10 Key Regulatory Focus Areas for UK/European Wholesale Markets in 2019

By David Berman, Carl Fernandes  Nicola Higgs, Rob Moulton, and Charlotte Collins

In the second post of this 10-blog series, we examine recent and upcoming developments relating to MiFID II. This is taken from our wider publication: 10 Key Regulatory Focus Areas for UK/European Wholesale Markets in 2019 – Progress Report. Read the full publication here.

FCA feedback on costs and charges

The FCA published its first formal piece of feedback on MiFID II implementation in February 2019, focusing on firms’ costs and charges disclosures. The FCA’s review looked at ex-ante disclosures by retail investment firms, finding that firms have interpreted the requirements inconsistently. In particular, the FCA found that firms were not accurately disclosing all transaction and incidental costs and charges, and struggled to disclose costs for third-party products and services to the same standard as their own costs. Although the findings are also relevant to firms operating in wholesale markets, unfortunately the review did not provide the clarity these firms are seeking on the issues and uncertainties relating to ex-post costs and charges disclosures.

Supervisory work

The FCA is conducting a range of post-implementation supervisory work. The FCA has stated that it is undertaking supervisory work in relation to research unbundling and the product governance regime. Output from this work is expected this year and will hopefully bring greater certainty to these difficult areas.

Meanwhile, at EU level, ESMA has launched a “common supervisory action” regarding the MiFID II appropriateness requirements. Participating national regulators will carry out supervisory work in the second half of 2019, assessing how firms apply the appropriateness requirements. This work will use ESMA’s supervisory briefing on appropriateness (which was updated in April 2019) as a starting point. It is not yet clear which national regulators will participate in the common supervisory action.

Further, ESMA has published a call for evidence on the impact of MiFID II disclosure requirements for inducements and costs and charges. In particular, ESMA is keen to understand how the application of the rules varies across Member States. The evidence gathered by ESMA will feed into a report that the European Commission must provide by 3 March 2020, and could potentially lead to adjustments to the rules.

ESMA is also taking action in relation to periodic auctions, having published a Final Report in June 2019 setting out its concerns and next steps. ESMA plans to work on further guidance covering price determination and pre-trade transparency in the context of frequent batch auctions. ESMA has also indicated that it will be looking at OTC trading, in particular SI trading, in its upcoming reviews.

Transaction reporting

The FCA continues to focus on transaction reporting, given that accurate transaction reporting data is critical to the FCA’s ability to monitor the market. The FCA published some initial observations on transaction reporting under MiFID II in Market Watch 59. These observations reference many basic and obvious errors, such as firms reporting the wrong price or time, or including incorrect party identifiers. The FCA also notes that some firms that have identified errors or omissions in their transaction reporting failed to cancel, correct, and resubmit their reports to the FCA. The FCA stresses the importance of firms both correcting any errors, and notifying the FCA of the errors identified. Firms should consider themselves on notice that the regulator will not continue to tolerate the sorts of mistakes highlighted in Market Watch 59. Firms should also note Mark Steward’s recent comment that they should “implement regular, 6-monthly reconciliations to detect reporting issues and to prevent breaches becoming endemic”.

Read the full publication: 10 Key Regulatory Focus Areas for UK/European Wholesale Markets in 2019 – Progress Report here.