Why does the market end up undermining investors' trust?

Phil Lynch

Why, until now, has financial services looked at compliance merely as a tick box exercise, rather than a business opportunity?

Surely, in this era of complex and interrelated regulations, there has never been a better chance to view compliance as an opportunity for differentiation and business growth.

The problem is that currently, by addressing different regulations in isolation, the industry is unintentionally at risk of undermining investor confidence, and ultimately trust in institutions.

In many cases, banks have been addressing compliance requirements individually, which means they are missing a unique opportunity to build trust with customers and improve risk management.

This may become critical as the sector finds itself at a regulatory crossroads. With less than 10 months to go until Mifid II and Priips arrive, how do institutions ensure they have the right information to maintain stability and confidence in the retail investment sector?

While the same level of granular detail is not required, a lot of the information market participants need to distribute for Mifid II is already reflected under Priips.

Little discussed is the fact that the overlap is inherently risky. Currently, many banks are adopting separate concepts for dealing with information around Mifid II and Priips.

The first involves a ‘push’ approach of sending information on a scheduled basis with the latest status at the time of sending.  The second is where information is ‘pulled’ on-demand, for example to generate a Priips key information document (KID).

While the push approach may suit relatively static instruments such as Ucits funds, the second approach is likely to be more useful in the structured product world, where instruments such as barrier reverse convertible products have dynamic underlying securities that can change.

This means that for some products like index certificates, cost information needed for both Priips and Mifid II is not static either, because it is linked to the performance of an underlying index.

The problem with running these approaches concurrently is the risk that the data flows for the two regulations become out of sync. Take the example of a bank receiving the latest intel required to generate an accurate Priips KID, based on data ‘pulled’ just before a client places a trade.

At the same time, this bank could be running a scheduled approach for Mifid II when attempting to carry out rigorous checks and reporting for the exact same trade.

This is all well and good for a standard equity trade, but for a structured product where details can change rapidly, the story is very different.

The bank in question could suddenly find itself with mismatched information across its Mifid II and Priips reporting obligations, resulting in a situation where a retail investor simultaneously receives a Priips KID and a Mifid II cost sheet that don’t add up.