MiFID II countdown: FCA clarity is still needed before implementation

By Cosmo Wisniewski | 11 September 2017

While relaxing on a sun lounger in the heat-haze of a distant shore, it is perhaps easy to forget that back in the UK, the Financial Conduct Authority (FCA) has recently published its final policy statement to assist with MiFID II (Markets in Financial Instruments Directive) implementation. Just as the holiday season was about to kick in may not have been the perfect time to release such a key statement, but now is certainly the perfect time to mention a few changes to MiFID II requirements.

Unsurprisingly, the main thrust of the policy statement is still promoting transparency around the touchpoints with clients of all types and especially the ultimate punter-in-the-street, closely followed by protecting client money in the final Big Bang-like echoes of the 2008/2009 chaos. It is difficult to remain optimistic and positive as various global horrors play out in the daily menu of news and fake news, but it seems entirely likely that something gruesome will occur within the next couple of years and the cycle of birth for MiFID III can be scheduled in. At what point will regulation destroy the value of any sort of active management? The day is getting ever closer, that’s for sure.

Has the FCA made its last bleat before preparing its Christmas card list? Very unlikely, methinks. As much as providing answers and some clarification around provisions including inducements relating to the research, best execution and recording communications, new questions are still being asked and it appears likely that further tweaks or clarifications will emerge. The little battles between different local regulators are not yet over and the tone that is being sounded in the Brexit shadows is hardly a beautiful concord.

Inducements for research will now also apply to collective portfolio managers as well as investment firms already within the broadening scope of EU Market regulations. The timing of deadlines for the provision of specific charges for that research have been softened greatly to a (probably) realistic thirty days, although - as is ever the case – this change creates new waves of frustration and mutterings concerning unintended consequences.

Asset managers remain split on how to handle the research data that is plaguing the business processes pre- and post-trade. Many are going for the easier but potentially more damaging bottom-line hitting approach in which they pay for research as a cost at a firm-wide level, in order to avoid the client impacting alternatives. This is in itself a flawed concept as it still opens the door to wholesale negotiation and forces firms to determine research needs ahead of the economic fundamentals that they really need to make these decisions. How can this be good for client value, even if it is transparent?

Whatever is decided, we are seeing good responses from the system providers in allowing solutions to be implemented relatively easily, but timing is still an issue and some project plans that I see are starting to look a little under-resourced.

Moving onto best execution, it does seem a relief that the FCA is now not going to apply the changes to Alternative Investment Fund Managers (AIFMs), but that is relatively too little, too late for many project costs to be avoided. And with respect to the recording of communications with clients, the latest levelling of the playing field is welcome so there is now some clarity as to what ‘notes’ need to be recorded as an alternative to physical recordings, and the impact across different business processes.

One of the most telling issues that is now all too clear is the admission that the FCA has exceeded the precise legal framework within MiFID II in certain areas, which can only be damaging to FCA regulated firms when compared to firms based in other countries – a situation that is not exactly helpful.

But despite all this, the momentum is building, the project teams are beavering away, the checklists are slowly accruing partial ticks and the mountain to be climbed is, well, not quite so high as it was. The industry in the UK is doing well and should be applauded; however, if you don’t recognise this level of progress in your own organisation, now is the time to put that cold beer down beside the pool and call your Operations Director.