76 reasons why firms still need to be scared of MiFID IIshieldadmin
Well ok, maybe not 76.
MiFID II (article 76) is approaching its one-year anniversary, and many companies are just now starting to understand its ongoing impacts on the way financial firms do business in Europe. Implementation of the new directive has ramped up over time, and Europe’s Financial Conduct Authority (FCA) has recently announced that it is ready to levy penalties against non-compliant firms. And, with industry research suggesting that 40% of firms remain out of compliance with MiFID II despite the over $2 billion already spent by Europe’s financial firms trying to get in line with its extensive requirements, a slew of regulatory enforcement actions may be just around the corner.
On paper, Article 76 represents an important step forward in preventing fraudulent or manipulative trades. However, implementing a company-wide monitoring system that properly tracks and maintains all voice and written data related to regulated financial activity is a serious undertaking that no firm should take lightly. So, while there are many reasons why your company needs to be ready for Article 76, we’ll stick to the most compelling ones.
Article 76 imposes stringent requirements on financial companies
MiFID II establishes the legal framework that regulates interactions between firms and their clients in European financial markets, and Article 76 of the directive, creates new rules for the monitoring of financial trades and related electronic communications. Rather than giving traders the latitude they’ve grown accustomed to, companies are now responsible for the direct supervision of trade-related communications within a firm. This may require data tracking, voice recording, or even video recording in some circumstances.
Altogether, the goal of the extensive monitoring required by Article 76 is to ensure that no trade activity can escape evaluation by regulators, auditors, or management. The primary motivation behind enacting such a far-reaching measure is to bolster consumer protection in financial markets. This is an issue that European regulators are taking very seriously, particularly since the 2008 financial crisis. However, it’s also shifted the responsibility to private financial companies to ensure that no improper trades are carried out under their watch.
Compliance with Article 76 may be no easy task
Article 76 requires firms to install new technologies to support the rule’s extensive monitoring requirements. However, capturing voice data in conjunction with a wide range of written and electronic communications is very difficult, even with today’s advanced digital recording and voice identification technology. And while it’s too early to determine whether most financial firms are in compliance with Article 76, regulated companies have struggled to comply with similar financial regulations under the MiFID II. For example, Article 16 of the directive requires financial services firms to install technology and complementary processes to capture, record, and retrieve business communications similar to those imposed on firms by Article 76. Researchers have found that a large proportion of European financial firms are noncompliant with these requirements – a statistic that reflects the practical difficulties of implementing the policy’s stringent technological and operational standards.
The data capture and storage required by Article 76 is meant to work hand-in-hand with other practices required by the MiFID II. However, some industry experts are concerned about the practical challenges of complying with the policy’s directives. “My suspicion is that firms, for MiFID II, have done enough to tick the boxes to show that they’re compliant with the new rules,” Paul Burleton, Associate Director at Lysis Financial, explains. But while achieving full compliance with the directive may be challenging, the potential costs of non-compliance are substantial.
Steep penalties for non-compliance
Needless to say, the head-in-the-sand approach is not an effective risk management technique. While noncompliance with Article 76 may be widespread in European financial markets, regulated companies are placing themselves at risk of fines and penalties of up to €5 million, or 10 percent of annual turnover, for each violation of the MiFID II.
As Paul Burleton succinctly summed up the issue of non-compliance with Article 76: “until there’s an investigation…” he explains, “only then will they start to think about, ‘How can I do this, potentially, in a better way?’”
The potential for improving processes
The costs of non-compliance may be substantial, but Article 76 isn’t all bad news for regulated financial firms. By effectively implementing the data capture and monitoring processes required by MiFID II, financial firms can boost performance.
Burleton himself believes that integrating data from eComms with outputs from order and execution management systems (OMSs/EMSs) would create a new and effective way to understand and analyze trade behaviors. This could enhance the effectiveness of all internal processes from pre-trade to post-trade, but, As Burleton explained, “to get real value from the process, firms need to develop a strategic approach to integrating eComms, surveillance and execution reporting, prioritizing the development of that resource over any one point solution.”