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Apr 29, 2019

Mifid II: UK brokers come under fire and SEC suggests market-approach idea

Different developments either side of the Atlantic on the far-reaching regulation

Interesting developments have recently emerged in the UK and the US regarding ongoing approaches to Mifid II.

In the UK, regulator the Financial Conduct Authority (FCA) has criticized the inaction of brokers toward the regulation in its latest CEO letter to all regulated financial firms, a copy of which has been obtained by IR Magazine.

The FCA states in the letter: ‘We find that, unlike other types of firms in these markets, brokers have not kept pace with, and have under-invested in, the requirements of this new [Mifid II] legislative and regulatory environment.

‘Although there has been some recent progress in the levels and quality of firms’ compliance resources, and the sophistication of firms’ systems and controls, supervisory intervention has more often driven these improvements than firms’ own initiative. In general, we continue to see a complacent attitude and resultant failure to meet expectations across all the areas of regulation we have recently examined.’

Analyzing where the problem lies, the FCA states: ‘We see poor and outdated remuneration models as a root cause of misconduct risk in this sector.’

The FCA adds that it is currently reviewing market practices through a survey of around 50 firms in the sector: ‘Preliminary findings show a worrying lack of awareness of obligations around the awarding of remuneration and, in some cases, material non-compliance. We will publish our findings later this year and will thereafter take a tough stance with all firms in pursuit of the changes we now see as both necessary and urgent.’

From a US perspective, the ongoing debate surrounding Mifid II took another interesting twist recently in a speech from one of the SEC’s divisional heads. Dalia Blass, SEC director of the division of investment management, made a statement that asserted the commission could well adopt a market approach to Mifid II, which has been developing in the US – but much engagement was needed first.

This comes after the 2017 SEC ruling that gave a 30-month reprieve to US banks and brokers to abide by Mifid II via a no-action assurance. That reprieve will expire in July 2020.

Blass said: ‘There are indications market solutions are developing that may make extending the no-action relief unnecessary. For example, I understand that some fund managers are using reconciliation or reimbursement processes to deliver cost transparency while addressing compliance.

‘At the same time, some broker-dealers have explored or taken steps to offer research through a registered advisory business. These are examples of market-based solutions that are developing and, as they emerge, I believe the [SEC] staff should explore opportunities to provide support while not getting ahead of the market.’

Blass noted, however, that this was part of an ongoing discussion, and much work was still needed to assess what market practices worked. ‘Would any of the emerging market-based solutions work well for some segments of market participants but not as well for others?’ she asked. ‘Is there guidance or rulemaking outside the Advisers Act, such as addressing direct, hard-dollar payments under section 28(e) of the Exchange Act, that would be beneficial? We look forward to engaging further.’