MiFID will force many EU member states to play catch up with the UK in terms of best-execution and compliance norms. By Jules Stewart.
European and US investment banks are engaged in a technological arms race to gear up for November when the Markets in Financial Instruments Directive (MiFID) comes into force.
The large investment banks have committed significant resources to ensure that the right systems are in place to comply with MiFID. They have had projects running for a year or more, with a technology spend in the order of £30m (€45m) to £50m each.
“The investment banks are most ahead in their preparation and have been working on this for more than a year,” says John Liver, partner in risk and regulatory services at Ernst & Young. “The asset managers are now engaging seriously and they’re viewing it as a compliance task, but there will be a last-minute scramble to be ready. Until now there hasn’t been a common dialogue between brokers and asset managers on the impact, but they have been recently coming together to match their expectations.”
The banks also need to conduct impact assessments in several areas, starting with best-execution.
“If you take best-execution, on the face of it this is a straight compliance impact on the way investment banks set their best-execution policies, and justify those policies by way of their actions,” says Dr Anthony Kirby, head of risk, regulation and compliance at Accenture. “The measures they take will also affect the parties upstream, such as investment managers, who need to think about the best investment results for their clients, which in this case would be an end-client like a pension fund or local authority fund.”
New policies
On the face of the challenge, new policies will be required, firms will have to put their processes under the microscope and have data to hand to justify what they have done. “All of this will pose a greater challenge for firms located in some EU member states where this is new, unlike in the UK, which has been used to this for quite some time because of CP154 [the Financial Services Authority’s 2003 ruling on best-execution],” says Mr Kirby.
“Mitigating the risk for best-execution is done by drilling down very concretely in terms of the processes that have to be managed. For example, first, classifying each type of client, be it retail or professional; second, recognising the instruments the firm is trading; third, the channel of the trade, whether this be electronic or dealer intermediated; fourth, whether a firm has the data and if this is rich or poor; and finally, recognising when it might be open to a challenge.”
MiFID is also seeking to promote consistent compliance-style processes around Europe. Compliance as a phenomenon grew up in the US and then spread to the UK, though as a rule the profession does not exist in Europe. “It will have to grow in Europe and that will produce consistent standards, but we won’t see different compliance processes introduced in the UK,” says John Tattersall, head of financial services regulatory practice at PricewaterhouseCoopers.
“With the introduction of MiFID, documents will have to be re-worded but this will not have an impact on the customer protection rules that have been in place in the UK since 1986.”
Accenture has identified a difference among firms that see MiFID as tactical, those that are comply-only in their approach, and others that are strategic and proactive in taking seats on boards, or evolving new services such as indication of interest management or rating agencies.
“Investment banks are definitely leading the pack with the more forward ones looking as if they’re keeping up with the exchanges,” says Mr Kirby. “The larger, more diversified buy-side firms are keeping up, particularly those with a hedge-fund-style orientation. But most of the buy-side will be heavily reliant on the sell-side and other outsourcing agents such as custodian banks to help them.”
Jules Stewart is a contributing editor to The Banker.
