Large amount of European financial businesses risk falling foul of MIFID

A large number of European financial institutions do not currently have record keeping procedures that are required by the Markets in Financial Instruments Directive (MIFID) in place. The rules are due to come into effect this Thursday.

The JWG-IT group, a think-tank for EU driven IT change in financial services, has studied 70 financial institutions and released findings that revealed 63 per cent of businesses do not comply with MIFID’s Article 51.

Article 51 requires that records be stored in a manner that makes them transparent and auditable for five years after a financial transaction takes place. Under MIFID Regulators will have the right to demand to see how different stages of a transaction took place, such as what the type of technology was used. Customer records will also need to be retained for the lifetime of the relationship with the client.

This means IT departments have to put systems in place to record and store the information. “MIFID will require a significant upgrade, not only in the way that records are stored and retrieved, but also how they are captured, linked and accessed at the required time,” said the JWG-IT group’s report.

JWG-IT said that firms should appoint a senior records manager with responsibility for implementing the project, “It is now up to each firm to define its operational targets and steer its course,” the report added.

According to experts there is a lack of clarity over who should take responsibility to enforcing the act. Mike Davis, Ovum senior analyst, said many banks are playing a “wait and see game.” Although the majority of firms have now decided on the detail, the go ahead has still not been given to IT, said Davis. Until there is an enforcement regime and policing in place, action will be limited, he added.

US listed companies will be more ready for MIFID because they have already had to introduce controls in order to comply with Sarbanes-Oxley, Davies added. Peter Redshaw, Gartner director of research, said he expects most UK firms to be MiFID compliant in time but added that there are significant differences in the preparation work done according to the size and type of firm.

Big firms, that sell, have spent more money preparing for MIFID than small buy-side firms, Redshaw said.

“Small buy-side firms probably have done a lot of work in preparation; it is just that they've deferred some of the discretionary parts, whereas the big sell-side firms need it all ready on day one,” Redshaw said.

“These small firms will do some repositioning and re-engineering once they've seen where they can optimise things later, based on hard evidence of how things are working,” he added.

To comply, small buy-side firms will have done the minimum for tasks such as classification, best execution, and reporting, and found quick fixes and updates through existing IT partners for applications such as order management and execution systems, Redshaw said

Redshaw predicts a second round of spending once firms begin to understand where the best venues and utilities are, and which vendors offer the best services.