With the implementation of the revised Markets in Financial Instruments Directive (MIFID II) less than 6 months away, investment firms are gearing up to the comply with the upgraded directive before the deadline. From the numerous upgrades and revisions to different elements, one of the biggest changes relates to the regulation regarding how firms record transactions and their dealings with clients. Under MiFID I, firms were subject to a few record keeping requirements compared to under MiFID II. Investment firms are required to keep records of every client order and every decision taken to execute the order. Firms must also keep records of transactions while executing or transmitting an order. European Securities and Markets Authority (ESMA) has provided a non-exhaustive list of minimum records to be kept which firms must adhere to. The period of time for the retention of a record shall begin on the date when the record is created. As per the directive, data must be stored for at least five years (with an option to extend it to seven years) and should be in a medium that can be easily accessed by National Competent Authorities (NCAs). One might say firms have limited and straightforward record keeping requirements under MiFID I. However, in order to fill the gaps left by MiFID I and due to the rapid development of the internet, the commission has significantly enhanced the record keeping requirements.
Under MiFID II, there is an increased need for investment firms to provide required information to NCAs. These enhanced records will assist NCA in confirming whether a firm has complied with its obligations in respect to its behaviour relating the integrity of the market. As a result, record keeping requirements under MiFID II are much more granular. MiFID II rules require investment firms to store records of all services, activities and transactions and ensure the data is sufficient so that a regulator can reconstruct each stage involved in the processing of a transaction. This means all the initial forms of communications must now be recorded as well, which is quiet an ask. In addition, records have to be ‘readily accessible’ by the relevant competent authority. However, there isn’t an explicit definition by ESMA or the FCA on what ‘readily accessible’ means. They expect a firm to identify what is appropriate based on the type of transactions involved. Firms at the moment might be looking at market benchmarks set by other regulations such as the American Dodd Frank regulations which imposes a requirement of a 72-hour turnaround. Investment firms must now ensure the stored records cannot be manipulated in any way, unless it is for amendments. In this case, a clear audit trail is required to show the changes that have taken place. MiFID II also requires firms to immediately record every initial order received from a client and in relation to every initial decision to deal taken for the disposal of any NCAs.
MiFID II has improved regulations regarding recording of voice and electronic communications as well. The new regulations require firms to operate an effective policy which covers the rules surrounding the recording of telephone conversations and electronic communications. It is mandatory for firms to keep records of telephone conversations and electronic communications relating to transactions whether they deal on own account; or receive, transmit or execute client orders. Keeping in mind the evolution of internet compared to a decade ago when MiFID I was introduced, MiFID II also extends its scope of communication to any form of electronic media like emails instant messaging, video conferencing, SMS and so on. This might turn out to be a tricky affair for firms as the widespread use of smart phones over the past few years has resulted in various messaging applications being used for communication. Firms must also inform new and existing clients that telephone calls which may result in transactions will be recorded.
With uncertainties still looming over a lot of the granularities over MiFID II, firms are still waiting for NCAs to localise the MiFID II guidelines and make them more specific. According to an estimate from auditors E&Y, a standard medium-sized UK wealth manager is expected to spend between £3 million to £5 million on preparations for MiFID II compliance. Enhanced compliance requirements including the ones on record keeping is expected to change how wealth managers conduct their research and how they bundle information. It is obvious that regulatory changes to processes like record keeping will affect all ends of a firm including IT, marketing and HR. How managers will align their firms with these changes and how NCAs across Europe will bring a sense of clarity to these vague requirements remains to be seen.