blamed for the troubles in the financial markets, it did help to highlight the important debate between market stability vs market efficiency. MiFID II has been designed to address the debate and changes in the financial markets not only due to the crises but also because of the changes in business requirements and technological innovation. The revised directive extends the scope of the directive on all areas and does not only focus on market structure and transparency. Depending on business model the scope of these changes can be extremely wide and costly.
New regulations require you to know your customer
One of the key changes in the revised directive is the increased focus on investor protection and ensuring clients’ best interest. Distribution, marketing and the design of investment products needs to be tailored to the target markets and there are differences on deals that can be offered to the three client types (retail, professional and eligible counterparties).
Highest protection from risky deals is naturally granted for retail clients but being categorised as an eligible counterparty is not as straightforward as it used to be under the old framework. Knowing your customer really becomes key in avoiding heavy sanctions from the supervisors.
Transparency in reporting is critical
Furthermore, as reporting and documentation is in the heart of any regulation in the EU, MiFID II also imposes new reporting requirements. Transparency of deals and transactions is required and can only be achieved through tracking the whole customer lifecycle, from first knowing the client to the person or algorithm responsible for execution. Thus it is evident that implementation of the directive will not just require a few tweaks in the existing systems but in depth analysis of current processes is fundamental to ensure compliance.
Regulation extends across borders
Since the financial crises, supervisory responsibilities have been under debate and the single passport has not been able to stay away from the limelight. MiFID II maintains the single passport and extends the recognition to 3rd country branches with similar regulatory and supervisory framework as the Commission. However, a third country firm can offer services to professional clients and eligible counterparties without establishing a branch. Sounds simple? In theory yes, but again this puts pressure on the back office to ensure client onboarding and product governance is top notch and processes are aligned to the variations in national regimes.
It’s not too early to start planning for change
Depending on the business model, MiFID II has widespread implications to business and number of functions from IT to client services. As the final adoption day is looming in 15 months’ time and the technical standards have still not been finalised, it is fundamental to start preparing for the implementation as soon as possible. The strategic impact of the regulatory changes as a whole, not just MiFID II, should be assessed, ensuring programme governance and compliance management tracking are in place. Even though the 4 level Lamfalussy process aims to reduce the “Big Bang” styled implementation, time will fly from publishing of technical standards to January 3rd 2017.