The oncoming MiFID II should be viewed as a data problem, rather than just as a regulatory problem, Manmeet Rana, director and MiFID II lead at Deloitte, told the PAM Annual Front Office Dinner.
In previous updates Ms Rana has delivered at PAM Annual Dinners she had said firms were expecting further clarity from the regulator. However, this has not emerged, she said this year.
Whereas MiFID I, which came into force in 2007, was very a “tick box exercise” about making sure official policies and procedures were in place in a number of areas, its successor is more of a “data problem”. It will have a real impact in the front office operates, Ms Rana said.
“Data capture will become crucial to how a firm is run under MiFID II,” she said. “The challenge is how firms will manage the data generated internally as well as it how it will use the increased external data that will become available.”
One of the main aims of MiFID II is to increase market transparency. This means that every investment decision will need to have more data surrounding it.
For example, post-trade transparency means all firms will need to report their trades and the rest of the market will be able to see this. While a firm will not be directly identified, the trade will be. The availability of this data means firms will need to decide how they use it, Ms Rana said. It could be used to give a competitive edge. Likewise firms must be aware that firms will now be able to see, and potentially use, the data on their trades.
Another area where the increased data requirements will prove a “huge challenge” is suitability. Ms Rana said the regulation will mean that investment decision, “be it buy, sell or hold”, will need to be documented as to how it meets suitability standards.
“Firms need to think how this will impact the team,” she said. Ms Rana told diners that some of this process can be automated but that they need to think how it will affect individuals and ensure that the data gathering does not become too onerous and lead to dissatisfaction.
One area that there is still a lack of clarity on is the disclosure of costs and charges. This is intended to enable a client to see all the charges it is paying, including charges to manufacturers of investment product, distribution charges etc. It should also show the impact these charges are having on long term returns.
However, Ms Rana said that there has been no guidance as to how firms should present this data to clients. The EU’s PRIPS rules does lay this out, so many firms are set to adopt this method. But if not all adopt a similar approach it will make it difficult for clients to compare costs and charges across firms, another intended outcome of the rules.
Ms Rana does believe that overtime the sector will come to make this data easy for clients to understand. This, she said, may take a few years but it will lead to competition on costs and charges, which will have its own impact on the sector.
In addition, the amount of data that firms will need to send to clients (as well as the above they will be required to report to a client when a portfolio drops by 10 percent or more) means they need to think about the method of delivery. This may vary from client to client and some may not even be interested in recievng the information that MiFID II will require firms to send them. Some of the data may even seem contradictory. Depending on how a client is going use this data, firms will need to tailor their approach, Ms Rana said.
The PAM Annual Front Office Dinner took place on 9 May 2017 at The Goring Hotel in London. It was attended by 20 members of senior front office staff, three speakers and was chaired by the founder of PAM Insight, James Anderson. The evening was kindly supported by Deloitte and Jupiter Asset Management.