The Financial Conduct Authority (FCA) has warned it will start holding firms to account for failing to comply with the Markets in Financial Instruments Directive (Mifid II) rules which came into force at the start of the year.
The regulator took a backstep in the six months after Mifid was introduced (3 January), to balance implementation of the new rules with ensuring markets function well but is about to change this approach, chief executive Andrew Bailey told MPs.
Speaking at a grilling before the Treasury select committee yesterday (13 June) Mr Bailey said: “Mifid II is probably the biggest piece of financial market legislation there has been so our approach at the outset was to prioritise the functioning of markets.
“We tend to not enforce immediately so the first [phase] would be supervision rather than enforcement but I want to be clear firms have to obey Mifid II.
"We were balancing getting it introduced with markets functioning effectively, giving some time for things to settle down because we had to deal with a few things on the run in the early days and weeks.
“But we have a programme of supervision that is underway and of course after a while we will enforce if people [don’t comply].”
He dismissed a question from committee chair Nicky Morgan about whether firms should be informing their clients at this stage if they are non-compliant.
He said: “No firm should say it’s not compliant and frankly if it is not compliant it ought to [ensure it is].”
Mifid II was designed to offer greater protection for investors and to inject more transparency into all asset classes.
It introduced a number of changes such as reporting requirements around portfolio falls and a transparency requirement around the cost of investing.
In a recent comment piece for FTAdviser Nick Burchett, UK equities manager at Cavendish Asset Management, warned the rules were inherently ambiguous, which put firms at risk as it made it possible for different individuals within a firm, or the industry, to come to very different interpretations.
There have also been concerns around parts of the Packaged Retail Insurance and Investment Products (Priips) rules, also introduced this year.
As FTAdviser reported, Priips has raised hackles from the industry about the implications of the transaction cost reporting requirements and the performance projection requirements for open and closed ended funds.
Simon Fraser, chairman of the F&C investment trust and the Merchants investment trust, described the requirement for investment trusts to include projections of future performance in the Priips-mandated key investor document (Kid) as a “future mis-selling scandal”.
Judith MacKenzie, a fund manager at Downing, said one of her funds lost around 10 per cent of its assets under management as a result of the transaction costs reporting rules.
Addressing the committee today, Bailey reiterated the regulator’s concerns about these rules, saying change was on the way.
The FCA will issue an evidence call in due course while some European member states are also addressing these particular issues, he said.
Darren Cooke of Red Circle Financial Planning thought some firms were still not ready for Mifid due to the big changes needed to be made to systems and processes and a perceived lack of clarity on what was required.
He said: "Given nobody seemed to fully understand what was actually required of firms and the FCA itself didn't give clear guidance then the soft stance seemed entirely appropriate.
"Sadly there is still little clarity on requirements and big differences in interpretation of the regulations and what needs to be done by when. Some of it is frankly all but impossible to apply yet as the technology just isn't there for the required reporting.
"On that basis I think the FCA will find that most firm are yet to fully comply the difference will be if they have applied best endeavours to understand and comply or simply ignored it."
carmen.reichman@ft.com
