The MiFID II ‘Quick Fix’ is now live. Linda Gibson, a regulatory expert at BNY Mellon Pershing, considers what works well within this revised regulatory framework and what firms need to do next.
In February 2022, the long-awaited MiFID Quick Fix Directive came into effect, impacting EU investment firms. The European Commission intended to alleviate some of the administrative burdens with these targeted amends – but in reality, the act of switching off certain reporting requirements has been far more complex, time-consuming and costly for investment firms than originally anticipated.
In its latest bid to mitigate the effects of Covid-19, the EC has set out to streamline regulatory requirements whilst allowing for more flexibility for wholesale clients. This has been somewhat thwarted by the UK’s approach, which has thrown a spanner in the works for dual-regulated firms operating in both regions.
Diverging proposals
As the UK forges its own regulatory path, dual-regulated firms have had to grapple with diverging MiFID II proposals from the UK and EU. In July 2021, the Financial Conduct Authority (FCA) made changes to best execution requirements and investment research, firing the starting gun ahead of the European Securities and Markets Authority (Esma). While the UK’s approach essentially mirrors the objectives of the EU reforms, it also aimed to address perceived deficiencies in the EU’s own rule changes.
The FCA’s developing strategy is something firms must watch out for. UK regulatory officials may be hoping to retain broad equivalence, but their ambition to streamline or improve specific rules for the sake of competitiveness and to do what’s in the best interests of the UK market and investors will ultimately prevail. In this respect, firms must prepare to navigate two subtly different regimes and timelines now and in the future.
The Quick Fix has landed, some would say too little and too late, but it is not intended to replace the ongoing full MiFID II review. Early reports suggest that the move to electronic communications for investor reporting, with the option for retail clients to opt in for a paper-based approach, has been well received and ties in with green initiatives for both firms and consumers. For some firms, it was a challenge to ensure consistency of reporting across their systems but many of the larger corporates had already made the move to e-delivery, making the change relatively seamless.
On February 28, the EU suspended RTS27 reporting for trading venues, but importantly not RTS28 requirements for investment firms. While a welcome approach that relieved some of the burdensome elements of these requirements, it is important to note that the UK and EU are diverging on best execution and will no longer be aligned going forward. This will prove problematic down the line for dual-regulated firms forced to follow the technical changes set to be imposed by the EU and the complete abolition of RTS 27 and 28 reporting by the UK. Watch this space.
The EU’s amendments to research unbundling allows an investment firm to disapply the explicit charges for research if the research applies to firms with a market capitalisation of less than €1 billion, or fixed income instruments only. However, a significant proportion of firms had already invested heavily in technology and amended their documentation to comply with the tough bounding rules that made up the original requirements. With this in mind, it is therefore not clear whether this amendment will really add value. It may just add more complexity.
In the UK, the Treasury has turned its attention to the next steps of the Wholesale Markets Review, outlining the desired post-Brexit approach to wholesale market regulation which includes further revisions to MiFID II. These changes are yet to be finalised, which could be as early as 2023 in a bid to showcase the fast-moving, nimble approach the UK can now take to regulatory change.
Meanwhile, the EU’s approach has been markedly different. The EC has so far published its reform proposals for MiFID II, concentrating on the establishment of a consolidated tape to provide a more integrated view of EU trading. This reform, though welcome, isn’t headline-grabbing and is indicative of the approach being taken by European regulators – piecemeal and slower to enact.
Irrespective of the diverging approaches, the process of implementing regulatory change will be ongoing, complex, and require strong regulatory oversight from senior-level management amongst UK and EU MiFID-regulated investment firms. Those at the top must be tuned into the UK and EU’s regulatory to-do list to anticipate, and plan for, the possible impact that future changes may have, particularly on the operational, technology and compliance functions.
Top priorities for market participants
Despite equivalence no longer being on the cards, there is a need for stronger cooperation and the UK and EU bodies governing financial services can still learn from one another as they continue to modify and adapt MiFID II for the benefit of their domestic markets.
With this in mind, and when thinking about top priorities for the regulatory agenda going forward, we believe the below would help address market participants’ concerns.
Firstly, there needs to be a more streamlined approach to consultation. Consideration should be given to how business can be done on a global cross-border basis. Larger firms and banks have big legal and compliance teams to help navigate change but not all firms have access to these resources – regulatory change should be easier to navigate. Wider thoughts should be given to the cost/benefit analysis of proposed changes to ensure the proposals hit the mark and do not overload firms.
Secondly, addressing the cost of trading as a key area for reform as part of the FCA’s Wholesale Markets Review. The cost of trading data should be mapped out as a key area for reform by the FCA, including the terms on which data is made available. The regulator has so far recognised the important role market data plays in price formation and best execution, so we look forward to the FCA setting out the next steps as part of their call for industry input on wholesale market data.
And thirdly, a clear timeline and implementation date for further MiFID II amendments from UK and EU regulators. The pandemic period led to several extensions to regulatory consultations and revisions for the benefit of end consumers and financial services firms. However, going forward, we believe transparency and clarity over the process behind regulatory change – including deadlines for implementation – will be paramount for UK and EU-regulated firms, allowing for adequate preparation. It cannot go unnoticed that a significant proportion of firms are working to remain compliant in both jurisdictions, so clear communications and expectations from UK and EU regulatory bodies will be essential and should be prioritised.
Linda Gibson is head of regulatory change at BNY Mellon Pershing
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