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MiFID II: A Long Way from Happy Ever After…

It is over a year since MiFID II was finally implemented on January 3, 2018 and in the mad dash to meet the regulatory deadline, many firms adopted immediate measures and mandatory shortcuts to meet the new research rules, that are now emerging as less than sustainable over the long-term. Fast forward 13 months, and some of the underlying challenges around implementation are appearing. We speak exclusively to HENRY PRICE, CEO of MiFID II research management platform Red Deer, to learn more about how firms are handling the new normal.

The initial implementation period was of course the biggest challenge – and it became rapidly obvious that the firms who had best prepared were those best placed to deal with the challenges – with a better handle on budgeting, and a more advanced relationship with potential providers. However, that is not to say that others remain at a disadvantage – a steep learning curve has levelled out the playing field.

“Around the deadline, the biggest concern was the predictability of research agreements with providers,” notes Price. “There is still a great deal of inconsistency, although improvements have been made throughout the year on what is not a simple problem for either provider or consumer. Inducement was a complete unknown on January 3, except for the very best prepared, and there was a quick learning curve in the months immediately following, as firms finally got a chance to collect and review data.”

Many managers (especially larger firms) are still trying to get their heads around the complexity of the regulation, and some providers who are not necessarily 100% MiFID II-focused have still not yet addressed the real complexities of the regulation. For example, concerns remain around the high level of buy-side variation in rate cards and charging methodologies for research provision, while corporate access has become another challenge, particularly around attestation. But the use of technology is helping to resolve these problems.

“Where investment managers have implemented legacy or non-compliant systems, or attempted to solve a problem manually, there is now a significant push to use technology to solve these problems effectively and efficiently. Research managers and their teams are being asked for greater business intelligence to drive the decision-making process, but there’s a fine balance to achieve between front office effort and quality of data, and effort on an overloaded back-office. Managers are looking for an unobtrusive ‘Front-Office First’ approach,” explains Price.

“Clients are increasingly looking to track corporate access management using similar tools to research interactions. We have recently released features around attestation, verification, reporting and alerting that have been requested by clients to allow them to manage and report – in both a consistent fashion to reduce the risk of non-compliance and with minimal extra effort.

“We are still seeing the requirements for board and investor research reporting evolve as our clients start to see meaningful data from a year’s consumption. MIS is quite addictive once you have accurate data, but the opportunity to extract insight still has not been fully tapped. We have seen some really interesting developments in the front office recently, from some of the more detailed internal consumption data.

“From the research provider side, as expected, we are still seeing issues with the accurate collection and reporting of data. This data can be useful in analysis, particularly for comparison prior to a vote or research agreement discussion, but there is still no substitute for buy-side tracked data when it comes to creating meaningful MIS for boards or investors.

“We have also had an influx of additional clients for our surveillance products, with a focus on the guidance given by the FCA relating to treatment of non-equity asset classes. In particular, from our client forums, we’ve seen an increased appetite for flexibility in cross-asset rule creation and workflow improvements, which are increasingly important, given the additional overhead in a more detailed monitoring framework. Both of these have stemmed from the recent guidance.”

And although there is still a broad hope amongst the buy-side community for greater standardization in charging methodologies, this may take rather longer than expected – and in the meantime, both users and providers are adjusting to the new normal.

“We’ve already started to see clients and prospects looking to make changes to their global processes as a result of their learnings from their MIFID implementation, including better valuation and voting, better data capture and the resulting improvement in the quality and value of management reporting, and their relationship with providers,” says Price.

So what comes next – could a MiFID III be hovering on the horizon?

“Any additional regulation is unlikely to be as broad in both scope and scale,” thinks Price. “While it’s likely that the existing rules will be finessed over time, funds need a transition period to address the impact of the current regulation, to make sure that they can manage any further changes from an operational perspective. The solutions we’ve built for MIFID II record and report data flexibly and in a granular way, so we do not foresee significant impact from further changes – for clients or ourselves.”

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