MiFID II implementation challenges for medium sized wealth firms
With less than 10 months to go until the implementation date of MiFID II, many firms have been scaling up their MiFID II implementation projects as we approach 3rd January 2018. Across the wealth firms we’ve helped so far, the average minimum total resource required to implement MiFID II for a medium sized wealth management firm, excluding IT development time, is 1,362 days of effort across departments. Or to put it another way, over three and a half years of effort between now and 3rd January 2018!
Despite this, it appears that a number of firms are yet to even undertake a detailed gap analysis of the new requirements against what they currently do.
We’ve recently assisted a number of firms with their gap analyses. Without doubt, the overwhelming take-away from this work has been the sheer level of resource that’s going to be required for firms to meet the numerous challenges to ensure they are fully compliant by January 2018.
Let’s not forget that many firms were fined for failing to implement MiFID I requirements properly and we don’t doubt that MiFID II will bring more of the same.
We’ve set out below the four most resource hungry areas by topic and the key challenges firms need to overcome to implement MiFID II effectively for each one:
1. Best execution
Best execution was the area that firms generally projected as requiring the most resource. On average firms estimated that they’d need 277 days of effort to make the necessary changes.
MiFID II requires wholesale changes to internal best execution processes. The obligation to take ‘all sufficient’ steps to achieve best execution and the additional new requirements around assessing and reporting of best execution to clients place a higher burden on firms. Firms will need to implement systems change, develop data capture processes and undergo a re-papering exercise across the business.
The cross-departmental nature of the resource required for best execution will pose a challenge for firms, particularly around IT and Operations.
Firms must re-evaluate their monitoring and record retention processes. They must accordingly enhance where needed to demonstrate best execution across execution venues on a quarterly basis, proactively demonstrate it on an ongoing basis, and take remedial steps where there is evidence best execution is not being achieved. Remember, only this week the FCA has commented on continuing MiFID I best execution short comings, so this will be a supervisory focus post 3rd January.
2. Information to clients
MiFID II greatly increases the level of information that firms must provide to clients. The area that has caused particular consternation for firms is that of costs and charges.
Firms must be able to provide clients with a breakdown of costs and charges. Both an upfront total of all one-off costs, and ongoing costs, paid by the client in both real and percentage terms must be provided. Firms must provide a backward-looking annual aggregation based on actual costs as well as an illustration of the impact those costs and charges will have on investment returns (upfront and annually). Much of this information will need to be sourced from the product providers and there will be undoubted difficulties in receiving the information in a consistent, usable format.
In terms of implementation, there are large resource requirements for firms to consider. On average, it was estimated by firms that developing a process to meet the new requirements would require around 271 days of effort. Again, this resource is cross-departmental in nature.
3. Transaction reporting
MiFID II increases the number of instruments and firms that are within the scope of transaction reporting requirements. The number of fields that firms must report is increasing from 24 to 65. Information such as the client’s identity, a short-selling flag, information about who executed the trade, and who made the investment decision must now be included. Obtaining, paying for, and maintaining Legal Entity Identifiers (‘LEIs’) for corporate entity and trust clients also represents an additional headache for firms to contend with.
The key procedural change for wealth firms is that there will no longer be the express provision for brokers to transaction report on behalf of discretionary management firms.
Firms will face significant data capture challenges in order to enable them to report the required information. Firms also face strategic and systems based challenges with considerable resource required from across the business.
The estimated average resource required from the firms we’ve worked with was 256 days of effort – equating to approximately 11.5 months of resource.
4. Client reporting
MiFID II requires wealth management firms to report to their clients when the overall value of the portfolio falls by 10%, or more, compared with the beginning of the reporting period. Under the regulations, firms must report this information by no later than the end of the business day in which the threshold is exceeded.
This new requirement raises substantial obstacles for firms to overcome in order to be able to comply. There will be systems change required and new data monitoring capabilities. Firms must develop the necessary monitoring systems in order to be able to detect portfolio falls of 10% (or multiples thereof) on an ongoing basis. Additionally, firms may well need to update all their T&Cs and client agreements.
Under the new requirements firms will be obligated to increase the minimum frequency of portfolio valuation statements from bi-annually to quarterly. Firms will also need to include additional information in custody statements.
Due to the variety of areas of the business that this new requirement will impact, there’s a large amount of resource that will be required to implement the necessary changes. Resource from Front Office, Compliance, Legal, IT, Operations, and Marketing will all be needed.
Among our clients, it was estimated on average that 122 days of effort, or approximately 24 business weeks, would be needed in terms of total resource.
Whilst the deadline for implementation is rapidly approaching, there’s still time for you to get your house in order. But it’s critical you identify your gaps and prioritise those areas requiring the greatest amount of resource.
How can Bovill Help?
We are currently working with a number of clients as they get to grips with the challenges that lie ahead.
We can help you with MiFID II in a number of ways:
- We can run a detailed gap analysis:
Using our own framework, we can help you to identify the areas of MiFID II with the greatest impact for your business, and shape a plan to deliver the required change.
- We can perform compliance-focused reviews:
Reviewing the work you’ve done so far, your project plans, proposed solutions and operating models – to help you determine whether you are on-track to achieve compliance.
- We can provide MiFID II change resources:
Our teams of compliance and change experts can be deployed to address specific projects and work streams within a broader MiFID II programme – supplementing your existing resources, and tackling some of the trickier compliance issues.
- We can embed MiFID II experts within your change teams:
You will have experts on the ground, working alongside change professionals, which can be a powerful tool in assuring that compliance is delivered effectively. We can work with your change teams to ensure that MiFID II is interpreted correctly, and the right outcomes are achieved from both a compliance and business perspective.