Find out what MiFID II is and what your business needs to do to be compliant.
If your business operates within the financial services sector, then it is almost certainly going to be affected by a new piece of legislation coming from the EU. MiFID II (Markets in Financial Instruments Directive) is aimed at making the industry more transparent and offering customers of such services greater levels of protection.
MiFID II’s implementation date is set for 3 January 2018. It builds on the foundation of the original MiFID regulation, introduced in 2004 as part of the European Commission’s Financial Services Action Plan.
MiFID set out the way in which investment firms should conduct their business and the way that they needed to be organised in order to operate correctly. It also covered issues such as the authorisation requirements for regulated financial markets, requirements to report to regulators to avoid market abuse, transparency in buying and selling shares, as well as setting out rules to cover the requirements for financial instruments to be traded.
MiFID II is designed to take account of changes that have happened within the trading environment since MiFID was introduced. In addition, it aims to improve the functioning of financial markets with a view to making them more efficient, more resilient and more transparent in the aftermath of the 2009 global financial crisis. One of the introductions to MiFID II is that investment firms must record telephone conversations and all communications relating to client transactions.
What does it cover?
MiFID II covers several different areas. Where its predecessor was predominantly aimed at the equities market (the buying and selling of shares in listed companies), the updated regulation will also incorporate many non-equity investments into a tougher regulatory system.
It will, in addition, move a large part of over-the-counter (OTC) trading across to regulated platforms which will align it with other parts of the market. It will also introduce markets that are safer, fairer and more efficient. Unlike the current FCA regulations for mobile call recording, MiFID II requires that the recording of calls is mandatory for financial advisors and brokers which encompasses IFAs, relationship managers and wealth managers as well as those involved in commodity trading. This means businesses will have to record conversations, text messages, emails and other data that are intended to end with a transaction. It also means that an additional 300,000 people will need to have their mobile conversations recorded.
The new rules also introduce an EU-wide limits regime for trading commodity derivatives, together with new rules relating to high-frequency-trading. These will bring in stricter sets of organisational requirements on investment firms and on trading venues. The idea of this is to ensure that companies are not subject to discrimination when it comes to accessing trading venues and central resources. This is intended to promote more competition within the market. Exchanges and trading venues will also need to make available disaggregated data on a reasonable commercial basis.
MiFID II promotes greater transparency. Methods of doing this include the use of thresholds for both the pre- and post-trade transparency. These will be extended to cover a wider range of investments beyond equities, including areas such as derivatives, bonds, structured finance products and carbon emission allowances.
This also means that non-equity investments will be subject to a new liquidity assessment. In addition, there will be a requirement for shares and certain types of derivatives to be traded only on suitably regulated platforms, this will include over-the-counter (OTC) transactions.
One of the key aims of MiFID II is the protection of investors. Part of which ensures that trades are executed using the appropriate regime. In addition, it will mean new standards for brokers and other firms that are involved in trading financial products, requiring them to record their transactions with customers in greater detail. This largely entails the recording of phone calls and SMS communications involved in trading and storing that recorded information for a period of five years in a form that’s accessible but can’t be modified.
Independent financial advisors will be regulated too, requiring them to take what the regulation calls a ‘sufficiently diverse’ view of the market when advising their clients. The rules also restrict fees or commissions for independent advisors with a view to making sure that they don’t affect the firm’s ability to act in its clients’ interests in a fair and honest way.
Businesses that offer portfolio management services will also be barred from accepting third-party inducements. There are exceptions to this if they’re so minor that they don’t affect the way business is conducted, or if they enhance the service which is being provided to the client. It’s important to note here that the provision of research can be seen as an inducement under MiFID II. This will mean that firms dealing in investments will need to pay for research from their own resources or using a special Research Payment Account (RPA).
As mentioned, one of the major changes MiFID II introduces is the requirement for the recording of all telephone calls and SMS (text) messages between advisors and clients with the data needing to be retained for a recommended seven years. For smaller firms offering financial advice, there are worries about the cost of installing call recording technology, particularly as mobile calls will need to be included too.
There are some extra rules that you need to be aware of. Firstly, that recording the call itself is only part of the requirement, the date and time of the call needs to be recorded too, along with the location, who was taking part and who initiated the call. Additionally, if a transaction happens as a result of the call, details of that need recording too. The FCA’s recommendation is that firms need to ‘capture all the main points of the full conversation that are relevant to the order’.
The FCA’s view is also that calls should be recorded even where the order under discussion does not eventually proceed. On this point, the FCA has produced a 524-page policy statement setting out how it believes businesses should comply with the recording requirements of the new rules. The overall view is that while advisors won’t have to record face-to-face meetings with clients, they will have to either record phone calls or provide a written note of them. Under the new regulation, these calls are ones that involve, ‘the reception, transmission and execution of orders, or dealing on own account’.
When and how?
In some ways, MiFID II is not as radical as its predecessor. But where it does have more of an impact is on communication and IT systems
It is going to affect several areas of business operation including, trading, transaction reporting, and client services as well as back-office functions that include IT and HR systems.
The new regulatory framework included under MiFID II is designed to take into account all of the developments that have happened in the financial trading environment since the original directive came into force back in 2004. In addition to this, it covers a much broader range of investments, thereby extending the scope of those investment services that need to have received authorisation from national regulators in order to operate their businesses legally.
Selecting the best mobile voice recording solution will be increasingly important After January 3rd, 2018. We live in an age of transparency where mobile call recording is no longer just a nice-to have – it’s a necessity.