Information from the FCA this week shows that a fifth of UK fund managers have made errors in transaction reporting under the Markets in Financial Instruments Directive (MiFID) II regulation.
The data was obtained by compliance consultants Duff & Phelps after a Freedom of Information request. It showed that 546 firms have admitted to errors in their transaction reporting since January 2018.
223 additional firms have been proactively contacted by the FCA regarding potential reporting errors, with the Authority having held visits, meetings or conference calls with 74 firms specifically to discuss the quality of their transaction reporting.
Why are fund managers struggling with MiFID II reporting?
In advance of MiFID II coming into force, we looked at what the legislation covers and what firms needed to do to comply – our blog sums up the changes, which in particular impact reporting.
New obligations under MiFID II included:
- client reporting – with all clients now needing to be informed if the value of their portfolio drops by 10%
- best execution (the duty of an investment services firm, such as a stock broker, executing orders on behalf of customers to ensure the best execution possible for their customers' orders)
- more prescriptive requirements around product governance
- aggregation of costs and charges
- The categorisation of marketing material for professional clients as a financial promotion
The challenges of MiFID II compliance
At the time it came into force, the FCA said that ‘MiFID II is a wide-ranging piece of legislation and, depending on your business model, could affect a wide range of your firm’s functions – from trading, transaction reporting and client services to IT and HR systems’.
The need for ‘All information, including marketing communications, addressed by the investment firm to clients or potential clients [to be] fair, clear and not misleading’ – something that applies equally to retail and institutional investors – is another of the MiFID II requirements.
Since it came into effect, MiFID II has caused debate, with the disclosure requirements in particular coming in for criticism. At a conference in June 2018, FCA Chief Executive Andrew Bailey had to address the ways that perceived shortcomings in the regulation were being tackled.
Releasing the findings from their FOI request, Nick Bayley, the Managing Director in Duff & Phelps’ Compliance and Regulatory Consulting practice said that:
“The sheer complexity of the MiFID reporting requirements means that virtually no one is getting it completely right. The honeymoon period of education and encouragement in relation to transaction reporting will not last forever. The FCA has told us that it will take a much stricter approach where firms have made no meaningful effort to comply with their obligations or failed to act on the regulator’s observations.”
We’ve seen that the Authority isn’t afraid to dish out significant fines. In the last couple of months, the regulator has issued a £15.4m fine for broker Tullett Prebon and a £19m fine for Henderson Investment Funds Limited.
We reported in July this year that the regulator’s fines had totalled £320m in the last six months of reported figures.
How to avoid MiFID II reporting errors
If you want to avoid falling foul of the regulator’s push for MiFID II compliance, you should take action to make sure your approach complies. In particular, consider:
- Ensuring you understand what you need to do to comply with the reporting obligations. Our blog outlining the MiFID II requirements gives a good overview of the rules.
- Checking how accurate your reporting currently is. com reports that only 682 firms (18%) have requested a data extract from the regulator’s Market Data Processor (MDP) system against which to check the accuracy of their reporting. Doing this will help you to ensure the quality of your own reporting.
- Reviewing your processes to make sure they support your new obligations. Taking a checklist-based approach may help – find out how using a checklist can help you with MiFID II compliance.
- Exploring whether automating some of your processes could help to prevent regulatory compliance breaches, whether relating to MiFID II or other requirements.
Download a free checklist to help with MiFID II compliance
Compliance with MiFID II – whether on reporting, finanscial promotions or other aspects – isn’t always straightforward.
We have worked with Compliance expert Chris Hall to produce a MiFID II Checklist. The checklist captures the key actions you need to take; you might find it useful to help work out whether your current approach complies. You can download your free copy here.
Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.