MiFID II costs mount as industry navigates uncertain future

A report analysing regulatory compliance has put the projected cost of MiFID II at $2.1 billion for the financial services industry in 2017 alone.

The report from HIS Markit and Expand, a Boston Consultancy Group company, provides the industry with fresh insight into how the sprawling package of reforms will affect financial institutions in Europe.

Upon its expected introduction in 2018, MiFID II will increase trade reporting requirements on multiple asset classes, accelerate the transition of OTC derivatives onto regulated electronic venues to reduce bilateral risk, while increasing both investor protection and market transparency with a series of measures.

Yet, such a comprehensive piece of legislation comes at an uncertain time for the financial services sector in Europe, as the UK’s future role and access to the single market is yet to be determined.

With many financial institutions in the UK firmly established in mainland Europe, with offices in financial centres such as Frankfurt, Amsterdam and Paris, the risk of a two-tiered regulatory framework poses real operational issues.

In order to gain insight from the market regarding the proposed compliance obligations, the FCA recently published a consultation paper on MiFID II, which outlined some of the organisation’s key priorities.

Andrew Bailey, chief executive at the FCA highlighted the following areas of focus:

“Strengthening consumer protection is one of the key aims of MiFID II and this aligns with, and advances, our own statutory objectives. The changes to rules we are proposing today reflect key themes that we have worked on in both retail and wholesale markets over recent years to promote competition and market integrity.”

However, Bailey also reiterated the need for institutions to comply with both UK and EU financial regulation:

“As we said in our statement following the EU referendum result, firms must continue to abide by their obligations under UK law including those derived from EU law. They must continue with implementation plans for legislation that is still to come into effect, of which MiFID II is one such example.”

Rise of ‘regtech’

In today’s cost-cutting environment, the growing cost of compliance has become a major issue for banks and the buy-side. A Thomson Reuters report analysing the current regulatory landscape in 2015 identified that 69 percent of respondents expect the cost of compliance to rise.

The report notes: “Regulatory matters are consuming disproportionate amounts of board time, from correcting non-compliance and preventing further sanctions to implementing structural changes to meet new rules.”

However, this increased focus has led to the rise of ‘regtech’ a subset of the growing fintech sector. The ability to develop innovative ways to comply with incoming regulation in an effective and cost-efficient manner enables firms to secure a competitive advantage.

The market is also poised for future growth, with more than two-thirds of firms that took part in the same Reuters study (68 percent) expecting an increase in their compliance budget last year with 19 percent expecting significantly more.

Those keen to differentiate themselves from the competition in a cost-sensitive environment are already looking at compliance as a means to secure an advantage.

Partnering with ‘regtech’ firms and building technology and operations around future regulations are likely to yield tangible results. But with uncertainty hovering in the air – it is easier said than done.