Compliance

132 | Regulatory Round Up | May 2018

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Tutors:

  • Gillian Boston, Head of Business Consulting, AutoRek
  • Kevin Silvester, Provider Relationships Manager, Brewin Dolphin

Learning outcomes:

  1. Since implementation how MiFID II has been received
  2. How agents as clients can work in a post MiFID II world
  3. How technology can be used to achieve smarter regulatory reporting

Channel

Compliance
PRESENTER: So, Kevin, let’s start with what happened with MiFID II. January 3rd it came into force. So how has it been received and has there been much disruption as perhaps people anticipated? KEVIN: Well I think it’s probably worth looking back to before the 3rd of January because, as you’re probably aware, there was a bit of a hiccough towards the end of December just before the Christmas period when the regulator changed the rules around what was required for an LEI, which threw us all into a bit of turmoil. So I think that was a bit of a challenge for us. And I think the industry, as they have done throughout the process of the lead-up to MiFID, did a really good job of working together and with the regulator to make sure that our clients see as little disruption as possible in the marketplace. But having said that, my experience to date is that it’s generally been well received, I think the client experience has been pretty good. Having said that most clients have heard of MiFID but haven’t really understood what that means to them. So we’re just coming up to the end of the first reporting period of Brewin Dolphin. So we’ll see what the outcome is when clients get their quarterly report, which includes information they haven’t previously received from us. PRESENTER: So have any issues come to light that weren’t perhaps thought about before January 3rd? KEVIN: Well I think that’s a really good question and as an industry we’ve struggled to come to terms over the period with all of the data that’s required to be able to give clients that seamless experience we spoke about earlier. So we face different issues across the industry about what we need to disclose to our clients, whether we’re acting as agent, as client, or the underlying clients below the surface, and we wrestle with the data to make sure that we can issue it to those clients in a manner that they can understand in accordance with what the FCA are asking us to do, which is to make it clear and unambiguous, fair and not misleading. PRESENTER: And in terms of concerns from your clients, they were the same thing you were hearing pre-January 3rd or have they changed? KEVIN: Yes, I think it’s pretty much the same as it was previously; mostly advisers that I deal with were asking me what did they have to do to make MiFID a reality for their clients. I mean we’re very happy to work with them with our business development managers to help them bring their business into the post-MiFID environment. And most of the conversations we’ve had since then have still been about the same subjects: how do I disclose costs and charges; how do I make my clients aware of what they’re going to see from the providers that we use in a post-MiFID world. PRESENTER: Well, we’re only a few months in, so do you think it’s perhaps too early to really feel the true impact of the regulation? KEVIN: I think you’re absolutely right, it is very early, and as I said our underlying clients haven’t received their first report yet. And I think the feedback we get from them will tell us what we need to do as a business and as an industry post-MiFID to make the implementation of the directive something that we can be proud of as an industry. PRESENTER: So talking about the FCA directive that was brought into effect in July last year. So has everything been met or is there still a lot of confusion surrounding it? I mean it’s a 1,200-page document, there’s a lot to get your head around there. KEVIN: It’s a long document. It’s complicated and there’s lots of notes to get your head around. And we’ve worked hard with our peers in the discretionary world to make sure that we’ve got a consolidated view of what needs to be done. Been to many working parties where we’ve been working together to make sure that what we implement is within the spirit as well as within the meaning of the rules. There’s still work to be done. Costs and charges I think is the biggest challenge for this industry to disclose those, as I said earlier, in a fair, clear and not misleading manner. Not because anything deliberately wants to mislead, but when a client sees the numbers it’s just very confusing. So much of the work that we’re doing is how to put that into a format that they can understand and ask the right questions to make sure they’re getting value for money. PRESENTER: OK. So costs and charges, you mentioned that, what’s the best way to approach it? Is there a checklist perhaps, what should people be thinking about? KEVIN: Well I think underlying clients need to be told what to expect within the reports. And in the run-up to the implementation of the directive, we focused very clearly on helping our advisers tell