At the highest level, MiFID II requires firms to prove they have acted honestly, fairly and professionally in accordance with the best interests of their clients at all times. If questions about a trade arise, or regulators field potentially credible complaints of malfeasance, investment banks must show that they:
- Understood their clients’ investing criteria and made suitable recommendations
- Offered products that matched the needs and investment objectives of their customers
- Provided relevant reports to clients, including an assessment of suitability
- Distributed marketing communications that were fair, clear and straightforward
- Avoided remuneration and sales targets that incentivized staff to recommend inappropriate financial instruments to retail clients
- Delivered clear and relevant information at all times
MiFID II is more than transactions
The vast majority of MiFID II focuses on activities that underpin a firm’s operations, including processes used in defining financial service products, core financial transactional systems and the controls that ensure investors are treated equally across investor classes and geographic markets. With the May 2018 implementation date fast approaching, most firms are well into their efforts to ensure that transactional aspects of their business are harmonized to meet the new MiFID II requirements.
However, one common thread seems to run through many of the core aspects of MiFID II: compliance requires a complete record of broker/investor interactions that led up to any given transaction. In fact, Article 16 of MiFID II indicates that firms must capture all communications that lead to a transaction, including all electronic communications—email, social media, telephone calls, etc.—as well as (interestingly enough) face-to-face meetings. Firms must also “take all reasonable steps” to ensure that communications do not occur on channels that cannot be captured.
Because of the time urgency of MiFID II, as well as the emphasis on trade reconstruction and other operational aspects, some firms have opted to rely upon their existing communications infrastructure to address the Article 16 record keeping, archival and supervisory requirements. The unfortunate implication for compliance staff is that firms must now control content from multiple systems—and define new policies to capture communications from content sources that may not currently be recorded and archived, such as WhatsApp, Slack or other emerging messaging tools. For many firms, this means relying upon technologies that may have been deployed five to 10 years ago—tools that were primarily designed to capture, preserve and enable supervision of email. This will create a significant strain on compliance staff, and also increase the risk that a conversation that could be important to the firm’s defense in response to a MiFID II compliance issue (say, perhaps, a conversation taking place on Twitter and LinkedIn) could have been missed or its context not understood by a reviewer using an email supervisory solution.
Context is key to MiFID II compliance
Some Investment firms may see MiFID II Article 16 compliance as a simple matter of archiving and retrieving client and trading-related communications, and to a certain extent that viewpoint is correct—MiFID II requires that firms keep records for at least five years. However, to truly address the breadth of MiFID II communications requirements, firms must ensure that their compliance processes can account for all forms of communications desired by investors—and that those communications can be captured, stored and reviewed in a manner that enables an understanding of the conversational context that led up to a transactional event.
Think about how brokers communicate with investors today. A typical financial services firm may have authorized interactions with investors to occur over a dozen or more communications networks—beyond email, voice and face-to-face. This may include public social media like Twitter and LinkedIn, Unified Communications (UC) tools like Microsoft Skype for Business and financial services–specific networks including Bloomberg, Symphony, Factset, IceChat and other homegrown communications tools. An initial conversation about a product or service might start on Twitter, move to a video or app share taking place on Skype for Business and then get finalized via email. All of these communications are rich, dynamic and contain multiple media types; each could contain vital information in proving that brokers are meeting MiFID II suitability requirements, or are treating different classes of investors equally. Continuing to rely upon existing archiving and supervisory tools that treat each interaction as an independent event could dramatically and measurably increase compliance risk.
The map for the communications maze
To improve the efficiency and effectiveness of MiFID II compliance processes, compliance staff needs tools to quickly and easily grasp the precise meaning of all interactions and events, whatever the medium. This can only be accomplished by modern technologies that enable firms to capture, retain and supervise any form of communications content—and not by continuing to rely upon outdated technology that was designed for a different purpose.
Technology keeps up with increasing compliance complexity
Fortunately, technology is available that allows firms to control today’s communications while meeting MiFID II requirements much more efficiently than legacy systems. Given the breadth of communications in use in highly regulated financial services institutions, most firms are familiar with tools that allow for the capture of diverse communications sources including, Instant Messaging (IM), UC and social media. However, market leaders are now adopting more robust approaches that allow for existing compliance policies to be enforced uniformly across those channels, as well as solutions that enable the preservation of the conversational context from each communication network.
Once that rich content has been captured, it needs to be stored immutably, but also with the ability for it to be quickly searched and presented to regulators on demand. In this area, modern, cloud-based technologies are rapidly gaining traction in meeting the need to index and store all communications formats, while providing the scalability to enable consistently fast search, retrieval and export. Solutions that preserve the conversational richness and context of each communications channel are also well suited to meet the demands of MiFID II—they provide greater compliance, team efficiency and increased confidence that the firm has captured and delivered all of the critical communications content that can be reconciled against trade events.
MiFID II compliance is a daunting task, but the blueprint is there to ease a lot of the burden.
Article by: Robert Cruz, Director, Information Governance, Actiance