So far, the United Kingdom's Financial Conduct Authority has not taken any enforcement action against non-observers of the European Union's second Markets in Financial Instruments Directive, despite the fact that hundreds of firms are still struggling with MiFID II transaction reporting.

A total of 546 firms have admitted to errors in their transaction reporting since MiFID II began on 3rd January last year, according to data released under a Freedom of Information request that my firm made to the FCA. The highlights of that disclosure are as follows.

• 546 firms have reported errors in the transaction reports that they sent - or did not send - to the FCA to satisfy MiFID II.
• The regulator has contacted a further 223 firms about potential transaction reporting errors.
• The FCA has not 'referred' any MiFID II transaction reporting cases to its enforcement department.

Of the 3,724 UK investment firms that MiFID II obliges to report transactions to the FCA, around 15% have notified the regulator of errors or omissions in their transaction reports.

This suggests that about one-fifth (18%) of all investment firms have been in communication with the FCA about errors in their efforts to make MiFID II reports.
 
The regulator has held visits, meetings or conference calls with 74 firms for the specific purpose of discussing the quality of their transaction reports.

Despite many firms struggling to comply with the new rules, the FCA has not yet opened any transaction reporting enforcement investigations.  Notably, the FCA imposed a total of over £90 millions' worth of fines on 14 different firms in relation to reporting under MiFID I, which began operations in November 2007.

I believe that the proportion of firms that are getting their transaction reporting wrong is actually far higher than the 18% or so that have been in contact with the FCA about their errors (each one asking for a data extract from the FCA’s MDP system against which to check the accuracy of its reports). MiFID II is the broadest and most complex piece of regulation to affect the European capital markets. It is understandable that the regulator has taken quite a pragmatic approach to firms’ compliance and has allowed them to improve their reporting unmolested.

However, the "honeymoon period" of the education and encouragement of firms in relation to transaction reporting will not last forever. The FCA has told us that it will take a much stricter approach against firms that have made no meaningful effort to comply with their obligations or failed to act on the FCA’s observations.  

When we look at the number and size of public actions that the FCA took under MiFID I, along with the relatively low hurdle that the FCA now applies when referring cases to its enforcement people, it is very possible that several transaction reporting cases might happen in 2020. However, the FCA enforcement machine is choc-a-bloc with other cases at present and this might not happen until the following year.

Given the express obligation in RTS 22 to regularly reconcile front-office trading records against data samples provided by the regulator, it is surprising that most firms have not asked for samples from the FCA’s MDP.

The FCA responded to our FOI request on 28 November.

* Nick Bayley, the managing director of regulatory consulting at Duff & Phelps, can be reached on +44 20 7089 4933 or at Nick.Bayley@duffandphelps.com