their clients what to expect in a post-MiFID world. For example, we’re used to issuing reports on an annual basis, or a half yearly basis. Some clients had opted out of receiving those reports. Now they’re going to get them on a mandatory basis and a quarterly basis. It’s going to include all sorts of data that they didn’t get previously. So part of the work that we did was to help our advisers articulate what that would look like, to understand why they might get depreciation reports at some point in the future and what they should do when those reports landed through the letterbox and who to speak to to get the right advice. PRESENTER: So just talk me through like an example. I mean what should they do, that sort of thing. KEVIN: Oh, for depreciation reporting? PRESENTER: Yes. KEVIN: So, as we know, depreciation reporting is when a portfolio drops by 10% or more within a calendar quarter. We’ve worked very closely with our advisers to help them understand where those notifications will be sent should the event occur. We run an agent as client model, and that allows us to give the advisers the choice of where that depreciation report lands. So they can choose whether it goes to the adviser, solely, or whether it goes to the client with a copy to the adviser. And our process is to alert the client to the fact that the portfolio has dropped, to tell them that there’s advice available and that they should follow their normal course of action and contact their adviser to have a discussion about what action they might need to take. Now that sounds really easy to do, but when you’re talking about tens of thousands of clients, it’s really important that we get out and talk to our advisers and help them through what could potentially be a minefield if we don’t get the communication channels right. PRESENTER: Well, Gillian, transaction reporting, this has been a big area of concern before MiFID II was implemented, I mean how has this been received? GILLIAN: Well it’s interesting because Kevin’s been talking about data there, so I’m going to talk about it in a slightly different way now. But I think certainly the new transaction reporting required under MiFID II, it was never going to be easy with the additional data fields and data collection. I think the estimates were put around £½bn to implement in the industry. And really that’s from the complexity of having to source and actually pull together transactional as well as static data into that single data field and report it within 24 hours. Some firms we know had difficulty with certain asset classes. I think those are starting to come through now. There are still firms who are misreporting volumes and prices. So what we’ve seen is that firms have been concentrating on getting the right data format to their arm for reporting and perhaps less of a consideration has been the financial controls around that. So, for example, RTS22 article 15, really you need to have a reconciliation between your trading records and also the static data that’s returned from the FCA or the competent authority, as well as RTS6, which again is looking at reconciliations between your trading logs and the orders that are executed or are outstanding. So that’s from the firm’s perspective. Now the FCA themselves had some difficulty with their MDP, their market data processor, and that’s what they use to analyse, or ingest and analyse the information that they’re receiving from firms. So after the 3rd of January there was connectivity issues, there were sequencing issues, and there was also mismatching issues from the [unclear 0:08:15] that firms were reporting compared to the static reference data that the FCA had. That’s kind of coming hopefully to an end now. The other one to point out is in terms of the data that the FCA can provide back to firms. It’s the timestamp on that information, that’s something that’s not there, or I understand isn’t there yet, so that makes it difficult for firms to determine whether or not transactions have been reported twice or, indeed, if there’s multiple versions of transactions that have been occurring. So what’s happened now is the FCA announced in February they’re going to start looking at the data quality of those transaction reports. So it does suggest that the bedding in period could be over. What the FCA have said is that they know there’s going to be errors. So on the one hand that’s a good thing, but equally they say firms should look to remediate these as quickly as they can. And I suppose from a firm’s perspective the quicker they can remediate those issues, not leave it for six to 12 months, it could keep the cost of that down. Because it leaving it longer would mean an awful lot more data and potentially systems to try and unravel to get to the root cause of why errors have been occurring. Also to say that Andrew Bailey actually was talking at a breakfast briefing recently and put it into context the FCA receive 35 million transactions in those reports on a daily basis – that is a lot of information. But what Andrew said was they’re absolutely going to exploit that information as far as they can to determine, to