By Martin Taylor, Deputy CEO and co-founder at Content Guru
When the Revised Markets in Financial Instruments Directive and new Markets in Financial Instruments Regulation, or MiFID II, was introduced three years ago it profoundly reshaped how EU financial markets, products, services, and the relationship between financial services firms and their customers are regulated.
Featuring binding obligations to record and store all external communications relating to a transaction, the exceptional circumstances created by COVID-19 meant that in March 2020 the European Securities and Markets Authority (ESMA) published a statement clarifying issues relating to the recording of telephone conversations. The Financial Conduct Authority (FCA) also issued similar guidance, urging firms to take steps to mitigate risks should they be unable to record all relevant voice communications due to the rapid implementation of work-from-home mandates in the face of the first UK-wide lockdown.
This is just one example of how the regulatory landscape has proved particularly difficult to navigate in a period when a global health pandemic generated significant operational, data security and compliance headaches for firms.
Making the difficult more complicated
High quality and accurate MiFID II reporting has proved challenging for many firms. Indeed, according to consultancy firm Duff & Phelps, more than a fifth of investment firms had already breached MiFID II reporting standards pre-COVID. And that was before a mass shift to remote working introduced further complications into the mix.
The forced transition to home working initiated a massive acceleration in technology adoption and innovation. In a bid to continue to serve clients, organisations responded with remarkable efficiency and determination, utilising everything from video conferencing to collaboration platforms such as Microsoft Teams. All of which led to the introduction of ‘new normal working practices’ featuring an extended range of digital tools and communication channels – including chat, phone and email, as well as screen sharing.
However, MiFID II applies to any communication that relates to a trade. This meant all interactions had to be recorded and stored. While regulators may have been forgiving at the height of the crisis, it’s clear that many Western countries now face an extended operational environment typified by the temporary easing and re-application of local, regional and even national lockdown restrictions. As a consequence, many firms are already planning to retain a hybrid working model for the long term and beyond any resolution of the current coronavirus pandemic.
Which means organisations will need to ensure they have processes in place to fully meet their MiFID II obligations.
Dealing with compliance in a post-COVID world
The impact of COVID has served to fast track the implementation of a much-expanded estate of digital collaboration and communication tools. And the general consensus is that firms won’t be returning to the old ways of doing business anytime soon.
Compliance officers now have to manage how information and data is captured, recorded, maintained, and made searchable across a diverse range of tools and media. That includes managing scenarios where, for example, while their trading professionals may be using Microsoft Teams, some of the clients they serve will be utilising Zoom.
Unified solutions may provide the answer to addressing the MiFID II compliance reporting challenge. As well as enabling organisations to take advantage of best-of-breed technologies, these platforms also feature functionality that makes it possible to undertake search-and-replay, e-discovery and end-to-end trade reconstruction across a diversified technology ecosystem. All of which makes it possible to implement cost-effective and enterprise-wide compliance and data management policies.
The drive towards enhanced data ingestion, automation, and data analytics
Managing operational risk and keeping an eye on what’s happening across the extended hybrid working environment is now top of mind for compliance officers. Increasingly, the ability to analyse an entire data set rather than undertaking random manual sampling means firms will be taking advantage of advanced speech-to-text and analytics technologies that proved so valuable during lockdown.
The increase in demand for high quality data heavy compliance strategies means firms will also need to ensure their data storage capacity is sufficient to retain significant volumes of electronic communications data – including uncompressed stereo voice recordings – for the mandatory minimum of five years.
Despite the EU’s adoption of a legislative proposal in July 202 that includes amendments designed to reduce the administrative information reporting burden on financial institutions, the debate continues to rage as to how such reporting may work in practice. Especially given that the regulatory framework between the UK and EU will look markedly different the further we go beyond Brexit.
Regardless of what happens, the FCA is preparing to initiate its own reporting regime and registers and is unlikely to reduce the scope of what needs to be recorded for MiFID II regulatory purposes. Firms that want to avoid fines, and preserve reputations, will need to assess their technologies and processes to accommodate any upcoming changes and continue to meet their compliance obligations – whatever these may be.
Preparing for an evolving regulatory landscape
While the post Brexit implementation of MiFID II in the UK will doubtless be complex, finding ways to keep on top of MiFID’s exhaustive reporting requirements will be mission critical to ensuring that firms can continue to manage and onboard clients and allow them to transact whilst remaining fully compliant.
Regardless of any forthcoming EU amendments to MiFID, UK based financial services firms that want to maintain an international profile and retain the trust of clients will need to ensure they are able to maintain MiFID II or its equivalence without missing a step.
In much the same way as firms had to keep compliance front of mind when adopting a technology-led approach to ensure they could continue to trade during the COVID-19 crisis, utilising today’s automated monitoring and information management platforms will become increasingly key for enabling the agile compliance and oversight monitoring and reporting that ensures firms can continue to operate in a controlled and transparent manner – and within the boundaries of a fast evolving regulatory landscape.