How Firms Can Leverage Technology to Ensure MiFID II Compliance

How financial institutions can leverage technology to ensure MiFID II compliance – and beyond

Edel Brophy, Global Tax and Regulatory Compliance Manager at Fenergo

The ever-evolving regulatory landscape forces financial institutions (FIs) to solve multiple regulatory and compliance rules simultaneously; a situation that has become even more complicated during the pandemic. With numerous regulations dictating different sets of data, documentation and regulatory requirements, already stretched compliance teams are feeling the pressure, now more than ever.

MiFID II in particular, The European Securities and Markets Authority’s (ESMA) legislative framework, is one of the most cumbersome requirements for compliance teams to manage. Although the regulatory obligations have been in force since 3 January 2018, many firms are still not fully compliant under the directive. In fact, comparing ESMA’s 2018 and 2019 reports show an increase in the number of Member States where sanctions and measures were applied and reported,  demonstrating just how burdensome MiFID II compliance can be.

Adding to this, the pandemic has created additional challenges for financial institutions in meeting their administrative requirements under MiFID II. To this end, on 24th July 2020 the EU Commission adopted a legislative proposal including ‘targeted amendments’ which would see a revision to the existing financial markets regulation. The amendment is focused at enabling these markets support the EU economy and rally from the pandemic.

MiFID II fines on the rise

In 2019, fines for breaches of MiFID II regulations resulted in a massive nominal amount of EUR 1,828,802.Regulators admit that the quality and accuracy of data  reported by financial institutional participants has been an issue due to the complexity of the obligations. Portugal, followed by the Czech Republic, Hungary, Bulgaria and Luxembourg were the countries with the highest number of imposed sanctions and fines.

ESMA acknowledged the considerable time that the enforcement processes takes in order to see the full effect. The transposition of the MiFID II directive into domestic legislation allows member states to exercise national discretions meaning that implementation may differ from other member states.. The timeline between the transposition process, implementation measures to permeate down and adopted by market participants and the visibility with regards to non-compliance can take a couple of years to become evident.  With this in mind and with the challenges the pandemic has presented to the Commission  acknowledged the requirement to remove ‘formal burdens where they are not strictly necessary’ and in its proposal remove administrative burdens that result from documentation and disclosure rules; this will leave more time for resources to focus and deal with the dilemmas and aftermath which has resulted from Covid 19.  The aim is to simplify current reporting requirements and enhance the quality of the data reported.  This will have a downstream effect on market participants and their compliance reporting mandate.  

Other regulatory authorities have also responded with ongoing statements and guidance on MiFID II requirements, such as the UK’s Financial Conduct Authority (FCA), with a focus on MiFID II reporting requirements, including provisions for the end of the Brexit transition period by the end of 2020. 

Transformational Approach Required to Comply with MiFID II

MiFID II requires a transformational approach by firms to solving its ongoing regulatory demands. Amongst the changes from MiFID I to MiFID II, the directive imposed greater regulatory obligations  in broadening its scope with regards to financial instruments as well as  bringing  more firms into scope who were required to seek an authorisation under MiFID II.  MiFID II was the most complex piece of regulation to affect European Capital Markets and  its impact  across firms are multiple, affecting  processing and procedures as well as capacity;  – everything from data and document management, compliance, outreach, client onboarding and off-boarding and overall client lifecycle management. 

Without a single view of all client data and documentation, repetitive requests become increasingly onerous and impacts the speed of client onboarding, ultimately impacting the financial institutions’ revenue. Furthermore, the pandemic has forced FIs to deal with inadequate legacy systems that aren’t equipped to manage a predominantly remote workforce. As a result, financial regulators across the world are strongly encouraging financial institutions to adopt regtech and digital technologies in order to safeguard themselves from financial crime and remain compliant.

Firms can solve MiFID II obligations, while fulfilling overall Client Lifecycle Management demands, simply by choosing the right technology partner and automating processes required to comply with global regulations and market reform rules – including MiFID II. By leveraging such systems, all data and documentation is stored in a central repository, creating a single client view to highlight any missing data required, drastically speeding up the onboarding process. 

Avoiding regulatory scrutiny in year three

MiFID II’s main goal, to strengthen investor protection and facilitating investments in the real economy should be a key focus for firms looking to avoid regulatory scrutiny. Firms can become more efficient, resilient and transparent, by digitalizing the customer journey and providing a single client view of all information to quickly identify and address weaknesses. By doing this, they will future proof themselves against new and evolving regulation, increase operational efficiencies and enhance the client experience, all while accelerating time to revenue. 

By leveraging the right technology, financial institutions can comply with MiFID II obligations quickly and proficiently not only avoiding fines but building credibility and safeguarding their reputation.