01 July 2008 Comments

 

Closing the MiFID compliance gap

Jennifer Slaughter, Skywire Software

MiFID has arrived. After years in the planning and months in consultation, the Markets in Financial Instruments Directive – known as MiFID throughout European financial centres – was finally adopted across all 25 member states of the EU last November.

The name may be unfamiliar to those who do not work in the market, but MiFID is aimed firmly at the consumer. At its heart, it contains a stream of provisions on a host of retail finance issues, designed to protect consumers throughout the European Union. Foremost among these provisions is an explicit statement that all retail communication must be “fair, clear and not misleading.”

Under MiFID rules, securities firms are now obliged to execute, report and confirm orders on the very best possible terms for their clients. Transparency plays a key role here as the process has to be traceable at every stage. Firms also have to maintain extensive and detailed records in order to prove the basis on which these trading decisions were reached in the first place.

But the communications challenge does not stop there. Pre- and post-trade transparency in all transactions for all financial instruments and their derivatives will increase the need for more and more information to be published. This in turn will require ever more sophisticated communications solutions.

Despite the almost ceaseless discussion and press coverage in the run-up, many financial services organisations are still struggling to meld the requirements of MiFiD with the even more pressing requirements of satisfying investors and their evolving wants and needs.

Across Europe, MiFID is requiring banks and insurers to make considerable changes to normal business processes, especially in the complex area of customer communications and record keeping, which are already highly regulated within each national jurisdiction.

Given the number of documents required to complete any financial transaction, the market is very keen to identify technologies that can automate and simplify compliance.

Just as mass personalisation was born out of technologies such as database marketing and CRM, technology continues to dictate the pace and degree of progress in improving regulatory compliance.

The difficulty for many firms is that inefficient manual processes still thrive, meaning they can only achieve personalisation through a great deal of human intervention. Information must be pulled together from disparate sources and details added manually to customer documents. And even where automation has been substantial, systems are rarely integrated, meaning many costly IT hours are absorbed pulling data together from incompatible systems.

Compliance with MiFID places a heavy burden on reporting as well. According to research by the Financial Services Authority (The Overall impact of MiFID, November 2006) obtaining internal approval of regulated document content, and ensuring the correct version goes into new documents, often takes days or even weeks.

Financial sector players will need to produce a considerable volume of entirely new and significantly amended customer communications, ranging from the standard to the really complex. Documents requiring revision and creation will have to include communications relating to client onboarding, client execution policies agreements, conflict of interest statements, and the basis for investment advice declarations.

Customer communications management will be central to balancing MiFID compliance with premium customer service. CCM combines the myriad forms and document information held across various business units and branch offices, providing the necessary control over design and content that is required for fast and accurate creation of records, statements and customer-facing reports.

Many of the existing solutions are simply not designed to cope with the volume, individualisation and range of products now in use, let alone cope with the new customer communications compliance rules as set down by MiFID. Firms now have to provide very timely, accurate and highly personalised documentation and all within the guiding parameter of being “fair, clear and not misleading.”

CCM is therefore critical, as it allows companies to comply with MiFID’s auditing guidelines. It is not enough to be able to send or publish required information. Financial institutions must demonstrate document compliance. CCM provides a means of managing the design, creation and storage of documents from a single repository, where all actions related to each can be recorded and tracked.

Whilst traditional enterprise content management solutions can offer advantages in the retention and management of stored records generally, a more bespoke approach must be taken when MiFID-compliant documents are being produced for investment management and private clients. The following areas must be addressed:

▪ All customer-facing documents must be vetted for suitability and appropriateness, for example, with warning statements on inappropriate trades.

▪ Notices must be generated confirming the execution of client orders, with accurate average pricing and MiFID-compliance attributed.

▪ All periodic valuation and performance reports must now include additional data on periodic performance, periodic benchmarks, commission and expenses.

▪ Achieving this level of detail and control over document creation requires a solution with the ability to adapt to changing regulatory rules, business processes, and new industry terminology.

For the majority of organisations, which have historically maintained a silo approach to customer communications by product and department, change is in the air. For example, in the area of OTC derivatives, regulatory scrutiny on credit derivatives automation over the last year has caused banks to increasingly adopt a bank-wide view with regard to technology adoption. Banks are favouring technologies that are flexible enough to become enterprise shared services. This is the driving force behind CCM solutions.

Of course, regulation always will be an evolving force, so flexibility is a key value for any company sourcing a CCM solution for compliance purposes. CCM solutions can be an invaluable means of enforcing and proving compliance in communications, but every organisation is different. Achieving compliance must not reduce productivity or impact normal response times. If anything, these should improve once a CCM solution is deployed and fully integrated across the company.

Jennifer Slaughter, director of professional services, EMEA, Skywire Software