deter and actually take the necessary action if there’s potential indication of market abuse. So in summary I think firms will be looking to rectify those errors that have perhaps been occurring, but also looking to perhaps strengthen their financial controls to make sure and mitigate against persistent errors occurring. PRESENTER: So when it comes to the mentality then of clients, I mean do they need to do more? Because I suppose MiFID II came into play January 3rd, did they think well that’s past now and we’ve done everything we need to do? I mean do they still have a long way to go? Kevin, I’ll put that to you. KEVIN: Well I think we talked about the policy statement the FCA issued in July last year, and as you said it was 1,200 pages long and one of the things that runs through it is that they want us to work as an industry with a theme of continuous improvement. So not to just do what’s necessary and then say that’s it, we’ve met the standard, but they want us to continuously improve the process and the services that we give to our clients, and I think that challenge is going to persist for some time to come. I think there’s still some ambiguity and flexibility in the reporting of costs and charges as we spoke about earlier. I’m sure that once we’ve got some experience of a full year’s worth of that reporting, post-MiFID, the FCA will want to take a closer look at how that’s done and whether some common standard needs to made available to clients. Our advisers are always asking us to make what we write to their clients clearer and easier to understand, and that’s a constant challenge for us and for our contemporaries in this business. PRESENTER: And looking at agents and clients, I mean how can this work in a post-MiFID II world because there have been some concerns about this; do you think those concerns are justified and how can it work? KEVIN: Well, agent as clients laid down in the COBS rules, and it’s pretty clear that it’s a robust business model and it kind of depends on your point of view I guess. I’ve read articles that suggest that maybe the FCA might change that in the future. I’ve been to industry events where some illumeries have stood on stage independent to our business and said this is probably the optimum model in a MiFID world. However I think what’s really clear is that advisers need to do the appropriate due diligence on the business model as who they either outsource or insource services from. And we’ve spent a lot of time, effort and energy to make sure that due diligence is as clear, as concise and as complete as we possibly can. Bearing in mind, we’re also trying to get to know at the same time the advisers’ business, and I think that clarity is really paramount for advisers and their clients. So I’d urge anybody who’s outsourcing or insourcing to do the appropriate due diligence. Make sure it meets their needs, protects their business and they understand precisely what the discretionary manager’s doing in our circumstance and precisely what the adviser’s doing so that everybody’s clear about who owns what and who’s responsible for which service. PRESENTER: So there won’t be a new sort of reliance on others model. KEVIN: Well, there may well be. That’s available within COBS, as it stands, but our view is that for our business agent as clients is a robust model that we think is the optimum model for us in a post-MiFID world. There’s several things, one of which is it protects the adviser’s clients because they are effectively standing in as the clients. And if they don’t want us to communicate with the underlying clients we won’t do that. We only have to write to the clients if the regulator demands it or if the tax authority demands it, and that’s laid down in our terms and conditions. And we’re very happy with our adviser clients to go through those on a line-by-line basis if necessary. Not quite as long as the FCA paper but pretty long. PRESENTER: And anything else advisers are contacting you about? KEVIN: Well I think the feedback I get from my business development managers and probably when I get back to my inbox there’ll be lots of questions about how advisers deal with their advisory portfolio so the funds that they’ve selected on behalf of their clients and the workload that places on their business. And that’s an area that we’re trying to help them to work through, particularly where we operate a discretionary portfolio alongside some advisory portfolios. And I think advisers need to understand the regulatory impact of that on them and the reporting that they need to do to their clients to underpin the advice that they’ve given, and I suppose they’ve got to somehow deal with the contradiction that says for an advisory portfolio we do A and for a discretionary portfolio the discretion manager does B. So I think that’s something that advisers should look to work with their insourcers and outsourcers to help to square the circle I guess. PRESENTER: So Gillian let’s move on now to the FCA’s call. In February, it was on using technology to achieve smarter regulatory reporting, so talk me through the key takeaways. GILLIAN: So the FCA