Financial service providers are advised to take a comprehensive, enterprise-wide approach to compliance, rather than relying on a hope-for-the-best strategy. By Stephen Epstein.

The Market in Financial Instruments Directive (MiFID) shares many commonalities with the Market Abuse Directive, enacted late last year.

Both directives are aimed at the creation of a common financial services market throughout Europe.

In most cases, the 42-step process derived by the EU towards this goal has focused on a ‘harmonisation’ of existing regulations between member states. MiFID is a departure from this approach and instead introduces regulations more akin to best-execution and advice regulations currently in force in the US.

MiFID seeks to make cross-border trading in securities in Europe more accessible for financial institutions and investors alike by harmonising secondary market rules with a goal of lowering the cost of capital for companies. MiFID establishes high-level organisational and conduct of business standards that apply to all investment firms. These include new standards for managing conflicts of interest, best execution, customer classification and suitability requirements for customers. MiFID affects nearly every financial institution in member states.

Broadly speaking, these are:

  • securities and futures firms;
  • banks conducting securities business;
  • alternative trading systems; and
  • recognised investment exchanges.

 

Courses of action

MiFID, like any new regulation, presents financial institutions with a variety of choices:

  • They can take no action, and hope that current systems will satisfy the new regulatory requirement;
  • They can address each new directive and regulation independently; or
  • They can adopt a comprehensive and holistic approach towards compliance that protects the firm not only in the present, but also safeguards the company for future regulatory action.

While recommending that firms ignore or take no action to address new regulation would be imprudent, many firms may perceive their existing compliance efforts to be adequate. That said, firms should consider not only the technical regulatory requirements – which in the case of MiFID introduce wholly new areas of supervision – but the characteristics of a compliance approach that yields the greatest degree of protection and operational insight.

Likewise, institutions can evaluate each new regulation as it occurs, utilising the consultation periods and implementation timeframes that accompany new directives to modify existing policies, documentation, workflow and technology. Though not intended, these efforts typically resemble stop-gap measures and fail to deliver the desired return on investment.

Ultimately, firms that take a comprehensive philosophy to compliance stand to avoid the maladies common in the first two courses of action detailed above. A comprehensive compliance philosophy also prevents firms from viewing technology as a panacea, but rather they understand the need for training, process and technology to work in concert.

Culture and awareness

Simply reacting to regulations does not take into account the environmental changes currently under way in the world’s financial markets. This lack of awareness and resulting reactionary response will reduce the competitiveness of financial institutions that react to, rather than manage, compliance.

Effective compliance goes well beyond sound technology. What can institutions do to foster a culture of compliance within their walls; and how does that translate into overall protection? By making compliance an aspect of the corporate culture, it sends a strong and consistent message that the institution is committed to compliance. Adopting the proper process and communication realises the culture of compliance. A strong awareness and training programme is absolutely critical to effectively build a strong, aware and ethical brand.

Technology and organisation

Integration of process, organisation and data is the key over the next few years. Without it, a firm is highly vulnerable, the total cost of ownership is much higher than it should be and return on compliance investment comes up short of expectations.

That said, enterprise-wide compliance solutions can offer maximum transparency into behaviours of employees, partners and of customers. Due to market pressures and a continued consolidation of the compliance vendor marketplace, many third-party analyst firms predict that one-off solutions will last about 18 months or less. It cannot be stressed enough that financial institutions do the right due diligence before selecting a compliance vendor.

Furthermore, the high cost of maintaining home-grown solutions – most of which cannot adapt to the changing regulatory climate -- reduces internal build effectiveness and saddles it with a high costs.

Execution

How a firm puts its compliance philosophy into action will dictate much of its success or failure. Implementation, training, process and education need to be considered in the same manner as any enterprise-wide implementation – board-level involvement, well planned, steady and methodical implementation. An effective compliance system is going to leverage large amounts of data. How this data is handled and managed presents firms with a tremendous opportunity to realise a significant return on investment while also addressing the most complex regulatory requirements. Lastly, compliance, operations and IT need to be closely aligned in order to ensure success with any enterprise-wide compliance philosophy.

Technology is essential for quickly and effectively identifying the behaviours that threaten a firm. It should, however, also be flexible and broad enough to deal with future demands and present a return that justifies the level of investment needed with a compliance strategy. The key is that technology must therefore be implemented as part of a strategy that deals with process, culture and awareness.

The result is enterprise compliance, or what research company Gartner calls “situational awareness”. As regulations change, the fundamental underpinnings of the technology should not, realising huge return benefits and significant leverage opportunities.

The importance of deploying enterprise-wide solutions cannot be overstated. They offer the greatest assurance of meeting regulatory requirements and detecting potential violations as soon as possible. Eva Weber, analyst at Aite Group, notes: “Enterprise-wide compliance is fast becoming a primary consideration for financial services firms. These firms are adopting frameworks that address multiple areas of compliance across multiple lines of business. There’s great potential to generate productivity gains and positive returns from holistic enterprise solutions, so firms should explore their options carefully.”

Despite the continuing date changes for implementation, MiFID is real, and introduces new requirements for documentation, process, education and technology for nearly all firms across the EU member states.

Faced with MiFID, and the current regulatory environment, financial institutions that take a comprehensive and holistic approach to regulatory compliance stand to be better protected and more competitive in the market than those firms that choose to take no action or address each regulation independently. Furthermore, they can ‘insulate’ much of their business from future regulatory changes by adopting a holistic approach to compliance.

Stephen Epstein is vice-president and head of product management, Mantas.

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