Are UK organisations unprepared for MiFID II?

The revised Markets in Financial Instruments Directive (MiFID II) is expected to come into force from January 3rd 2018.

 

In February 2016, the European Commission pushed back the introduction of MiFID II by a year, citing the directive’s complexity and the need for companies to be given time to fully update their systems and processes.

 

However, despite the extension and with just six months to go until the directive’s introduction, recent research has indicated that many British organisations are still unprepared.

Industry admits MiFID confusion

A staggering proportion of risk and compliance professionals across UK financial institutions aren’t aware of the penalties associated with MiFID II failings, according to recent research from Aeriandi.

 

The PCI solutions provider revealed that nearly three-quarters (72 per cent) of people polled didn’t know their firm could be forced to pay a fine of €5 million euros or 10 per cent of annual revenue for non-compliance.

 

Twenty-nine per cent said they hadn’t yet implemented the technology or infrastructure needed to comply, while only 10 per cent had told partners and suppliers what preparations they were making for MiFID II.

 

More than one-fifth (22 per cent) claimed they understood the directive but weren’t sure how it affected their organisation. Worryingly, barely a third (36 per cent) have developed the necessary policies and procedures.

 

Brexit appears to be a key driver for MiFID II confusion; 14 per cent of firms had no idea how the UK leaving the EU would affect their compliance requirements, while one-quarter felt they would be exempt following the split.

 

However, the poll only covered 250 professionals across the UK, so what does other research say?

Buy-side battling compliance issues

As we predicted earlier this year, smaller buy-side firms seem to be having the biggest difficulties with MiFID II compliance.

 

Large-scale investment banks and similar-sized operations have the resources to tackle many of the problems they face, but this simply isn’t replicated at some of the smaller enterprises.

 

A recent survey from regulatory change management firm JWG found that as many as nine out of ten buy-side businesses are at risk of non-compliance in six months’ time.

 

Two-thirds of organisations are still relying on labour-intensive manual processes and “ineffective” routes to regulatory compliance.

 

Meanwhile, 45 per cent of firms weren’t sure how MiFID II would affect their firm – over double the proportion of financial services organisations in general.

Size doesn’t matter for buy-side non-compliance

The research showed that 45 per cent of buy-side organisations, regardless of size, were attempting to comply with the directive using an implementation team of fewer than five people.

 

Moreover, some of the biggest firms in the industry, with up to £500 billion of assets under management, had approved budgets of less than £2 million to implement systems and policies for MiFID II.

 

PJ Di Giammarino, CEO of JWG, said buy-side firms were guilty of “small teams” and a “DIY approach” to a serious regulatory change that is just around the corner.

 

“With only a few thousand hours to implementation, it is very troubling that the buy-side does not see itself compliant with MiFID II,” he explained.

 

“A common view of the 1.4 million paragraphs of MiFID II is critical for firms on the buy-side to avoid harsh penalties from the regulator and lose out to their competition next year.”

Sell-side ‘faces biggest disruption’

Buy-side firms may seem the most unprepared, but Quinlan & Associates believes the sell-side is likelier to face significant disruptions from MiFID II.

 

The downside risks are particularly prominent for global investment banks, the firm claimed in a recent report. Investment research appears to be one of the biggest areas of concern, with the directive requiring greater transparency over how clients’ fees are used for producing industry insights.

 

“Burdened by inherent conflicts between their research and investment banking departments, as well as stubbornly high costs due to complicated cost structures, managers are increasingly looking for alternative content providers in their quest for high-quality, cost-effective research,” the report read.

 

This dilemma has seen a rise in independent research providers, which offer premium, impartial insights through performance-linked revenue share compensation arrangements and other innovative business models.

 

Quinlan & Associates estimates that some investment banking research departments could lose up to $240 million (£182.5 million) within the next three years due to increased competition.

Preparing for MiFID II

With just six months to go before MiFID II is introduced, there is clearly a long way to go for some companies that need to comply with the directive.

 

At Barclay Simpson, we are seeing a number of firms strengthening their compliance teams in preparation for next year – and we expect that trend to continue.

 

Regulatory compliance specialists, hired on an interim basis, are particularly popular and can help organisations implement new systems and processes without committing to long-term headcount increases.

 

Business analysts, change management experts and project managers are also in high demand among enterprises that are serious about MiFID II compliance ahead of the deadline.

 

If you would like to discuss your regulatory compliance needs in the run-up to MiFID II, please contact one of our consultants today.

 

Our 2017 Market Report combines our review of the prevailing conditions in the compliance recruitment market with the results of our latest employer survey.

 

Image: Eyematrix via iStock