Implementation advice is coming from all quarters and there are still voices of dissent but organisations must now get on with their preparations for compliance with MiFID, says Michael Imeson. He finds out how the investment services industry is faring.
Three months have passed since the European Commission (EC) published its draft ‘level 2’ implementing measures for the Markets in Financial Instruments Directive (MiFID). Once these measures have been given their stamps of approval by the European Parliament and the European Securities Committee, which are currently considering them, they will be formally adopted by the EC this summer.
Despite the fact that they are still drafts, the industry has not been standing idly by. Banks, other investment firms and their national regulators have been studying the texts, interpreting what the measures will mean for them and, where they can, incorporating them into their business models, compliance and risk manuals and IT systems.
The chief repository of knowledge and advice for the investment industry in the UK is MiFID Connect. This is a group of 11 trade associations that was put together last year to advise firms on as many aspects of implementation as possible. Members include the British Bankers’ Association, the Association of British Insurers, the Futures and Options Association (FOA), the International Capital Market Association, the London Investment Banking Association – and the US’s Bond Market Association (BMA), which joined in the past few weeks.
Why is a US association getting involved? Because many of its members have European operations. “The BMA has serious ambitions to carve out a bigger European space for itself,” says Anthony Belchambers, chairman of MiFID Connect and chief executive of the FOA.
His other news is that MiFID Connect established an IT advisory committee last month. “It will provide technical input to practitioners’ committees,” says Mr Belchambers.
Areas of the directive on which MiFID Connect has advised members already are best execution, suitability and appropriateness tests, and conflicts of interest. Areas that it is covering include client classification and transaction reporting.
Pan-European alliance
Another industry association grouping that was formed to help with compliance is the MiFID Joint Working Group (JWG), a pan-European alliance of financial services IT associations. It was created in May 2005 to address the technology-related compliance requirements of the directive. The four founding associations are FIX Protocol, ISITC Europe, the Reference Data User Group and the Software and Information Industry Association’s Financial Information Services Division (SIIA/FISD).
The MiFID JWG convinced the EC to make some changes to the draft implementing measures before they were published in February but its focus now is on advising investment firms across Europe how to make the IT changes needed to comply with MiFID. It is a not-for-profit body that organises its work across several subject groups, such as standard protocols, best execution and reference data. It has about 500 individual participants from more than 120 investment firms and other organisations across Europe.
IT think-tank
The IT subject group broke away from MiFID JWG in February to form an independent commercial venture called JWG-IT. It is run by PJ Di Giammarino, former IT chief operating officer at Barclays Capital. “We act as a think-tank for the IT issues associated with MiFID,” he says. “We are not consultants, we are not lobbyists and we do not develop strategy or policy. We just advise firms on IT implementation.”
JWG-IT recently ran a workshop on transaction reporting, for example, that consisted of two half-day sessions over two weeks, which 12 firms attended. The workshop covered tactical issues, such as who will create the message manual that will be needed to communicate to the competent regulatory authority, and practical issues, such as how transaction reporting will be done (for example, by using an in-house facility, an exchange or another vendor).
“We have split MiFID into 24 topics, including client order handling and systemic internalisation, and will be covering all of them,” says Mr Di Giammarino. He is building up subscriptions from investment firms and IT suppliers to fund the venture. Some aspects of the service are free but the basic package costs €25,000 a year per member firm, with the full-service package costing €125,000.
Business issue for banks
Bob Fuller, IT director at German bank Dresdner Kleinwort Wasserstein (DrKW) in London and one of JWG-IT’s supporters, says: “There’s no doubt that MiFID significantly alters financial services regulation in the EU, including how firms operate their businesses and how they interact with customers.”
So how are DrKW’s implementation plans progressing on the IT side? “MiFID is a business issue, with IT and compliance assisting. We are actively involved in working out what MiFID will mean for our business model but I am not empowered to tell you anything other than that.”
Dutch bank ABN AMRO has operations in 17 of the 25 EU member states and the regulatory part of its EU MiFID programme across these countries is run by Nick Gibson “We are involved in all areas of the investment services industry, so we have a lot of breadth and depth,” he says. “One of the biggest challenges is mobilising an organisation of this size to deal with the directive as a matter of urgency. It is something that we have to kick off seriously now.
“Another challenge is trying to design a new world when the detail of the new world is still out there somewhere. The measures published so far are just draft measures. The final wording of the implementing directive and the implementing regulation will probably not be finalised until late June.”
National regulators
The UK’s Financial Services Authority (FSA) proposes to implement MiFID through four consultation papers. In the meantime, firms are still using the FSA’s Planning for MiFID document, published last November, to learn what the authority expects of them. The FSA is due to hold an industry conference on MiFID implementation on 15 May.
The four consultation papers are:
- Systems and controls CP, Q2 2006. This will cover the organisational and systems and controls requirements arising both from MiFID and the Capital Requirements Directive, setting out proposals for a single set of requirements for all firms subject to either or both of these directives.
- Markets and transparency CP, Q3 2006. This will cover MiFID provisions on market transparency, transaction reporting, authorisation and permissions, and enforcement and co-operation, but will exclude conduct of business and financial promotions.
- Conduct of business CP, Q4 2006. This will include the best execution requirements and is the paper that should shed more light on best execution on over-the-counter markets.
- Financial promotions CP, Q4 2006. This will cover MiFID provisions on marketing and communications.
Consumer trepidation
Perhaps the final word should go to consumers. The UK’s Financial Services Consumer Panel, which bills itself as “an independent voice for consumers of financial services”, is preparing for MiFID with some trepidation. It believes that some aspects of MiFID will undermine consumer protection in certain areas. It has written to Charlie McCreevy, the EC’s internal market commissioner, to tell him so.
For example, in the UK the FSA requires firms to disclose commission in cash terms and sets enhanced suitability standards, both of which reduce the risk of product bias where advisers are paid on a commission-only basis. Under MiFID this requirement would disappear.
“We must make sure that, in the laudable aim of making it easier for consumers to access financial services in a single market across Europe, we do not lose all of the consumer protection that has been built up in the UK, and that consumers have come to rely on,” says John Howard, chairman of the panel.
The panel’s complaints will be ignored. Trying to initiate fundamental change at this stage is a non-starter. What is on the agenda now is how investment firms, and their regulators, will implement what has already been decided.
AREAS OF UNCERTAINTY OVER MIFID
The level 2 technical implementing measures were published by the European Commission in February in two parts: the implementing regulation, which will apply directly in each member state; and the implementing directive, which will have to be transposed into national law in each member state. The commission will adopt the final measures this summer and MiFID is due to come into effect on November 1, 2007.
There are two intractable implementation difficulties for investment firms:
- they are having to work to draft measures, which could change in a few months’ time;
- the final version of the implementing directive could vary slightly from country to country when each member state transposes it into national law.
In both cases, any changes are likely to be small, so firms are using the draft measures to start most of their implementation projects. But in areas of uncertainty they are holding back until the final versions are ready.
