The complexity of transaction reporting requirements under Europe’s second Markets in Financial Instruments Directive (Mifid II) combined with the number of firms struggling to submit accurate data could result in a climbdown from regulators in the next few years, say lawyers.
“The post-crisis philosophy behind regulation requires ‘as much transparency as is feasible’,” says Azad Ali, partner at law firm Fieldfisher LLP. “Regulators believe they should have as much information as possible to understand the market and where the risks lie. Over-reaching by regulators is inbuilt in that post-crisis philosophy. The idea is to push things to the limit and then later recede from that as necessary in large part driven by the limits of practical feasibility.
“I would not be surprised if there was a climbdown and further simplification of some of the reporting fields, or at least better guidance as to how they should be dealt with. A situation where the regulators operate hand in glove with the market isn’t consistent with the current regulatory philosophy. Regulators do want to acknowledge how the markets operate, but they are also unafraid of regulations causing fundamental changes to markets.”
A freedom of information request submitted to the UK’s Financial Conduct Authority (FCA) by regulatory consultancy Bovill found that under the Mifid II regime, 1,335 inaccurate transaction data reports had been submitted to the regulator in 2018, almost one in four of the total received.
“We expected the number to be high, but I think it has surpassed even our expectations,” says Damon Batten, managing consultant and head of markets at Bovill. That’s not because we think there aren’t even more firms who haven’t done everything quite right, but that there are probably more firms quietly fixing things in the background.
“My personal view is that it’s quite likely that the vast majority of firms have made at least some kind of error in their transaction reporting, and I think I’ve yet to see an example where I’m genuinely convinced they have got everything 100% right.”
Regulatory give and take
The FCA has handed out fines to both UBS and Goldman Sachs for Mifid II failings, charging the banks £27.6m and £34m respectively. To date, 14 firms have been fined by the UK’s national conduct authority (NCA) for improper Mifid transaction reporting.
“We expect all firms will take this opportunity to ensure they can fully detail their activity and are regularly checking their systems, so any problems are detected and remedied promptly,” Mark Steward, FCA executive director of enforcement and market oversight, said in a statement at the time of the Goldman Sachs fine.
Steven Burrows, associate for financial markets and products at Fieldfisher LLP, adds: “When you look at the firms that have been fined, it’s primarily the big institutions who really ought to have more resources to get these things right. The final notices issued by the FCA in respect of those firms reveal the sources of the errors and, ultimately, it's not one single flaw but rather a whole laundry list of small errors. These have all accumulated with the effect that millions of incorrect reports have been submitted, as well as some that ought to have been submitted but haven't and vice versa.”
“In terms of enforcement,” says Azad, “the obvious cases will attract fines. In other cases, regulators may choose to iron out problems with the firm on a private basis and give [them] an opportunity to correct things, especially if the firm can demonstrate that it has done its best to fulfil its reporting obligations."
For Batten, it’s unlikely that the industry will see more large-scale fines for the time being. “I think at this stage a fine is pretty unlikely unless you’ve done something really egregious and made no real commitment to fix things. As a general rule, the FCA is far more likely to fine a firm which fails to spot a problem, rather than those which self-identify and commit to putting it right.
“This is this is a hugely complex new regime. Whether the complexity is required or whether the regulators have overreached it is an interesting question. But nevertheless, we have the regime that we have, and it is hugely complicated on both sides, for both the regulators implementing it and the firms having to deal with it. There’s recognition on both sides that it hasn’t been perfect from either.”
Azad adds that although regulators might show leeway in private, publicly there will still be a hard-nosed approach. “Regulators may have to be transparent in terms of how many reports have been submitted which are incorrect or inaccurate, but in terms of their enforcement approach, they don’t want to relax the pressure on firms getting it right.”
An FCA spokesperson declined to comment on the matter.