receives over half a million regulatory returns per annum, as well as ad hoc reports on top of that. So that is a lot of information again. So what this call for input focuses on, it’s really about reshaping those systems and processes within the regulatory requirement piece. And it’s all about really say accuracy, consistency and a far more efficient way of doing that. So interestingly this particular call to input focuses on the notion of machine readable language. So what that really means is it’s trying to remove that human intervention of the interpretation of the rules, as well as producing those regulatory returns. So it’s about automatically if you like applying the rooms and executing the rules, as well as within financial systems or within systems, within firms, actually going, using the machine readable language to extract the necessary data to populate those returns, to try and drive up that consistency and quality of data. And again if a rule was to change to minimise the human intervention or the interpretation, which can be different from one firm to another, so if that change occurs again it automatically flows through. So, in terms of key challenges, I think the FCA recognises key challenges both from their perspective as well as a firm’s perspective. Now there are quite a lot of challenges but I want to just focus on the most salient ones. So first of all data can really vary depending on the size and the type of firm. So again a really range of information can be sent to the FCA. Again, regulatory reporting can be difficult in terms of the interpretation of the rules, and often firms do go to external parties to help them with that interpretation, but again that means the interpretation can be different. Firms within the same sector but if you use different external consultants again their interpretation could be different. And again what then happens is it’s inconsistent reporting, so it’s difficult for the FCA to really use that information in the way they want to if it’s a different take on the interpretation of the rules. And also in terms of if rules are changed, that leads to policy changes within a firm, which then leads to perhaps having to get different data, it all adds up in time-wise; whereas actually the FCA want the information much more quickly, and what typically happens is the FCA will ask for ad hoc reports. So again that’s if you like pushing up the compliance burden in firms. But really the key takeaways from this call to input is the FCA are looking to embrace technology, which I think can only be a good thing. They also want to keep the costs of adhering to regulation down, and really that’s to encourage competition as well as to ensure firms aren’t necessarily passing that cost on to customers. And I think the key benefit they’re trying to drive out here is clarity. It is about efficiencies, and it is also about the quality of data both from the FCA’s perspective as well as from the firm’s perspective as well. PRESENTER: And how can technology make regulatory reporting easier? GILLIAN: Well I think it goes back to that human intervention. I mean wouldn’t it be great if actually we didn’t have to try and interpret the rules, you know, if machine readable language could do that for us. And it’s also really about trying to automate the production of those regulatory returns. I think the more you can do that and detract from human intervention, if you like, then that would be a good place for all of us I think. PRESENTER: And it can improve the quality of information. GILLIAN: I think that’s the key thing here: the FCA really do want more granular and more timely information. Because if they get that more quickly it actually could help them take the necessary steps to, you know, whether it’s in the market, market abuse, the more timely that information then it’s almost like the more power the FCA would have to take the necessary steps if they’re required to intervene. PRESENTER: And I’ve heard of tech sprints, I mean what exactly is this and what did that uncover? GILLIAN: So the tech sprints. So there’s actually a RegTech team now at the FCA, who we’ve actually met with. It was quite an interesting experience because they were really keen to see how our software solution helped firms with regulatory reporting and compliance with regulations. So the RegTech team bring together SMEs, they bring together tech companies, and they also bring together financial service providers. And it’s really to get these brains together to develop solutions for regulatory challenges. So what happened last November was there was a two-week tech sprint held with the Bank of England. At which they explored the potential for fully automating processes that firms could use to provide regulatory returns, and actually the output of it is this now call to input and the notion of this machine readable language. PRESENTER: So RegTech then, are we going to be seeing a lot more of this; I mean is it going to become mainstream? GILLIAN: Absolutely. I think it will to the sense that it’s about embracing technology. It’s about not using Excel spreadsheets and manual