Waking Up To The MiFID II Compliance Challenge

The second phase of European Union’s 2007 Markets in Financial Instruments Directive (MiFID) II comes into effect startingJanuary 2018. It will not onlyextendthe scope of financial instruments under coverage but also require extensive record keeping setting firms across the EU for a big compliance challenge.

Its next incarnation, MiFID II, which comes into effect in January 2018, extends the codes of conduct beyond shares to other types of instruments, including contract-based assets and structured finance products, and requires the recording and storing for five years of any telephone conversations of anyone involved in the advice chain that may result in a trade.

Under MiFID, it was at member states’ discretion how third-country (non-EU) investment firms were treated. However, MiFID II requires a more harmonized approach, depending on the type of client that is receiving the investment service.

US-headquartered TABB Group just opened a new London office to meet growing demand for its MiFID II advisory services. TABB analyst Tim Cave says that given its breadth, MiFID II represents a huge compliance challenge for all firms. “But based on the conversations we are having, bigger market participants are much further ahead when it comes to implementation projects,” he explains. “Some smaller and medium-size firms are only just waking up to the new obligations that affect them. That said, even the biggest firms are having to perform a triage process, identifying areas where compliance from the outset of MiFID II is paramount and those where regulators may be willing to turn more of a blind eye initially, given the sheer scale of the changes they are being required to undertake.”

Cave says compliance efforts are concentrated on areas such as MiFID II’s trade and transaction reporting regime, which applies to both the sellside and buyside, and where it will be highly visible if firms are not compliant from Day One. “European regulators also have form in taking action against reporting failures,” says Cave, “and this aspect of the rules is key to MiFID II’s overall aim of improving transparency and helping to spot any market abuse.”