The UK is likely to face a significant challenge in the identification of clients and counterparties at an individual level on a national basis, as specified by the current proposals under the auspices of the MiFID review, according to participants at this week’s MiFID Transaction Reporting Group meeting. Rather than opting for firm level identification standards, the European Commission is keen for national standards to be set, which will prove challenging for the UK in particular due to its lack of ID cards.
Under current regulation, all MiFID investment firms need to endeavour to obtain a Swift Bank Identifier Code (BIC) to allow for the tracking of data cross border in the European Economic Area. After obtaining a BIC, firms must then provide this data to the UK Financial Services Authority’s (FSA) Transaction Monitoring Unit (TMU). However, in order to allow the regulator to track client and counterparty data for market abuse detection purposes, firms must also provide one of three identifiers for these parties to the FSA: the BIC, if one is available, is the preferred option; but firms can also request an FRN code from the regulator; or use their own proprietary identifiers. However, as noted by Jean Obray and Ana Fernandes from the FSA’s TMU during the meeting, the regulator will be moving away from using FRNs because of the cross border requirements under the incoming second version of MiFID. Hence, when a client or counterparty does not have a BIC, another code will need to be used. This is fine in countries where individuals have identification cards and numbers that specifically identify them (although there are concerns about the sharing of this data in a cross border context), but the UK does not have these in place and is unlikely to introduce them in the near future. The challenge then, is to select another form of identification standard or code for the UK at a national level in order to meet MiFID’s proposed requirements. Attendees to the meeting discussed the potential of national insurance numbers and passport numbers in this context, but both of these have their challenges. Remarkably, national insurance numbers only cover around 60% of the UK population and passport numbers are unique to each passport rather than the individual (ergo an individual can have several numbers). Certainly, this dilemma will not be an easy one to solve and set in a cross border context, the mapping and sharing of this data could prove problematic regardless. After all, which number should be used for individuals living and working in another country? On the other hand, if the Commission’s proposals specified identification standards at the firm level, where each firm is tasked with identifying and tracking this data, then this problem would be less challenging. The attendees to this week’s meeting seemed to be hoping for such a revision to be made. It is also interesting to note the prevalence of the Swift BIC in these conversations, mirroring some of the discussions going on across the pond with the Office of Financial Research. However, as noted by one attendee from an unidentified US brokerage firm, the focus of the European proposals remains fairly regional and the US and Europe “really need to speak to each other more” on this topic.