processes, it’s absolutely moving away from that. Because what you can do now, it can make such a difference. And I do think if it’s even taken a stage further to help firms navigate the actual handbook itself then that could help to overcome what’s normally or usually perceived as a compliance burden if you like. PRESENTER: Well the call from the FCA is still open until June 20th. So if you want to take part in that, then there’s a link to the FCA below the player. Right so Kevin, I’m going to ask you a question now. In terms of other regulation around the corner, we’ve got SMCR, it’s on its way, so what would you say are the main points that people need to consider to be prepared? KEVIN: So I think SMCR we’ve already seen the impact of that in some businesses, in the banking industry and within the provider, private provider world. I think there are four challenges really. That’s to understand the composition of your board and the management structure of your business. And I guess the larger the business the more complex that becomes. We have to make sure that there are statements of responsibility in place so we know who’s responsible for which area of the business, what our contractual requirements are, and then any modifications of internal processes and controls within the business. PRESENTER: And, Gillian, last time you were on you did discuss SMCR, so any updates from the last regulatory roundup? GILLIAN: Well I think in terms of what, I would absolutely echo what Kevin says, it’s really about are there any potential weaknesses that do need to be addressed ahead of the go live date if you like. It’s about the business, it’s about the culture, accountability and responsibility. It’s about having the evidence as well so that evidencing the organisational structure, evidencing the mapping of management functions, having those statements of responsibilities and accountabilities in place, and not just as a one-off exercise but also having the right processes in place to ensure that that is reviewed on an ongoing basis. PRESENTER: So SMCR, when does it come into effect and if it’s a little while off can they just sort of put it to one side for the moment? GILLIAN: Well for insurance companies it’s the end of 2018 and then for the asset management and wealth management if you like it’s into 2019. So it has been pushed back a little bit, but I do think act now so that you’re not scrabbling around towards those deadlines, and really think about the items that Kevin and I have just touched on there. PRESENTER: So, Gillian, any other headlines from the FCA we should be aware of? GILLIAN: Yes. So the FCA actually issued a ‘Dear CEO’ letter recently with respect to Prudential regulatory returns. So what the FCA have said is that there’s still a significant number of firms who are sending them incomplete or inaccurate data. So from the 1st of October 2018 the FCA do want to undertake a review of returns with respect to really driving up the quality of the data they’re receiving. So it goes back to what we were talking about before, and I suppose there is a bit of a tenuous link there if you like to the recent call to input about using smarter technology, or rather using technology to ensure smarter regulatory returns. The only other thing that I would also mention in terms of other regulations is FATCA and CRS. So with respect to the common reporting standard this year actually sees the second tranche of companies coming into play. So there’s now over 100 countries that have signed up to the common reporting standing, but also what we’re seeing is that tax authorities themselves are tweaking the guidance that was sent out last year. So in terms of FATCA and CRS it still is a bit of a moving target for organisations. PRESENTER: And Kevin, GDPR, that’s also coming up soon and I think that’s actually a headache for quite a people already, so how can they best be prepared? I mean give me a checklist. KEVIN: Well I think GDPR’s just around the corner, so hopefully most of our listeners are going to be well on the way to getting GDPR compliant. I think the real key to this is again very simple. Get your data inventory done, make sure that’s complete. Make sure you have policies and procedures about the retention of data so that it sits within your control. Clearly there’s a need to review and to update client consent and to manage any data cleansing that’s required as a result of that consent, and then to maintain that on an ongoing basis. I think finally the most important thing is to make sure we’ve got the appropriate training in place to make sure everybody understands what they do with data and what our obligations are. Because at the end of the day it’s our clients’ data that’s really important and it needs to be kept in a secure fashion. PRESENTER: Absolutely. And, Gillian, from a data management perspective, there does seem to perhaps be, people are adopting this blanket approach, would you think that’s OK? GILLIAN: I do, but I think what’s most important to consider is your data models, the governance around your data models and the security of your data as well. So thinking about