MiFID II has reached its six-month milestone. After gruelling and expensive implementation projects, many firms may have hoped to draw a line under the regulation roll-out. But the effects of the European Union’s directive are still being felt by financial firms and recent statements from the regulator suggest that scrutiny levels are set to rise.

We know from the FCA’s business plan for 2018/19 that forbearance, if it ever existed, is now over. We now expect that the FCA will start exercising its supervision and enforcement in the following four areas:

Transaction reporting: Firms will need to complete or commence end-to-end data reconciliations to identify any problems before the regulator does. In particular, the FCA will focus its market abuse surveillance on firms trading fixed income, commodities and non-standard derivatives as these instruments are in scope of transaction reporting for the first time. And as the European Securities and Markets Authority (ESMA) has confirmed that it will not extend its temporary reprieve on firms and clients without legal entity identifiers (LEIs) – representing a return to their ‘no LEI, no trade’ stance, firms must be sure to have them in place by 2 July 2018.

Best Execution: With the first round of RTS 28 reporting out of the way for most firms, the focus now must be on monitoring. In particular, on the use of RTS 27 reports published by trading venues, systematic internalisers (SIs) and ‘other liquidity providers’ (whose definition was clarified in the recent update to the investor protection Q&A). RTS 27 reports are now being published on a quarterly basis and firms’ monitoring will need to incorporate the content in a meaningful way, not least because the next RTS 28 disclosure in April 2019 will need to describe how this has been achieved. Making sense of the vast amount of RTS 27 data that will be available is likely to pose challenges throughout the rest of the year.

Payment for research: The FCA recently revealed that it will undertake a six-month long ‘diagnostic’ review of a range of organisations on the topic of research and inducements. The objective being to understand how the industry has tackled compliance challenges created by the implementation of the MiFID II research rules. These rules were hotly debated across the industry prior to 3 January 2018 and thereafter remained, in many respects, opaque. Firms complying with the letter (and not the spirit) of the rules must be prepared to justify their approach should they find themselves in scope of any such reviews.

High frequency trading (HFT) and algorithmic trading: Firms employing these trading strategies must ensure that their pre-trade controls and post-trade monitoring are now working as intended. They must be sure their systems and processes prevent and identify any potentially abusive activity. Any individual executing or overseeing such strategies must continue to have the skills and expertise to react to unintended or abusive behaviour by HFT and algorithmic trading systems.

With the regulator indicating that best endeavours are no longer enough, firms should take a step back and review their arrangements to ensure:

• their compliance programmes cover the full scope of MiFID II requirements;
• newly-implemented systems and controls are operational and effective;
• they can ─ in front of the regulator ─ justify their approach to implementation; and
• employees are trained on and understand the new obligations imposed by MiFID II.

We are not expecting immediate and significant enforcement actions to arise from the FCA’s “close monitoring of how well firms are complying with these new requirements,” (other than in instances where firms have shown blatant disregard for the rules). But where firms are in scope of a review and their arrangements are not up-to-scratch, experience tells us that further scrutiny is likely to follow.