Ever since the gargantuan European Union (EU) regulation Markets in Financial Instruments Directive (MiFID II) came into effect, several new challenges and trends have recently arisen, stirring the UK financial market.
Within one month of the MiFID II roll-out, significant changes were made in trading venues/structures across the EU; research arrangements between investment firms and research firms are now constantly being reevaluated, and investment firms with Systematic Internaliser (Sis) status have seen their business skyrocket as dark pool trading volumes have supposedly been stopped and opaque broker crossing networks have been banned.
However, some of the major changes in EU financial market can be seen in one of the pillars of the MiFID II regime. Recordkeeping – including the recording of business text messages, chat logs, emails, etc. and the supervision of such records – is one of the key highlights in the newly implemented regulation, and indeed has brought up a new set of obligations for UK buy-side firms such as asset managers, investment managers, and insurers.
Eight months into MiFID II implementation, its influence on the UK financial market is evident. Experts say that there are now new shifts and challenges that UK financial organizations must plan for. With the Financial Conduct Authority (FCA) ready to imminently exercise its supervision and enforcement power, we present here the key challenges and trends facing UK financial companies today with regards to compliance with recordkeeping requirements of MiFID II.
Recordkeeping Challenges After MiFID II Rollout
One of the challenges UK asset management firms are experiencing with regards to recordkeeping is the identification of employees who are having “relevant communication” with their clients and by what method, as well as enforcing policies and enterprise archiving platforms to capture, retain, and supervise those communications.
Before MiFID II, the archiving of communications was a burden applicable only to sell-side firms such as investment banks and brokerage houses. Now, buy-side firms also require that all their business-related communications is in compliance with FCA’s recordkeeping rules.
Another key chokepoint in recordkeeping compliance for many firms is data retrieval. Some firms are reportedly having difficulties tying together transaction and communication data from a multiplicity of databases, which might have been caused by these companies having multiple order execution methods for their customers.
Lastly, many firms have invested in advanced compliance technologies without fully understanding their capabilities or how to use them. This has required firms significant time and resources just to fully prepare their organizations to use those technologies efficiently.
Emerging Recordkeeping Trends After MiFID II Rollout
From a compliance standpoint, more and more UK financial firms are investing in enterprise-grade mobile archiving platform to fulfill their recordkeeping obligations. These platforms are helping them to overcome the challenge of how to capture and supervise granular trade-related mobile conversations such as text messages, voice chats, chat logs, IMs, email, etc.
However, as a recent post from Finextra.com notes, capturing communication isn’t compliance, at least not by itself. According to author Eran Noam, MiFID is not just about storing communications and being able to retrieve it upon request. Companies under FCA must also be able to detect any type of market abuse and reconstruct captured communications in case of litigation as well as to demonstrate Best Execution, which is one of the key areas of MiFID II compliance that FCA will scrutinize.
In order to meet all these expectations of FCA, many firms have begun investing in a mobile archiving solution that has real-time monitoring capabilities and call recording features that should be compliant with FCA call recording regulations as well. Regardless, many compliance experts still believe that an in-depth risks assessment is still the key to fully maximize this type of technological solution in order to ensure that focus is given to the right time frame and communication methods.
Lastly, industry experts believe that beyond the right technology and policies, the most important piece to ensure compliance with MiFID II is by training and educating the staff about its recordkeeping requirements. They need to understand the importance of archiving mobile content – and more importantly the financial and reputational risks that the organization can suffer given the significant fines that FCA can levy for non-compliance with MiFID II.
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