Why, until now, has financial services looked at compliance merely as a tick box exercise, rather than a business opportunity? Surely, in this era of complex and interrelated regulations, there has never been a better chance to view compliance as an opportunity for differentiation and business growth.
The problem is that currently, by addressing different regulations in isolation, the industry is unintentionally at risk of undermining investor confidence, and ultimately trust in institutions.
In many cases, financial institutions have been addressing compliance requirements individually, which means they are missing a unique opportunity to build trust with customers and improve risk management.
This may become critical as the sector finds itself at a regulatory crossroads. With less than 10 months to go until Mifid II and Priips arrive, how do institutions ensure they have the right information to maintain stability and confidence in the retail investment sector?
While the same level of granular detail is not required, a lot of the information market participants need to distribute for Mifid II is already reflected under Priips. Little discussed is that the very fact of the overlap is inherently risky.
Currently, many financial institutions are adopting separate concepts for dealing with information around Mifid II and Priips. The first involves a ‘push’ approach of sending information on a scheduled basis with the latest status at the time of sending. The second is where information is ‘pulled’ on-demand, for example to generate a Priip-KID.
While the push approach may suit relatively static instruments such as Ucits funds, the second approach is likely to be more useful in the structured product world, where instruments such as barrier reverse convertible products have dynamic underlying securities that can change. This means that for some products like index certificates, cost information needed for both Priips and Mifid II is not static either, because it is linked to the performance of an underlying index.
The problem with running these approaches concurrently is the risk that the data flows for the two regulations become out of sync. Take the example of a financial institution receiving the latest intel required to generate an accurate Priip KID, based on data ‘pulled’ just before a client places a trade. At the same time, the institution could be running a scheduled approach for Mifid II when attempting to carry out rigorous checks and reporting for the exact same trade.
While this is all well and good for a standard equity trade, for a structured product where details can change rapidly, the story is very different. The financial institution in question could suddenly find itself with mismatched information across its Mifid II and Priips reporting obligations, resulting in a situation where a retail investor simultaneously receives a Priip KID and a Mifid II cost sheet that don’t add up.
This is a serious issue for an individual firm, but when you consider the implications across an entire industry, the potential for systemic risk looms large. At the same time, polling all instruments and attributes for changes, then updating the affected documents and reporting even if there is no current demand, creates unnecessary and costly processing and overhead.
Ultimately, no financial institution wants to be making decisions for their customers on mismatched Priips and Mifid II data. With deadlines just around the corner, financial institutions can ill-afford to continue adopting multiple regulatory solutions from numerous different vendors and relying on internal project teams operating in isolation.
For a loss of confidence in retail investment to be averted, the industry as a whole needs to start talking about how information is exchanged, particularly with key data now flowing both ways between manufacturers and retail networks.
This is surely the only way to ensure the industry has the most up to date information at any point in time in order to start seeing regulation as less of a bureaucratic burden, and more of an opportunity to drive new revenue streams.
Phil Lynch is global head of markets, products and strategy at SIX Financial Information.