By Martin Taylor, Deputy CEO and co-founder at Content Guru
The second round of the Markets in Financial Instruments Directive, MiFID II, is an EU-wide standardisation and compliance framework for traders. This directive, which includes binding obligations to record and store all external communications that could result in a transaction, has been in place for nearly three years. Considered complex at the best of times, MiFID II’s impact and value remain a matter of debate. While the EU Regulator recently reported success in relation to the directive’s impact on research and analysis, it has previously said MiFID II’s rules had failed on market data costs. In a wider sense, organisations and individuals whose work is regulated by MiFID II have shared a somewhat mixed view of its success, to say the least.
Experience and opinions notwithstanding, it is clear that MiFID II’s appetite for imposing financial penalties is likely to increase substantially in the coming years. Many organisations fell foul of multi-million-pound fines for transaction reporting failures under the original MiFID. Conversely, the European Securities and Markets Authority (ESMA) revealed recently that only €1.8m in sanctions were issued in 2019, under the new regime. This seems likely to be the calm before the storm: Once the ‘honeymoon period’ of non-enforcement by the Financial Conduct Authority (FCA) comes to a natural close, financial penalties will ensue. According to consultancy firm Duff & Phelps, more than a fifth of investment firms had already breached MiFID II reporting standards pre-Covid.
At the same time, since the Brexit referendum, MiFID II’s long-term role within the UK has come under particular scrutiny. The lingering prospect of a no-deal scenario has served only to prolong a sense of uncertainty about MiFID II’s future when the transition period ends on December 31st 2020. In the court of informed opinion, the jury seems to be out on whether the directive should be cast aside as an example of hated red tape, or else retained as evidence of high standards and a bulwark against the spectre of ‘wild west’ practices.
New complexities in the new normal
And if that wasn’t enough, Covid-19 has also brought new complexities to the role and application of MiFID II. In particular, widespread remote working has initiated a massive acceleration in technology adoption and innovation. Organisations with well-established technology infrastructure, processes and MiFID II-compliant working methodologies were forced by lockdown to pivot to remote working. As with many other industries, the finance sector had to keep many plates spinning: Not only was there an immediate requirement to close offices, but companies also needed to continue servicing the needs of clients, whilst enabling traders to work effectively from home.
The speed and efficiency of this forced transformation was, in many cases, remarkable. Organisations reacted with efficiency and determination to 2020’s ‘new normal’ – an experience which proved valuable as the second UK lockdown came into force. The adoption of collaboration technologies, from video conferencing to applications such as Microsoft Teams, has been a particular feature of this successful shift in working culture.
And therein lies the problem. MiFID II is applicable to any communication that may result in a trade. In a lockdown environment, where finance professionals are collaborating and screen sharing to make decisions, they are still operating under the compliance rules set out by MiFID II, and their interactions should be recorded and stored. But how many organisations actually put processes in place to meet these obligations?
MiFID II in a post-COVID environment
We all hope that a return to pre-COVID working arrangements will become a permanent option before too long. But what is also clear is that many organisations will retain home working as part of a hybrid working culture in the long term. Where does that leave MiFID II compliance?
In a post-COVID environment, many organisations will retain their expanded estate of digital collaboration and communication tools, presenting a complex challenge for compliance officers. How, for example, might three compliance officers effectively manage disparate communications platforms across dozens of brokers and traders? The issues are twofold:
1) Managing a wide range of digital tools and services
2) Managing the data that is shared across them
How can organisations be sure they are recording and reviewing all the information recorded?
Technical complexity requires an effective technology-led response. Disjointed, ‘swivel chair’ compliance is becoming increasingly impractical, given the diversity of tools now in use. For example, if trading professionals use Microsoft Teams, but have a client who uses Zoom, how can compliance officers ensure that recordings are maintained irrespective of the medium being used? The answer may be unified solutions, which provide a platform to take advantage of these best-of-breed technologies and provides resources such as search-and-replay, e-discovery and end-to-end trade reconstruction across a diversified technical ecosystem. Unified solutions may allow firms to develop cost effective, enterprise-wide compliance and data management policies that eliminate the problems associated with old-style disjointed methodologies.
Data analysis will be key
Now and for the future, the ability to analyse an entire dataset, as opposed to random manual sampling, is the key to eliminating gaps in reporting. Today’s advanced speech-to-text and analytics technologies have proven invaluable during lockdown and will continue to set the standard post-Covid. Not only does universal search give compliance officers complete visibility, but it also helps maintain effective standards across all stakeholders, who know that all transaction communications are monitored, recorded and analysed.
This helps illustrate another important point. The broad requirement to conduct monitoring and risk management will see firms increasingly reliant on data-heavy compliance strategies. The increase in demand for comprehensive, high-quality data will bring with it the need for robust, high-capacity storage solutions. Firms must ensure that their systems utilise compliant data storage, with sufficient capacity to retain electronic communications data, including uncompressed stereo voice recordings, for the minimum five-year period mandated by the directive.
While no-one could have anticipated the massive challenges experienced across society this year, the ability to adapt has defined which organisations gain competitive advantage over the pack. Despite the many challenges facing the financial services sector at present, it is vital that compliance remains front of mind. As organisations invest in a technology-led approach to work through and beyond the pandemic, they must apply the same level of focus to their compliance obligations and the technologies they deploy to meet them.
