Regulatory Reporting
UK regulator’s grace period ends for MiFID II transaction reporting failures
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December 5, 2024
The Financial Conduct Authority’s (FCA) latest Market Watch publication signals the end of the long grace period for Markets in Financial Instruments Directive (MiFID II) transaction reporting failures.
Market Watch 81 switches the regulator’s focus from data quality to governance and control frameworks, and acknowledges some firms have been subject to skilled persons reviews (s166). One wholesale market participant is currently subject to FCA enforcement for potential failures in transaction reporting and market abuse monitoring, the FCA said in May (see Case 9).
“It’s a targeted piece that points to the law and says in some ways, firms are breaking the law by not organising themselves properly. [The FCA’s] tone in public commentary has gotten harsher over the last 18 months,” said Matthew Vincent, a managing director and MiFIR subject matter expert at Kaizen in London.
“The FCA has gone from ‘we’re working with firms to improve data quality’ and ‘we’re still working with firms to improve data quality’ to ‘you know what? We’re still seeing data quality issues and we are seeing organisational failures. We’ve had enough of this. You’ve had seven years’,” Vincent added.
MiFID II’s transaction reporting regime started in 2018, but the FCA has taken its time to instigate s166 reviews and enforcement investigations.
“This is a key set of observations by the FCA,” said Jonathan Herbst, a partner at Norton Rose Fulbright in London. “They reflect the world of thorough compliance and legal documentation expectations which we now live in, and the combination of this and the need for a clear senior manager responsibility cascade through both first and second line. [It’s] a Market Watch to pay a lot of attention to, I think, and a clear warning to any firms who do not do so.”
Flashback
Kaizen Reporting’s Vincent believes Market Watch 81 offers a similar warning to the then Financial Services Authority’s (FSA) Market Watch 28, published in June 2008.
It said: “We expect firms now to be fully compliant with the transaction reporting requirements set out in SUP 17. Where we identify problems with transaction reporting we will consider the use of our enforcement tools.”
Barclays was fined a year later and quoted Market Watch 28 in the final notice.
Market Watch 81 sets out nine instances where firms’ weak governance and control frameworks might “not align” with the MiFID Org Regs.
“They have made it absolutely clear what they expect. They can now sanction you, and the sanction can be for data quality because you’re breaking the law,” Vincent said. “And now you can also be very clearly sanctioned for organisational failings because you’re breaking the law, not just an FCA principle of business. All those previous final notices talk to breaches of a principle, whereas now they can say breaches of black and white legal text.”
Regulatory decay
Firms were fined £130 million under the MiFID I regime for a variety of transaction reporting failures. Despite this level of fines, some firms will also have failed to implement MiFID II requirements effectively. Most, however, will have started well but as time elapses reporting frameworks weaken.
“Firms set up well on day one, and then as time goes on, they suffer from regulatory decay. People move on; knowledge is lost; practices and procedures get put to the wayside, ” Vincent said. “Other things become more important — and firms need to keep on top of it to prevent regulatory decay.”