The end is in sight. In under six months, the deadline for MiFID II implementation will have passed. Since its legislative inception, JWG has iterated the importance of forward planning and anticipating the major changes under MiFID II. In concrete terms, our MiFID Implementation Group (MIG) meetings have provided the platform for senior managers from top-tier banks and vendors to discuss the most contentious areas of MiFID II and agree the path forward.
We have also been active on this platform in advocating a focus on the issues that matter in a collaborative manner. One of our most popular articles was on the 10 key changes to best execution under MiFID II, back in September 2015. Under MiFID II, firms will be required to take “all sufficient steps” to ensure the best possible results for clients and the scope of best execution will be extended to asset managers.
Yet an interim report by the FCA in November 2016 that conducted a market study on assessment management noted how asset managers are still failing to ensure effective oversight of best execution. In the FCA’s final report last month, many of the themes that emerged from the interim report were confirmed.
With the MiFID II deadline looming, what can be done? Preparation and compliance can still be achieved in a limited time. To facilitate this process, this article will outline the changing requirements for best execution and outline the opportunities for asset managers to implement these changes in a smart way.
Scope and main obligations
The FCA proposes to apply MiFID II best execution obligations depending on the type of firms:
- Collective Portfolio Management Investment Firm (including AIFMs and UCITS ManCos): full MiFID II rules apply
- Collective Portfolio Managers (AIFM): FCA proposes to extend the RTS 28 disclosure requirements
- Collective Portfolio Manager (UCITS ManCo): FCA proposes to apply MiFID II best execution requirements to UCITS ManCos.
A key change that MiFID II implements vis-à-vis best execution is for firms to make “sufficient steps” instead of “reasonable steps … to obtain the best possible results for its clients”. What does this mean in practical terms? ESMA’s Q&As outline that the enhanced standards of “sufficient steps” will require the following:
- Intended outcomes lead the design of policies
- Front-office accountability
- Having the detection capabilities to identify any potential deficiencies
- Monitor the quality of execution arrangements and policies before and after achieving the outcome to identify when changes are appropriate.
The last point is an important change as it requires a wider cultural shift when thinking about how asset managers approach best execution.
Regulatory shift leading to a cultural shift
MiFID II’s best execution requirements mean that asset managers will have to change how they operate. This change will require constructing a business plan and making operational changes, but this is all part of a wider shift.
Asset managers will have to continually ensure and demonstrate that they have the correct governance and control framework to consistently review performances and policies.
Best execution can no longer be seen simply as a perfunctory exercise. Instead, it must be perceived as an important process that all asset managers must integrate into their practice. This aim must include market monitoring to assess ongoing effectiveness of policies and ensuring transparency to build trust with clients and demonstrate that the best deal is being supplied.
Is it too late?
Although the interim report by the FCA highlighted many issues faced by asset managers, MiFID II offers firms the opportunity to examine their business models and focus on how they can deliver the best outcomes for their clients.
The deadline for compliance with MiFID II is rapidly approaching, yet there are areas surrounding best execution that still generate confusion and will require collaboration between the senior managers at top-tier banks and the vendors to discuss the most contentious issues. JWG supplies this platform through our MIG meetings. Our next three meetings are:
- MIG 91: Information to clients and client data guidance meeting 5
- MIG: Transaction reporting call 1
- MIG 92: Research guidance meeting 2
If you wish to find out more about MIG, please contact firstname.lastname@example.org. You can also keep up to date with MiFID II related news on our LinkedIn Group or follow us on Twitter and subscribe to our newsletter alerts.