MiFID II was launched in January 2018 to ensure fairer, safer and more efficient markets. It’s goal, to increase transparency for all its participants. That’s Mifid II in a nutshell. But, as the regulation continues through its second year, and with the additional pressure of SMR compliance and GDPR leaving the sector in a whirlwind of reform, are firms keeping pace?
It seems that brokers have recently come under the firing line, both in the UK and US. In their recent CEO letter, the FCA has highlighted some key concerns which still haven’t been dealt with, particularly the current renumeration model being described as “poor and outdated” and a “root cause of misconduct risk in this sector”.
In this blog we will review some of the MiFID requirements and how effective communications monitoring can drive compliance within Financial Institutions and large to medium IDBs or smaller broker firms.
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A brief history of the MiFID II directive
The markets in financial instruments directive (MiFID) has been in force across the European Union since 2007. However, the new and updated regulation was brought in after the 2008 financial crisis to deal with the various shortcomings of the EU Legislation for Markets in Financial Instruments Directive (MiFID).
In a speech by Andrew Bailey, Chief Executive at the FCA, he comments on the positive impacts since the regulation was brought in, particularly for buy-side asset managers and brokers: “Our findings suggest that the new rules are having a positive impact on the accountability and discipline of the buy-side when procuring research, and on the cost of execution.”
So, where does technology fit into this picture? Bailey has also observed that new tech is not only changing the nature of investigations but how the information is being supplied, monitoring and valued.
At the beginning of the year, our COO, Juan Diego Martín spoke to Citywire : “One year on from MiFID II and we’re still faced with unanswered questions. This is particularly the case when it comes to communications monitoring in financial institutions. In fact, some of the rules have still not been implemented by some asset managers and small banks, who are still not monitoring their communications in accordance with the regulations.”
What are the MiFID II requirements for communications monitoring?
One of the main goals of MiFID was to promote broader participation in capital markets by smaller and medium firms. Although this has come with increased rules, reporting and documentation, the effects of the growing integration and market opening far outweighs the costs.
It’s common knowledge now that firms must capture large scopes of data, across vast and multiple activities, store it for longer and apply robust communications monitoring, in some cases real time analytics, to provide effective and efficient evidencing to the regulator. In fact, at Fonetic, we know only too well about how voice surveillance has evolved in the last decade.
But what exactly are the key areas to look at when reviewing your required capacity for communications monitoring? We have three to start you off:
1. Audio Recording and Data Capture
An area which is all well and good but what are firms expected to do with all this data? It seems ridiculous for comms to sit there collecting dust when they could actually offer some valuable insight into the business if analysed and actively reviewed.
“Recording of all telephone conversations and electronic communications is now required.” - MiFID II article 16.7
2. Monitoring Trader Activity
Although the regulation can be interpreted in varying measures of intensity, regulators are putting Brokers under a spotlight and it won’t be long until they will be requiring full automation of their communications monitoring. After all, most other market players are adopting surveillance solutions. Brokers be wary not to fall behind the pack.
“Firms can adopt a proportionate, risk-based approach to monitoring phone records of transactions” - ESMA technical advice 2.6 MiFID II article 2.6
3. Evidencing Appropriate Investment Advice
Firms must be found to be giving clients and potential clients recommendations and advice that are suitable for them and their transaction. Tools like Automatic Trade Reconstruction, can help with pre-trade and post-trade transparency, allowing senior managers can find key insights into how their employees are interacting with their clients. Intelligence like this can increase selling effectiveness and catch potential market abuse before impacting your business’s reputation or client’s satisfaction
“Information addressed by a firm to a client should be fair, clear and not misleading” – MiFID II Article 24.3
What's next for the markets?
In response to the FCA’s letter on increasing governance standards could result in “fewer, better firms” , David Clark, chairman at the EVIA, considers that “this rise in standards will reduce competition and highlight that regulation is steering back to principles-based, rather than rules-based”.
Should there be a debate on the future of regulation for markets members?
We will have to watch this space.
If you want to know more about how Fonetic can help your firm effectively and proactively monitor your communications data and provide automatic Trade Reconstruction, download our datasheet.
If you found this article interesting, see also:
- Thoughts on SMR: A view from a grizzled ex-trader
- What you need to know about proactive Trade Reconstruction
- 1LoD Buy-Side Risk & Control Summit 2019: event round-up