A lack of preparation, failure to meet deadlines and poor quality compliance has been a theme echoed across the industry since Mifid ll came into force.
While the regulation’s impact on asset managers and larger financial institutions has dominated headlines, the issues it has created for multi-family offices (MFOs) have been underreported but significant.
In the build up to Mifid II’s implementation more than 10 months ago, many MFOs underestimated the challenges that it would bring. This meant that among MFOs, preparation was last minute at best, at worst nonexistent. Many believed that the regulation was not directly relevant to them, believing Mifid II would only impact much larger financial institutions. Others were unsure of their obligations. But of the 9,000 firms affected by Mifid II, 6,500 are small-to-medium enterprises – and many of these are MFOs.
Even still, 10 months on, little has changed. Preparedness remains low among MFOs, in part due to a belief that regulators are failing to crack down on non-compliance – an unsurprising reaction given the wave of criticisms directed at the FCA for its limited interest in fining big banks and asset managers for non-compliance.
Just six firms have so far reported themselves to the regulator and the FCA has written to a mere eight, despite receiving a dossier showing 50 were in breach.
But the FCA’s lax attitude toward Mifid II is unlikely to continue forever – meaning MFOs could be exposed when the regulators do eventually come knocking.
MFOs operate a unique, but problematic space in the financial world, acting as a hybrid between private and institutional clients. This means that they should have been particularly concerned about Mifid II’s new rules, because, as a result of their complexity, they tend to deal with large numbers of different financial intermediaries – for example asset managers, custodians, providers of reporting and analysis, Forex firms, and other specialists.
As MFOs often deal with a significant amount of different financial players, their obligations under Mifid II are highly challenging. Amongst the many demands, transaction reporting requires MFOs to keep records of all conversations, activities and communications they have engaged in – storing in a digitised, tamper-proof format to be made available at the regulator’s request within 72 hours.
Alongside this, best execution obligations necessitate that MFOs disclose their top five execution venues for each class of financial instrument – a technical and complex requirement.
To make matters worse, SMEs, including MFOs, tend to have a shortage of time, capital and resources to devote time and effort to compliance.
And with dated, less flexible legacy systems in place, the technology they use may be unable to manage these new obligations. Moreover, as heavy regulation is a fairly new challenge for both single and multi-family offices, the rush of regulatory challenges such as Mifid II appear to have taken them by surprise.
Complying with Mifid II should be a particular concern for MFOs and family offices more broadly as they manage not only the finances of HNWI, but their family reputation, a valuable asset built up over the generations.
With the FCA likely to step up its game, fines will not be the only cost borne by MFOs for non-adherence. There is the risk of reputational damage – much harder to value and even harder to repair as credibility in the market is lost.
But it’s not just about keeping the FCA at bay. Mifid II provides a number of positive opportunities for MFOs, and failure to invest and keep up with the regulatory landscape could mean they are poorly equipped to keep up with their competitors in the future.
Becoming Mifid II-compliant can also bring MFOs a number of long-term benefits.
At a minimum, the regulation increases transparency, offering investment protection in the market and levelling the playing field for family offices. Additionally, the wealth of previously dormant data which needs to be consolidated by firms under Mifid II can be better analysed, revealing insights that MFOs can use to improve their business efficiency, build on existing practices and gain a competitive edge.
Putting some time and effort into investing in the right resources to help handle their new reporting obligations can make complying with Mifid II much easier than they expected. The regulation has encouraged collaboration and innovation across finance and technology – simplifying the process for firms in a flexible, cost-efficient manner.
By taking the steps needed to comply with Mifid II, MFOs can begin to exploit the possibilities flowing from improved data management that the regulation presents.
The result will be greater clarity, transparency and a more level playing field in the industry – helping MFOs compete on the qualities that really matter.
Matt Smith (pictured) is SteelEye's CEO. SteelEye data analytics was founded in 2017 to help firms meet regulatory requirements.