The European Union's second Markets in Financial Instruments Directive (MiFID II) comes into effect on 3rd January 2018. This article looks at the state of play at present.

In June, the European Commission announced the application date of MiFID II and MiFIR had been delayed by one year to 3rd January 2018. The news was greeted by many with a huge sigh of relief. Plenty of people had been warning that it would be impossible for firms to be ready for such all-encompassing and far-reaching changes by the end of 2016.

When the delay was announced, 2018 seem some way off. However, it is now just a year away! How have you used this additional time? Have you taken advantage of it to ensure you are well prepared ahead of the deadline or was it an opportunity to ‘ease off the gas’?

One reason why firms were struggling with the original 2017 deadline was the existence of too many ‘unknown unknowns.’ Things have moved on – ESMA has published its "Final Draft Regulatory and Implementing Technical Standards," a number of delegated directives and regulations and more recently their guidelines for transaction reporting and the UK's Financial Conduct Authority has published its fourth consultation paper on MiFID II implementation. Things are far clearer than last summer, although there are still many questions to be answered.

In May, the FCA stated: “Firms will need to start planning for the MiFID II changes ahead of the finalisation of the EU implementing legislation and the subsequent changes we make to our Handbook.” The fact that you are unprepared on 3rd January 2018 because you did not know enough detail in time is unlikely to wash with the regulators.

What about Brexit? Obviously this is going to have an effect, but I would suggest that its biggest effect will be on people who have let it become a distraction. Anyone who was hoping that Brexit would be the death knell for MiFID II or that it would be allowed to wither on the vine will be sorely disappointed.

We do not know when we will actually leave the EU and under what terms but, irrespective of what Brexit looks like, the UK will still want to be part of the European financial market and British regulators will still want to protect investors from sharp practice. As Kay Swinburne (a Member of the European Parliament and a member of its Economics and Monetary Affairs Committee) said, “Ask Norway, ask Switzerland, for that matter ask South Africa. If you want to have access to the EU market, you have to comply with EU rules.” Even if your firm has no direct dealings with the EU it will still be subject to British regulation, which in turn is likely to be close to ‘EU-equivalence standards.’

Is the British wealth management sector ahead of the game when it comes to MiFID II? I think it is. The FCA ‘gold plated’ the original MiFID in some areas. Indeed, because of the Retail Distribution Review, many of its tenets relating to independent advice and financial inducements are already ingrained in the British financial sector.

On top of this, some firms’ compliance functions and business strategies have created a further layer of gold plating. It would be a mistake, however, if they were to allow any belief they might have that they are ahead of the pack to stop them from appreciating the enormity of the work they have to do. I have heard one compliance officer say that “it’s like ten directives all shoehorned into one.”

MiFID II cannot be viewed in isolation. It is part of an evolving regulatory landscape and one that will continue to evolve. The list of acronyms - ISD, MiFID, RDR, MiFID II, UCITS, PRIIPS, CASS - is a long one. The purpose of MiFID II is to build on the original MiFID. According to ESMA: “These new rules are designed to take into account developments in the trading environment since the implementation of MiFID in 2007 and, in light of the financial crisis, to improve the functioning of financial markets making them more efficient, resilient and transparent.”

This can make it difficult to identify the aspects of MiFID II that will require significant change. For example, the FCA has said that “for client assets the changes represent adoption or adaption of the existing domestic regime, so the requirement will not be too onerous.”

So where do you stand on MiFID II? What type of firm are you in? Are the changes smaller than you anticipated? Due to ‘gold plating,’ are you already well on your way? Do the conflicting messages in some areas leave you with a large degree of uncertainty? Do you wake up in a cold sweat and have sleepless nights worrying about the implications of MiFID II?

I suspect that most firms are somewhere in the middle of this spectrum. Some of their MiFID II implementation work streams are progressing smoothly and others are a worry. On some days, their compliance officers probably experience no trouble at all and on others they can hardly see the wood for the trees. Sometimes product governance is the big concern, at other times it is cost disclosure or transaction reporting. Uncertainty and unknowns will remain for some time. I would not be surprised to see some still remaining as we enter 2018. To have any chance of being ready for 3rd January 2018, however, you cannot afford to allow these problems to distract you.

* Steve Martin is a Senior Business Consultant for Dion Global’s MiFID II solutions team. He can be reached at MiFIDIISolutions@dionglobal.com