Building Societies regulation–SMR, MiFID II, PRIIPs KIDs-what's in store?
Posted on Friday, January 20, 2017 by David Woolcock — No comments
Following on from our previous blog which looked at the journey of Building Society regulation so far, we are going to look at the current situation and future impacts on the sector.
The regulation of Building Societies has moved from the Building Societies Commission to the FSA and as a result of this the FCA and PRA are the bodies now responsible for regulatory oversight of the sector. This also means that Building Societies will be subject to the full implementation of MiFID II due to come into force frighteningly quickly on the 3rd of January 2018 as they are regulated by a EU banking authority. For complex reasons it is highly unlikely Brexit will alter this in any way.
Being under the oversight of the FCA & PRA has also drawn Building Societies into the Senior Managers and Certification regime and will have occasioned work on the identification of the individuals involved in this regime and the statement of responsibilities being completed. All firms should now have completed the associated training and issued the certifications. This is leading to a review of systems and controls to ensure that senior management has the appropriate MIS to fulfil its responsibilities for the areas they are responsible for. This is particularly important for those in front office roles. Another consequence of being under UK financial regulators and the SMR is that you need a state of the art complaints system given the importance given by the FCA and their placing greater onus on “senior persons” to understand how effective their firms’ complaint handling process is and how to manage remediation.
The next headache for Building Societies on the regulatory front is the Packaged Retail Insurance-based Investment Products (PRIIPs) and the need for related Key Information Documents (KIDs). Due to come into force by the end of 2016, and closely related to MiFID II – MiFIR, organisations that offer products that exhibit a non-fixed outcome; as defined as “the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor”; are going to need to develop a KID for each product.
The purpose of the KID is to create a short and standardised document that will communicate all relevant information about a PRIIPs to retail clients. In addition, article 6 of the regulation states that the KID must only contain information that relates to the nature and features of the product and be separate from any marketing documents, with no cross-references to marketing material. All in all it adds up to having robust systems for client oversight, a good contact management system with tools to making documentation available and the ability to control, report and audit compliance with the regulation.
What should be concentrating most minds in the Building Society sector is the speed at which the MiFID II – MiFIR changes need to be incorporated into systems. As noted by the FCA in guidance to both banks and building societies “Firms will need to start planning for the MiFID II changes ahead of the finalisation of the EU implementing legislation and the subsequent changes that we and the PRA make to our Handbooks, and changes that HM Treasury makes to financial services legislation. MiFID II is a wide-ranging piece of legislation and, depending on your business model, could affect a wide range of your firm’s functions – from trading, transaction reporting and client services to IT and HR systems”.
Survival of the fittest is the order of the day in the financial services jungle. Regulations like MiFID II, could arguably give the banks an advantage in that their existing systems are more adaptable to the consequences of the rule changes which will affect PRA-designated banks and building societies. Building Societies need to urgently conduct a gap analysis of existing systems and platforms and make sure they have advanced plans as to how to upgrade their systems to cope with the complexities of the following key areas –
Appropriateness & Control, Pre-Trade Compliance, Record Keeping & Telephony, Trade & Order Handling, Post Trade Disclosure, Best Execution, Client Reporting, Market Data Reporting and Transaction Reporting.
This extensive list will have differing impacts on individual Building Societies. It would be a risk not to ensure, for the activities undertaken, that suitable planning and implementation in respect of the changing regulatory landscape had been undertaken. The FCA recognises the very specific strengths of the of the building society mutual model and have introduced to it a new supervisory model with a very specific regulatory approach. However this does not stop the overarching regulatory changes in financial services having deep and profound impacts on each Building Society as they get swept up in the general regulatory reforms being imposed on the banking sector.