Duff & Phelps' Nick Bayley is a managing director in the Compliance and Regulatory Consulting practice and has partnered with Hedgeweek to provide a monthly blog series providing insight on this imminent regulatory change.
Prior to this, Nick was a Head of Department in the FCA's Markets Policy and International Division, FCA Senior Markets Advisor, and was responsible for the UK regulator’s MiFID II Policy Project.
Although firms might not have all their ducks in a row, there are likely to be a couple of areas they should prioritise. I’m going to stick my neck out and offer my personal opinion on some of the areas that the FCA is likely to be most concerned about.
The first subject is the dreaded transaction reporting (MiFID investment firms only). The clock should now be ticking loudly for those who have done little or nothing to prepare for the MiFID II changes. Come January 3, the regulator will know exactly who is, and who isn’t, meeting their reporting obligations. Interestingly, in the past it has been far from clear that the FCA looks at the completeness of its reporting population; I think that may change this time with the large number of buy-side firms on the hook for reporting for the first time.
As many of you will know all too well, there’s a lot of complexity involved in preparing for MiFID II transaction reporting. Don’t leave it too late.
A second area the FCA is likely to be focused on, in the early throws of MiFID II, is inducements, particularly research unbundling. I cannot believe there are many buy-side firms that don’t already have the research issue on their radar.
Although this is an FCA priority area, the regulator also understands the level of disruption that is taking place to existing market practice. Pricing and distribution models for research may take a while to settle down and the pressure may also build on some of the smaller buy-side firms to pay for research out of their own P&L. What must definitely stop by January is the free distribution and receipt of substantive research. If you haven’t agreed a deal to keep receiving it, then you are obliged to block it from coming into your organisation.
Clearly, you should also have made the effort to communicate MiFID II related changes to your clients and updated your terms of business accordingly. Although the ex post and ex ante disclosure of costs and charges, to take just one example, remains something of a work in progress, investors will expect managers to have had a pretty good go at meeting the new rules, even if some refining will probably take place at a later date.
FCA will inevitably look more favorably at firms that have made an effort to engage with investors and keep them updated on new disclosure requirements, rather than those who have not got around to it.
It’ll be the same with product governance arrangements. You may not have everything in place but you should at least be able to demonstrate you have developed a product governance framework and have started the communication process with distribution partners.
So, if the FCA calls you up in mid-January and says, ‘We know you’re not transaction reporting, why not?’, replying, ‘I didn’t realise I needed to’, isn’t going to hold much water. If you are able to say, ‘We’ve selected an ARM, we are sorting out our data and we expect to be reporting by the start of February’, the FCA is likely to turn its attention elsewhere.
At the end of the day, the FCA is not going to expect every single piece of this hugely complex regulatory regime to be adhered to on day one. Provided you can evidence that you are making a clear effort to get the different changes driven by MiFID II in place, the FCA are likely to work with you, not against you.
What the regulator will not tolerate is firms who are making no genuine attempt to become fully compliant and where new obligations are being deliberately flouted.
There is still time to tackle the key issues ahead of January. Tick tock…