A new Thomson Reuters survey reveals the key issues as organizations prepare to meet the complex demands of Markets in Financial Instruments Directive II (MiFID II).
Having successfully adapted to a continuous wave of new regulation since the financial crisis, businesses and financial institutions are facing their biggest challenge yet.
MiFID II will fundamentally change the way capital markets operate in Europe and the ripples will be felt right across the world. From new trading venues to greater transparency and from greater investor protection to the need to demonstrate best execution, its requirements are multiple and far-reaching. As businesses and financial institutions limber up for implementation in January 2018, our survey of over 1,100 executives across the world, all impacted by the oncoming regulation, provides a fascinating and detailed insight into the pressure points and potential benefits of MiFID II.
A clear knowledge gap
While awareness of MiFID II is high, our survey reveals a significant knowledge gap. Only 46% of respondents describe themselves as “knowledgeable” about MiFID II. There was a significant disparity between the 49% of EU respondents and the 44% of non-EU respondents who declared themselves knowledgeable. Asia outperformed all regions with 52% of respondents saying they were fully clued up about MiFID II, while in areas least likely to be impacted such as Latin America and Australia Pacific, only a quarter made this claim.
Concern about MiFID II outstrips that of any other regulation, including recent and ongoing challenges such as the Anti-Money Laundering (AML) directive and EU General Data Protection rules. EU and Asian respondents were the most concerned about MiFID II, both putting it significantly ahead of AML.
More help needed from regulators
So what is it about MiFID that causes apprehension?
The most popular response to this question was increased cost and compliance pressures, followed by harm to the industry and fear of noncompliance. Interestingly, non-EU respondents were more concerned about these three issues than EU respondents, while those who described themselves as the most knowledgeable were also more likely to be concerned. Over a third of Asia-based respondents feared not being compliant in time.
With such high levels of concern, the role of regulators to educate and support organizations may be crucial. Four in 10 of all respondents say that the regulators are providing the guidance they need, while almost half consider there is a need to work more closely with rule makers. Globally, just over one in 10 (11%) believe the regulations are not clear and more guidance is needed, rising to nearly one in five (18%) in the EU.
With the deadline looming, many are not ready
Failure to prepare is famously described as a preparation for failure, so how ready are respondents? Thirty-seven percent felt their organization was not fully prepared, although this fell to only 21% for those who described themselves as fully knowledgeable about MiFID II. Given the limited time available between now and when the regulation goes live in January 2018, this suggests that a lot of clarification and catch-up work is required.
Respondents were more pessimistic about other participant groups, feeling that 46% of regulators were not prepared and 50% suggesting that their industry as a whole was not ready. The group regarded as being furthest from the starting blocks was customers, with 59% of those surveyed saying their clients were not prepared, rising to 63% for EU respondents. This may reflect the fact that customers generally expect their financial service providers to bear the brunt of compliance. With MiFID II this may be a dangerous route to take, as the buy-side has its own distinct compliance obligation in areas such as transaction reporting.
Significantly more resources are being dedicated to compliance
Given the issues flagged above, it is perhaps not surprising that 72% expected their organizations to dedicate more time and attention to preparing for MiFID II, while just over a quarter (26%) felt it would require significantly more time and attention. Asia tops the charts again in this respect, with 31% expecting to spend significantly more time and attention on compliance than at present.
This won’t come cheap, with compliance costs forecast to increase by 28% in the next 12 months and remain at this heightened level for the next three years. Non-EU respondents had slightly higher cost expectations than EU ones, but those professing to have the most knowledge about MiFID II put the cost of compliance at its highest level, suggesting an average spend of US$158 million over the next 12 months.
Data is a key issue
The wide scope of MiFID II means that our respondents have no shortage of areas to invest their compliance spend, from boosting investor protection and accessing new trading venues to ensuring greater transparency and demonstrating best execution. One common element in many of these challenges is data.
To comply and operate efficiently in a post-MiFID II world, organizations will need to be able to create, access, absorb and aggregate data from a variety of sources. Yet 40% of respondents did not feel confident that they had the data they needed to comply. Key challenges named by respondents were the volume, complexity, sourcing and reconciling of data. Many respondents (40%) were looking to Thomson Reuters, the world’s largest provider of financial reference data, as a MiFID II solution provider.
Will it be worth it all in the end?
Despite the range of concerns and costs, our survey revealed that it will be worth the effort. Just over two-thirds of all respondents believe MiFID II will be of overall benefit to their organizations, with this figure rising to three-quarters among those most knowledgeable about the coming regulation. The greatest benefits identified were better investor protection and improving the transparency of financial markets. There could also be good news for FinTech and RegTech companies as our respondents believe the need to find new compliance solutions will drive a significant increase in the number of such companies within their region.
Turning a challenge into an opportunity
While our survey highlights some serious issues, there is also evidence that these are being addressed, with more money, time and effort going into compliance. And recognition that, despite the initial pain, MiFID II will put the industry and its customers on a stronger and more secure footing.
It’s important to remember that compliance is not purely a defensive play; having everything in the right place and ready to go can provide a competitive advantage. As a recognized leader and trusted ally in the market, Thomson Reuters is strongly positioned to support organizations as they address the complex data needs and solve the key challenges of MiFID II.
To learn more about MiFID II, visit mifidii.com.