Four areas asset managers need to tackle before 3 January 2018
It’s now just over a month until MiFID II is officially introduced, it ceases to be just a scary acronym and becomes a part of our daily working lives. Understanding how your firm and your asset managers’ role needs to change is of the utmost importance.
If asset managers think they’ll get by with only minor alterations to their working routine, they could be in for a shock as they are likely to experience the biggest adjustments. There are certain changes that will have a massive impact on firms such as further transparency, more compliance, and, overall, taking responsibility for the whole life of the product.
So, with the deadline looming ever larger how can firms act now to prepare themselves? Using our experience, we recommend four critical areas that asset managers should consider – and prepare for – under the new and enhanced requirements placed upon them from MiFID II.
Under MiFID I, asset managers had to take ‘all reasonable steps’ to obtain the best possible results for their clients. However, a key change with MiFID II is that a much higher compliance standard is now required.
These enhanced standards demand more detail in execution policies with greater granularity in the number of instrument classes covered. Policies must now be annually reviewed, and firms who execute client orders will be required to publish the top five execution venues in terms of trading volume and quality of execution received each year.
Changes such as these will require a wider cultural shift for asset managers when approaching best execution, and, ultimately, how they operate within the business. They will have to continually ensure and demonstrate that they have the correct governance to consistently review performances and policies – not just make sure a box is ticked.
MiFID II will deliver increased transparency for end investors, but this is presenting challenges for asset managers. Firms will no longer be able to rely upon their brokers to report their executions under MiFID II, they’ll be responsible for reporting themselves.
The frequency with which asset managers must report to clients with portfolio statements will also rise – from every six months to quarterly – and the reports must include valuations, a review of all activity and performance during the relevant period and any depreciation in the value of the portfolio if it exceeds 10 per cent. All of this can add significant additional time and money, as well as requiring a shift in ways of working.
The record keeping of communications may prove to be one of the most challenging requirements of MiFID II. Current regulations stipulate that only conversations involving individuals directly involved in a trade need to be recorded; MiFID II requires that all calls be recorded for anyone involved in the ‘advice chain’ that could lead to a trade. The retention period for call recording data has also significantly increased, from just six months to a minimum term of five years.
For asset managers, this means automatically recording all calls as standard. The best solution here is to implement call recording at the mobile network level as opposed to application layer; this means all calls are recorded automatically, and they won’t have to alter their behaviour to use the solution and remain compliant.
As well as the above, asset managers will need to ensure calls are periodically reviewed and that it can be demonstrated to the regulator that they have implemented policies and procedures to oversee their call recording requirement.
Firms may already have a compliance programme in place that has to be updated to comply with MiFID II, or they may need to implement a formal compliance initiative for the first time. Either way, asset managers will have to carry out some groundwork in this area to prepare for MiFID II.
The first step to compliance involves an audit of the regulation to know exactly what is required; looking at the processes that are currently in place and where what and for how long data has to be captured. But getting compliance efforts in place ahead of MiFID II is only half the battle. After the deadline passes is where compliance requirements come face to face with real life. For example, you may also have to enforce rules on not communicating with clients through “unofficial” channels such as messaging services.
The final element is setting up reporting; tracking how the compliance programme is operating and that it’s doing what it’s supposed to, such as recording and storing calls properly. And in the event of a problem, this can demonstrate that the company is taking compliance seriously.
The good news is that the challenges of MiFID II also presents opportunities for asset managers to step back and consider where their responsibilities – and capabilities – lie. This approach should help improve their business models to secure the best outcomes for clients while delivering confidence, trust and transparency.