The 12 month delay of MiFID II has propelled many financial services organisations into a ‘wait and see’ mode, on the back of continuing uncertainty over key requirements, wider regulatory pressures and project teams which are struggling to maintain momentum. The approach however comes with a considerable risk, warns a new report, as it could leave investment banks, asset managers and private banks not being able to transact for, and with, key clients when MiFID II launches in January 2018.
The Markets in Financial Instruments Directive (MiFID) came into effect in 2007 and has the objective to make European financial markets more transparent and to strengthen the protection of investors. The regulations’ successor, MiFID II, which revises certain rules and regulations for investment firms and trading platforms, was set to be enacted in January 2017, however, after a proposal by the European Commission, the go-live date has been postponed until January 2018.
MiFID II is set to have a significant impact on the operations of players in the financial services space, and in a bid to gain insight in how the industry is shaping up ahead of implementation, PA Consulting Group surveyed 25 major banks – both investment and private banks – and asset managers in the UK. The study finds that nearly all firms (95%) agree that their business strategy will be impacted by the European regulation, yet the majority of respondents are still unclear about the exact impact. Over 30% believe that they are fully aware MiFID II will impact their firm's business strategy and are already taking action. The largest group, over 50%, acknowledge that they foresee an impact, but they are still reviewing what the extent of it will be on their operating models.
MiFID II does not serve as distraction from firms' overall non-regulatory strategic objectives, with 84% of respondents saying that none of these types of programmes have been put on hold to focus on compliance with the Directive. Asked for which requirements of the new regulation will have the most impact, respondents highlight transparency, best execution and business conduct. “Pre- and post- trade transparency requirements will clearly be one of the most important aspects of MiFID II,” says David Troman, author of the report, adding “They not only affect implementation in terms of difficulty and cost, but also the market structure and firm operations post-implementation.” Troman highlights that to overcome the challenge, firms will need to ensure robust plans are in place.
In terms of costs, 64% of respondents expect the total estimated cost for adherence to the MiFID II requirements will be up to or less than £9 million. Banks are higher up in their cost estimate – all of the respondents who expect adherence to cost over £20 million (the remaining 26%) work at investment / commercial banks. 75% believe that transparency requirements will be the most costly to comply with, record keeping and best execution also are included in the top four. Transaction reporting too is seen as a costly exercise, however it is not seen as a key impact, according to Troman because third-party solutions are well suited to deal with the matter.
MiFID II readiness
The twelve month delay of MiFID II has seen postponement creep into project portfolios. Over 60% of surveyed financial services organisations have put parts of their MiFID II programme on hold. These are primarily in the areas of record keeping, transparency (pre- & post- trade) and business conduct. The delay is though not just one of choice – many respondents complain that they have put projects / workstreams on hold as they still are awaiting clarity from the regulators. Surveyed managers in addition note that they have diverted some focus to deliver other compliance-related regulations that have earlier implementation dates, including Market Abuse Regulation (MAR) and Packaged Retail and Insurance-based Investment Products (PRIIPS).
The changing and uncertain landscape leaves almost 40% of respondents feeling that they may not be ready by the implementation date. “Despite having an additional 12 months to deliver MiFID II, many firms are not confident they will make the implementation date. This is driven by a lack of clarity over the final requirements, other regulatory pressures and a difficult market environment,” comments David Biggin, a financial services regulation expert at PA Consulting.
To avoid jeopardising an on-time delivery, 50% of respondents say that they need the final rules to be in by Q3 2016. Troman cautions that a realistic approach must be taken: “It is unlikely that all of industry’s questions will be answered by the final level two technical standards. Therefore, financial services institutions need to move forward using a set of working assumptions. This will allow progress to be made and plans adjusted as the requirements become clear.”
The run up to implementation will see programme teams ramp up their resourcing. Over 80% of respondents have projected that their MiFID II programme teams are likely to increase by a minimum of up to 20% and a maximum of over 50%, with the largest chunk of up-scaling to commence in Q3 2016. The majority (nearly 40%) of this increase is expected to be achieved using internal resources. However there will still be a significant external demand, with 24% being filled by independent advisers, 21% by contractors and the remainder by consultants of third-party solutions providers. Consultants brought in will mostly focus on IT/Technology and programme management positions, followed by legal and functional roles. Only 5% of MiFID II external hiring will go to strategy consultants.
IT solutions for MiFID II
From a technology perspective, 78% of respondents say that they are planning to utilise a third-party solution to address (certain) MiFID II requirements. Those that will do so are earmarking transaction reporting, record keeping and best execution as the key areas to be enabled by new technology. In particular reporting leans well for external solutions, says Troman: “reporting requirements can easily be met by using third-party solutions. Utilising these where they are available can often help firms meet requirements in their entirety without significant impact on the firm’s business itself when compared to an in-house approach.”
Reflecting on the study, Troman points out that although many firms are achieving progress, overall the picture raises some concerns across the MiFID II implementation landscape. “60% have yet to adjust their business strategy, 60% have placed part of their programmes on hold and 40% of firms are not confident they will make the implementation date. All this means firms need to take urgent action.”