Compliance is an opportunity for differentiation and business growth, Six

Why, until now, have financial services looked at compliance merely as a tick box exercise, rather than a business opportunity? What are the dangers of approaching the European Commission's Markets in Financial Instruments Directive 2 (Mifid 2) and the Packaged Retail and Insurance-based Investment Products (Priips) regulation on a piecemeal basis? Phil Lynch (pictured), head of product management at Six Financial Information spoke to SRP about why in this "era of complex and interrelated regulations", there has never been a better chance to look at compliance as an opportunity for differentiation and business growth.

The problem is that, by addressing different regulations in isolation, the industry is unintentionally at risk of undermining investor confidence, and ultimately trust in institutions, according to Lynch.

"In many cases, banks have been addressing compliance requirements individually, which means they are missing a unique opportunity to build trust with customers and improve risk management," said Lynch. "This may become critical as the sector finds itself at a regulatory crossroads. With less than 10 months until Mifid 2 and Priips arrive, how does the industry ensure they are reporting the correct information to ensure stability across the retail investment sector?"

While the same level of granular detail is not required, a lot of the information that market participants need to distribute for Mifid 2 is already reflected in Priips, according to Lynch. "Little discussed is that the very fact of the overlap is inherently risky," saidLynch. "Many banks are adopting separate concepts for dealing with information around Mifid 2 and Priips. The first involves a 'push' approach of sending information on a scheduled basis with the latest status at the time of sending. The second is where information is 'pulled' on-demand, for example, to generate a Priip-Kid."

While the push approach may suit relatively static instruments, such as Ucits funds, the second approach is likely to be more useful for structured products, where instruments such as barrier reverse convertible products have dynamic underlying securities and can change, according to Lynch. "This means that, for some products like index certificates, cost information needed for both Priips and Mifid 2 is not static either, because it is linked to the performance of an underlying index," said Lynch. The problem with running these approaches concurrently is the risk that the data flows for the two regulations become out of sync, according to Lynch.

"Take the example of a bank receiving the latest intel required to generate an accurate Priip-Kid, based on data 'pulled' just before a client places a trade," said Lynch. "At the same time, this bank could be running a scheduled approach for Mifid 2 when attempting to carry out rigorous checks for the exact same trade."

While this is "all well and good for a standard equity trade", for a structured product where details can change often, the story is very different, according to Lynch. "The bank in question could suddenly find itself with mismatched information across its Mifid 2 and Priips reporting obligations, resulting in a situation where a retail investor simultaneously receives a Priip Kid and Mifid 2 cost sheet that don't add up," said Lynch.

"This is a serious issue for an individual bank, but when you consider the implications across an entire industry, the potential for systemic risk looms large," said Lynch.

At the same time, polling all instruments and attributes for changes, then updating the affected documents and reporting even if there is no current demand, creates unnecessary and costly processing and overhead. "Ultimately, no bank wants to be making decisions for their customers on mismatched Priips and Mifid 2 data," said Lynch. "With deadlines just around the corner, financial institutions can ill-afford to continue adopting multiple regulatory solutions from numerous different vendors and relying on internal project teams operating in isolation."

The industry as a whole needs to start talking about how information is exchanged to avert a loss of confidence in the financial system, "particularly with key data now flowing both ways between manufacturers and retail networks", according to Lynch.

"This is surely the only way to ensure the industry has the most up-to-date information at any point in time in order to start seeing regulation as less of a bureaucratic burden, and more of an opportunity to drive new revenue streams," said Lynch.

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