Consistent with the recent overhaul of the EU regulatory framework for financial services, the European Commission has issued updated rules for Markets in Financial Instruments Directive (“MiFID II”), which takes effect on January 3, 2018 for all 28 EU member states. While the effective date of compliance has been delayed, firms should prepare to work on their technology implementation now to be ready on time.
The revised MiFID II places a strong emphasis on improving investor protections by introducing more stringent measures for client communications, disclosures and transparency requirements. As a result, there will be a greater focus on alignment of product and customer profiles. Here are four pillars of compliance as they pertain to a firm’s digital communications with clients:
1. Policy and Training
Article 16 and 45 of the Directive, firms must provide adequate staff training so employees can understand the rules and also maintain an audit trail of the controls and processes that address the regulation. The policy and training team should draw members from legal, compliance, technology and the business to teach them the distinctions between MiFID and MiFID II for their firm.
Articles 13 and 24 requires that a firm’s digital marketing content be fair, clear and not misleading. Having technology in place to assure that firms are disseminating content through their employees that has been reviewed and approved is strongly recommended. Additionally, Article 25 requires firms to ensure the “suitability” of their client’s needs in order to make appropriate product or services recommendations—an effort which can be achieved by having proper compliance technology in place.
Article 16 requires the need for a robust monitoring system, ensuring that the firm’s digital communications with clients are always appropriate and in line with client’s best interest. As a first step, firms should assess their current data capture and supervision capabilities to identify any process and technology gaps. Firms should consider technology that allows for different supervision styles given everything has to be pre-approved before being communicated to pre-approvals or post approvals mandated based on type of content and digital channel.
Finally, to be compliant with Articles 16 and 69, firms are required to keep records of all electronic communications—including social, email, and text messages—from any device, ensuring that they maintain adequate records of disclosures of potential conflicts of interest. The records should be easily obtainable and available to clients for up to five years and, for regulators, up to seven years. It’s also important to record communications in a linear manner to avoid having to piece together communications from different devices if audited.
Firms have until January 2018 to comply with the rules, but we recommend a swift and systematic approach to MiFID II. We believe MiFID II is one of several new regulations that are being considered to address gaps in European capital markets operations that were exposed during the 2008 financial crisis. Firms that are able to plan and implement robust MiFID II-compliant platforms for digital client communications and recordkeeping will be well positioned to deliver new and important insights to the front office while providing ongoing value to a firm’s stakeholders.
How are you planning to implement MiFID II requirements with respect to the advisor-client digital communication channels? What are some of the challenges you are facing? If you are interested in chatting more, tweet me at @YasminZarabi
Yasmin Zarabi is VP Legal and Compliance at Hearsay Social
Disclaimer: The material available in this article is for informational purposes only and not for the purpose of providing legal advice.