regulation and PII, it does seem at odds though with retention periods with other regulation, so typically five years, seven years and so forth in terms of the retention of internal records. So with that mind, you know, really do think about scrutinising your data models and your data security. Think about encryption, about masking data. Because you do still need to have your internal records with respect to transactions, but it is really about getting rid of that client element from your data. So for example I know we’ve been talking about MiFID II. So, you know, work with your arm, thinking about data encryption and then that should put you in a good place for GDPR. PRESENTER: Absolutely. So to summarise then everything we’ve discussed today, MiFID II regulation that’s coming up. Kevin, what would you say, where should people be now: I mean what should they have done and what should they really be thinking about in the future? KEVIN: So I think it’s really paramount for advisers, as we’ve discussed, to make sure their clients understand what they’re going to see from a reporting perspective. That’s just about to start in earnest as we go through the end of the first quarter. Make sure they understand about depreciation reporting. And we’ve armed our business development managers with information and support that they can give to their advisers to help them get beyond that period. I think helping them get prepared for GDPR where we can. PRESENTER: Give me examples of how you’d help them. KEVIN: So again it’s working with them to understand where data’s going to be sent when we’re doing reporting, who’s going to have access to it and the destination of those final reports to our clients. PRESENTER: And so what should they be thinking about moving forwards? KEVIN: So moving forwards I think considering with business development managers and their clients exactly what they’d like to see for their clients as far as reporting’s concerned. You know, we’re anxious, as the industry is, to make sure that as we’ve said earlier that reporting’s clear and unambiguous. And I think we’d like to work with the industry to make sure that what we do is as clear as possible. PRESENTER: And are you coming across any common mistakes people are making, anything that they really should be avoiding at this point in time? KEVIN: I haven’t come across anything that you’d say well this is happening all the time. I think there are several challenges for us as I’ve said earlier with costs and reporting. It’s really difficult to go back beyond the FCA paper back into 2017 and get necessarily the exact costs that are attributable to portfolios. So we’ve been asked to provide summaries of total returns against total charges and OCFs. It’s difficult to do that without the historic data to deliver it. That’s a challenge that we’re trying to meet and hit as early as we possibly can. PRESENTER: Absolutely. And Gillian, what point do you think we are now? Where should people be and what should they be thinking about in the future? GILLIAN: Well it’s interesting if the FCA are embracing technology, perhaps firms need to think about that too. Regulation’s here and it’s here to stay and it will change, firms will need to adapt, so is there a better way or a more efficient way that will also keep the cost of compliance down? Maybe firms should be thinking about that, both from satisfying client requirements as well as satisfying the regulatory requirements to the FCA themselves as well. PRESENTER: Good. So we’re almost at the end of this session. So let’s finish with some final thoughts. So what do you want viewers to take away Kevin from this? KEVIN: I think I’d like them to take away the fact that the industry’s here to help. I know we’ve probably said that in the past and maybe we’ve not been able to deliver but the FCA have been really clear that we need to work together on the MiFID rules especially to make sure that clients get value for money and we deliver the outcomes that they’re expecting. So I think I’d like to see much more of that in a collegiate fashion. As I think you know the discretionary fund managers work together to make sure that we’re as joined-up as we can be with the different models that we offer and I think that will continue into the foreseeable future. PRESENTER: And Gillian, what would you like people to take away from this? GILLIAN: I would echo that as well in terms of collaboration. Whether it be between firms, actually with the FCA themselves, you know, we’ve been speaking to the FCA, I’m sure if you have a good relationship with the FCA that can help significantly. PRESENTER: So the regulation’s not here to trip people up, it’s a good thing overall would you say? KEVIN: I think the FCA have been very collaborative with the way that they’ve helped implement the directive, you know, it’s built on what we already have in place following RDR and I think that they’ve been very supportive of businesses like ours. They’ve been very supportive of their advisers in helping us all get ready for the new world. PRESENTER: Super, Kevin, Gillian, thank you. GILLIAN: Thank you. KEVIN: Thank you.