As the 3 January 2018 deadline approaches, the financial press is full of dire warnings about the challenge of MiFID II implementation. Indeed, many news stories have headlines suggesting that we cancel Christmas!
The recent imposition of the first FCA fine for a breach of the European Markets Infrastructure Regulation (EMIR)—Merrill Lynch was fined £34.5m for a failure to report tens of millions of derivative trades—has only served to heighten concern.
Against this backdrop, it is perhaps worth acknowledging that MiFID II could create a perfect storm from a culture, operational risk and governance perspective. A storm in which complex technical requirements, tight implementation deadlines and demands for budget could potentially collide with pressures from the business and/or clients for trading to continue uninterrupted as the new rules bed-in.
For example, in the front office, the need for Legal Entity Identifiers (LEIs) from day one, could prove difficult to manage when faced with clients who have been unable to get themselves set up in time.
Culture and Conduct
Now is a good time to reinforce messages about culture, conduct and escalation in order to avoid the poor conduct choices and rationalizations that have damaged our industry in the past.
One area where culture and conduct will be particularly relevant is product governance. The new rules focus on the identification of ‘target markets’ i.e. the types of clients for whom a product is designed. As a consequence, firms must carefully define the parameters of each target market’s population, including:
- Levels of knowledge and experience
- Appetite for loss
- Tolerance for risk/reward
- Investment objectives and needs
At a firm level, these new rules support the FCA’s long-standing TCF (Treating Customers Fairly) Outcomes.
At an individual level, they reflect the standards set by Conduct Rule 4: ‘You must pay due regard to the interests of customers and treat them fairly’. Conduct Rule 4 creates a personal responsibility for all those involved in the end-to-end product development, promotion and sales process, backed by firm and regulatory penalties for those who breach the required standards.
This presents a good opportunity for firms to update and reinforce their training messages on TCF. It also provides fertile ground for the development of topical and timely scenarios within TCF, conduct, Conduct Rules and SM&CR training materials.
As regards the SM&CR, the FCA are likely to take an interest in product governance frameworks, particularly in the context of the ‘reasonable steps’ test. Mark Steward, FCA Executive Director of Enforcement and Market Oversight, has put us on notice that decisions on potential enforcement action in relation to MiFID II will be based on whether a firm has “taken sufficient steps to meet the new obligations by the start-date”.
So now is also a good time to ensure that you have a robust audit trail that evidences the steps that you have taken at every stage of your MiFID II implementation project.