What is MiFID Compliance?
The Markets in Financial Instruments Directive (MiFID) is a vital piece of legislation enforced across the European Union (EU), to regulate firms which provide financial services and instruments to their clients. MiFID aims to increase transparency across firms in the EU by enforcing a common and robust regulatory framework, which will consequently protect the interests of the individual investor and client. In January 2018, MiFID was revised and replaced by MiFID II, which has rectified previous weaknesses and oversights. Compliance with MiFID II demonstrates a firm's integrity and ensures healthy competition is present in the market, therefore it is important to understand how to comply with MiFID II.
What is MiFID II?
MiFID was enforced in the UK in 2007 and subsequently revised in January 2018, creating MiFID II. MiFID was revised to ensure that financial firms outside of the EU could not enjoy a significant competitive advantage over the financial firms within the EU, due to less rigorous regulation.
The enforcement of MiFID II since January 2018 has been considered as complex, broad and demanding. Therefore, compliance with MiFID II has been a long-term challenge for many firms, but it remains an important challenge to overcome.
If a financial firm demonstrates a lack of compliance with MiFID II, they will face regulatory scrutiny from the Financial Conduct Authority (FCA) which can be damaging for multiple reasons.
How to comply with MiFID II
To comply with MiFID II, financial firms will have to demonstrate a commitment to the demands stated within the regulatory framework.
MiFID II demands financial firms conduct the following actions:
- Demonstrate that your firm's portfolio managers are behaving in the best interest of their clients.
- Demonstrate your firm's orderly trading behaviour within markets.
- Portfolio managers must demonstrate that their investment decisions are not unduly influenced by third parties.
- Firms must charge clients transparently. Prior to MiFID II, asset managers were able to charge their clients and use part of these fees to fund firm research, which was not made explicitly clear to the clients. Now, asset managers must either pay for their research themselves or charge clients transparently.
- Firms must disclose the specific details of costs as a cash amount and percentage.
- Firms must provide periodic statements, specifying the fees and charges used during the reporting period.
What are the consequences of failing to comply with MiFID II?
The FCA is the UK's conduct regulator for 59,000 financial services firms and the financial markets. Thus, the FCA is the body responsible for ensuring financial firms in the UK are complying with MiFID II.
After the introduction of MiFID II on 3 January 2018, the FCA gave firms six months to become fully compliant. However, after this period the FCA made it clear that all firms must demonstrate compliance with MiFID II to avoid investigation.
Since the enforcement of MiFID II, the FCA now gather significantly more data from financial firms in the UK, allowing the body to identify the misconduct of firms far earlier. Currently, the FCA is working hard to scrutinise intermediaries' compliance with MiFID II, with a strong focus on adviser explanations of their charges and their record keeping.
If the FCA investigate a financial firm and identify a lack of compliance with MiFID II, the firm will potentially face a significant financial penalty to reflect the severity of the breach.
The FCA fined UBS £27.6 million for failing to comply with MiFID II, due to their misconduct in transaction reporting. To gain an accurate oversight of the market, the FCA demand accurate transaction reports from all firms. However, according to the FCA report in March 2019, UBS failed to submit accurate information in relation to approximately 86.67 million reportable transactions.
The FCA found in their investigation that UBS had failed to provide accurate transaction reports for a period of nine and a half years. Therefore, UBS was found guilty of providing transaction reports with 135.8m errors. UBS agreed to co-operate with the FCA on the grounds that they had reported insufficiently, resulting in them qualifying for a 30% discount of their overall penalty. Thus, the FCA reported in March 2019 that if UBS had not co-operated and qualified for a discount, the original penalty would have been £39,427,795.
The recent fines administered by the FCA prove that compliance with MiFID II is essential for financial firms in the UK. Therefore, employee awareness and training on how to comply with MiFID II is of utmost importance.