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No Enforcement Doesn’t Mean No Problem, Warns FCA on MiFID II Compliance

The question of regulatory enforcement is a tough one, and the FCA has come in for its fair share of criticism over how it has handled the compliance requirements for the radical new fee disclosure requirements brought in by MiFID II in January last year. The regulator has been adamant in its stance that MiFID II enforcement requires a proportionate response based on assistance rather than aggression. Yet despite its formerly relaxed approach, recent developments suggest that this extended period of clemency could soon be drawing to a close…

The FCA has been in clear in its approach from the start – a balanced response allowing firms the time they need to adapt to the enormous changes of the new regulation. Way back in September 2017 Mark Steward, Director of Enforcement and Market Oversight, took pains to reassure the market that: “We intend to act proportionately. In this context, this means we will not take a strict liability approach especially given the size, complexity and magnitude of the changes that are required to be in place.” In fact, the FCA confirmed at the time that it had no intention of taking enforcement action against firms for not meeting all requirements straight away, as long as there was evidence that they had taken “sufficient steps” to meet their new obligations by the start date.

Since then, the regulator has stuck to this laissez-faire approach, despite repeated warnings that it would start holding firms to account. In June 2018 FCA Chief Executive Andrew Bailey told a Treasury Select Committee that: “We have a programme of supervision that is underway and of course after a while we will enforce if people [don’t comply].” Yet in January 2019, Bailey admitted at another Treasury hearing that the FCA has yet to take enforcement action against any investment firm over MiFID II non-compliance – leading to strong criticism from the industry.

Prominent wealth manager and anti-Brexit campaigner Gina Miller, co-founder of SCM Direct, in response called for Bailey’s resignation, claiming that he was “turning a blind eye” to fee disclosure requirements.

“The buck has to stop somewhere and I suggest it is at Mr Bailey’s door. Culture comes from the top, and the FCA’s culture under Mr Bailey appears to be capitulation to the very industry it is meant to regulate,” she said. “It is time for him to ensure the FCA properly regulates the UK investment industry, or else resign.”

According to SCM Direct, true transparency of costs and charges would save investors at least £903 million a year, or £4.5 billion over a five-year period, and the firm has been vocal in its criticism of the FCA for its perceived failure to take action against rule breaches. The company has already sent two dossiers of information to the FCA, in which it highlights over 50 companies it claims are in breach of MiFID II requirements; and it continues to identify and directly challenge specific firms for the non-disclosure of accurate costs and charges.

In his latest Select Committee appearance Bailey defended his position, explaining that the FCA has hitherto been “focused on supervisory action”. Yet recent developments suggest that the wind could soon be changing.

On February 4, 2019 the FCA revealed (in response to a Freedom of Information request from The Times newspaper) that 48 investment companies were now under investigation for failing to disclose costs – up from a total of 34 as of October 2018.

And in a speech to the Tax Incentivised Savings Association last week (February 7) the FCA Head of Market Policy, Stephen Hanks, warned that just because there have not yet been any enforcement cases to date, does not mean the regulator is satisfied with current compliance levels.

“We have been having discussions with firms across a range of issues which are in the nature of supervisory intervention, but as was revealed at the Treasury committee session, there are no pending enforcement cases in relation costs and charges,” he said.

“This shouldn’t be taken as simply as we are entirely happy with what is going and are taking no action… It’s just there is nothing that we have found that meets the requirements for taking an enforcement case, which is complicated and time and resource consuming.”

The FCA is expected to publish a report in Q1 2019 outlining its findings on the effectiveness of cost disclosures and the processes by which firms calculate and report transaction costs. Could these early warning signs could be viewed a primary shot across the bows?

We want to hear your thoughts! Does the FCA’s easy-going approach need to upgrade into a more effective enforcement operation? Have you experienced issues with fee disclosure, or do you have a tech solution to assist firms with MiFID II disclosure requirements? Comment in the box below, or tweet us at @RegTechInsight to join the debate.

One Reply to “No Enforcement Doesn’t Mean No Problem, Warns FCA on MiFID II Compliance”

  1. I am not impressed with compliance as a whole. I founded a company and we built solutions in the knowledge the law REQUIRED that firms implement solutions. On contacting non-compliant firms, we were simply blanked, and to this day, many of them do not have solutions in place as can be seen by the publicly available data. On notifying the FCA of breaches, in an e-mail reply they simply state that it’s up to the firms concerned, and it’s nothing to do with the FCA if firms are in breach of MiFID II.

    Machine readable, publicly available pre and post trade transparency? Good luck with that. From all but a handful. Firms are actively and intentionally making it difficult to get this.

    Best execution RTS 27 & RTS 28, slightly better than transparency publication – but not by much.

    RTS 23 Instrument reference data from mainland continental Europe venues and SIs? Um… not really. UK firms spent millions on it, EU firms in comparison seem not to have bothered – where are the EU national regulators?

    RTS 25 time sync with atomic clocks or satellite networks? Nah, we’ve got our sundial, we’re fine.

    As someone who spent a lot of time, money and effort building solutions to the industry problems, I’d like to see the FCA grow a pair and get on with enforcement. That goes for all continental based NCAs. Firms are deliberately ignoring the regulations at the moment, as they know there are costs of complying, and no penalty for not doing so.

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