The High Cost of MiFID II Non-Compliance: Why Recordkeeping Matters

With the January 2018 implementation of the revised Markets in Financial Instruments Directive (MiFID II), financial institutions across Europe face strict new regulations governing their internal operations and external transactions. While the goal of restoring investor confidence and stabilizing markets is laudable, many firms are struggling to comply with MiFID II’s extensive requirements. With non-compliance penalties on the rise, it’s essential for companies to take MiFID II seriously or risk severe sanctions.

As the Financial Conduct Authority’s CEO recently told the UK’s Treasury Select Committee, "We will start holding firms to account for MiFID II non-compliance" [2]. Regulators have made it clear that the grace period is over.

So what exactly is at stake for non-compliant firms? Let's look at the potential consequences:

Rising Tide of Penalties

In June 2017, even before MiFID II took effect, the FCA already issued over €225 million in fines related to non-compliance with existing regulations [5]. As one compliance expert summed it up, "until there’s an investigation...only then will [companies] start to think about, ‘How can I do this, potentially, in a better way?’" [2].

Recent years have seen penalties skyrocket for financial institutions found lacking in their MiFID II compliance:

• In 2020, European regulators levied total fines of €8.4 million for MiFID II breaches - more than quadruple the €1.8 million from 2019 [3].

• The FCA alone fined 16 major banks and brokerages over £1.5 billion just for using unauthorised messaging apps and deleting messages [1].

• Individual financial firms have faced multi-million pound fines for transaction reporting failures under existing MiFID regulations [7][8][9].

As one compliance advisor put it, with MiFID II as complex and far-reaching as it is, "more fines will likely be issued once it comes into force" [4]. The time is now for firms to reassess their readiness.

The Price of Non-Compliance

The specific penalties for MiFID II non-compliance depend on the nature and severity of the violation but can be as high as €5 million or 10% of a firm's total annual revenue - no small sum [6]. Violations related to data reporting carry strict liability, meaning firms can face sanctions regardless of the reasons for non-compliance [5].

Beyond direct fines, however, non-compliance can inflict lasting damage on organizations in other ways:

• Negative PR and reputation loss from regulatory disclosures of non-compliance [8]

• Investor mistrust and loss of business from perceived misconduct

• Knock-on litigation and third party claims related to non-compliance [2]

Given the scale of potential sanctions, firms must prioritize MiFID II adherence or put their finances and reputations at risk.

Safeguarding Customer Interactions

One key area where firms face compliance challenges is maintaining records of all customer communications under Articles 16(7) and 76 of MiFID II. This includes recording telephone calls, video conferences, face-to-face meetings, emails, and mobile messaging [6].

Proper recordkeeping is essential for constructing audit trails, investigating disputes, and uncovering potential misconduct. Without accurate archives, companies leave themselves vulnerable to steep penalties. Case in point: the FCA fined a UK broker over £1 million just for inadequate monitoring of client communications and lax recordkeeping policies [9].

Yet manual tracking of customer interactions across multiple platforms is time-consuming and prone to human error. This is where solutions like the Eyeson Stream Recorder prove invaluable for MiFID II compliance.

This video recording software integrates seamlessly with commonly used UC platforms to capture calls, video meetings, and screen activity. Custom retention policies can be set to store recordings long-term in encrypted format. And automated logging of all interaction metadata enables quick searching and replay [10].

With MiFID II enforcements ramping up, having robust systems in place to record and retrieve customer communications can help firms avoid penalties while also optimizing internal processes.

Looking Ahead

In the world of financial compliance, there is no room for complacency. Regulators will only increase their scrutiny of MiFID II adherence, while non-compliance fines continue to rise. But there is still time for firms to implement the policies, technologies, and cultural changes required to meet MiFID II’s high standards.

By taking proactive steps like integrating customer communication archives and training staff on proper recordkeeping, organizations can position themselves for MiFID II success. Though the path to full compliance may be challenging, it's never too late to get on the right track. Financial institutions that embrace MiFID II's principles of transparency and accountability have an opportunity not just to avoid penalties, but to rebuild public trust and thrive in the new regulatory environment.

[1] https://www.computerworld.com/article/3675289/16-wall-street-firms-fined-18b-for-using-private-text-apps-lying-about-it.html

[2] https://www.marsh.com/content/dam/marsh/Documents/PDF/UK-en/MiFID%20II.pdf

[3] https://www.cube.global/en-us/resource/esma-fines-for-mifid-ii-non-compliance-quadruple-to-e8-4-million-in-2020/

[4] https://www.financierworldwide.com/the-impact-and-far-reaching-consequences-of-mifid-ii

[5] https://www.shieldfc.com/resources/blog/76-reasons-why-firms-still-need-to-be-scared-of-mifid-ii/

[6] https://www.ir.com/blog/communications/what-is-mifid-ii

[7] https://www.cloudworldwideservices.com/en/penalties-for-noncompliance-gdpr-mifidii-pci-dss/

[8] https://www.niceactimize.com/compliance/blog-fcas-mifid-and-mar-fines-begin-buyside-takes-note.html

[9] https://www.smarsh.com/blog/fca-fines-broker-1-million-poor-surveillance-potential-insider-trading/

[10] https://www.eyeson.com/product-secure-stream-recording