Published originally in Wealth Manager By John Schaffer 26 Apr, 2019
Earlier in April, regulatory consultancy Bovill suggested that nearly one in four firms submitting transaction data under Mifid II rules filed inaccurate returns.
We dug further into the findings and asked compliance experts why firms are struggling to comply with the new regulations.
Matthew Chapman, senior principal consultant at ACA Compliance, suggested that there has been a ‘systematic’ problem in reporting failures.
‘There’s a misconception that as long as the reporting process appears to be working and validation errors are being cleared, that everything is as it should be,’ he said.
‘The FCA has been saying for months that they are losing patience with reports which are ‘valid but wrong’ – where fields are populated with values which pass validation, but which are incorrect. In some cases they are clearly fabricated to force a report through the validation checks.’
Bovill managing consultant, Damon Batten, told Wealth Manager that, although in principle transaction reporting should be easy, firms are struggling to pool all the data required from myriad systems.
He said: ‘The issues arise because the reports themselves are complex, they require data to be sourced and consolidated often from a number of systems, and the scope of the reporting is very broad. Many errors creep in when data is transferred in back office systems, with every transfer or mapping of data representing a risk.
So do firms have the right systems in place to comply with the new regulation? Batten believes that although many will have made significant investments in back office technology, others will still be reliant on ‘very manual processes’.
He said: ‘The biggest area of under-preparedness is generally in the controls and validation, where firms are still not able to prove and continuously improve the quality of their reporting.’
John McGrath, chief revenue officer at BidFX, added: ‘On top of the bid/offer price, asset managers face the unenviable task of uncovering implicit costs that could include commissions and taxes.
‘This presents somewhat of a problem, particularly as what is considered ‘best execution’ is no longer necessarily obtained by trading at the best price, but at the price that represents best value to the fund. If these implicit costs can’t be displayed clearly to investors, how does a fund manager harbour any hopes delivering the best possible value?’
Batten stressed that the vast majority of firms in the UK take their obligations under Mifid seriously. However, transaction reporting in particular is a back office function, and therefore nothing but an overhead to firms.
He said: ‘Firms are balancing the regulatory risk of misreporting versus the significant cost of designing systems and controls which would be capable of ensuring 100% accurate reporting at all times.’
Chapman added: ‘There are few firms which have failed to appreciate the importance of correct reporting.
‘Although reporting is a largely binary process, it is riddled with complexity. Even when a firm has reported in a way that is, to all intents and purposes, correct, their data is being corrupted by their service providers. This results in an unholy mess that can only be discovered through regular reviews of data extracted from the FCA’s market data processor.’