We learn to play chess by first understanding the legal moves of each piece but soon realise that it is our ability to strategically out-think our opponent that makes the difference between winning and losing. The Markets in Financial Instruments Directive presents a similar challenge: those organisations that are able to look beyond the face-value of individual directive requirements and apply a strategic approach which plays to their strengths will avoid the pitfalls and ultimately reap the competitive benefits in 2007 and for years to come.
Today's financial services firms face many challenges in embracing a strategic approach to regulatory change, and this is particularly true for MiFID. If firms are to avoid the pitfalls that lie ahead and achieve maximum benefit from this radical shake-up of European financial services, thereby securing their competitive advantage, they must take some bold strategic steps and position themselves to stand the test of tough boardroom scrutiny over the next two years. Rather than dissect the detail of the recently published level two measures, this article looks at the specific delivery challenges that organisations face. The final details of the directive will unfold over the remainder of 2006 and there will be much debate about the specific implications of each new or changed requirement. The ability of firms to respond in a timely and strategic manner will determine their chances of success.
Understand what drives the complexity of your programme
MiFID implementation presents complex challenges to all firms that fall within its reach and could bring substantial changes to many facets of an organisation's business. With over 70 wide-ranging articles in the level one directive and a four-stage approach to legislating MiFID, the relatively short timescale in which firms must achieve compliance mean that many organisations may have to consider tactical moves to avoid penalties on implementation day. Even on first reading of the level two implementation measures, it is clear that the new regime brings requirements for change in nearly every aspect of firms' existing operations, procedures and systems.
The challenge of MiFID is much more than just knowing how to comply with the individual requirements. Firms must see beyond simple compliance and identify the business opportunities that the directive presents. Not only must a firm formulate a good strategy, it must also successfully convert strategic opportunities into tangible benefits. Change will be delivered through a diverse portfolio of projects and will touch all aspects of the business.
There are four factors that drive the complexity of a firm's MiFID response:
- The diverse nature of MiFID — its potential to touch all aspects of an organisation's business operations.
- Participant business model and internal organisation – the breadth and depth of a firm's product and service offering and the degree of internal integration across assets class, instrument type, client classification and geographical location.
- Programme management capability — an organisation's ability to formulate a strategic approach and manage successful delivery of complex change.
- Technical environment – existing levels of automation, rules-based solutions and consolidated architectures.
Achieving compliance is the first and most basic target for many firms as it allows them to continue to do business. There is, however, much more at stake and firms have the potential to gain above and beyond this basic response.
The problem is that most organisations have some experience of failing to deliver large strategic projects of this kind and this has influenced decision-making. Simple compliance offers a path of least resistance; it is essential, mandatory and therefore does not require great self-belief and strength of organisational character, as would a more strategic response. Organisations may lose their focus on the strategic goals of MiFID as other initiatives appear to rise in priority.
Understand the pitfalls and prioritise risk mitigation
There are several principal areas where MiFID implementation programmes could go wrong:
- Compliance-only tactical response — missing critical strategic opportunities.
- Technology led — failing to deliver business benefits; lost competitiveness.
- Duplicated effort — conflicting projects across business that are not joined up.
- Leaving it to the suppliers — responsibility ultimately rests with firm.
- Late delivery — failure to accurately track progress to ensure targets are met.
- Failure to prioritise — MiFID loses out to "business as usual" projects.
- Lack of governance — no single-point decision making and prioritisation.
- Gilding the lily — MiFID used as opportunity for excessive scope creep.
So how can firms achieve the maximum potential benefits of MiFID, and avoid pitfalls along the way?
Establish the roadmap capable of balancing business and compliance goals
MiFID looks set to keep some of the most talented people in the City busy for the next 18 months and beyond. As with any long term and varied change programme, good planning and communications are essential to success. Firms should have three goals: to build firm programme foundations, to set the right direction and pace for the work and to implement ruthless control over the delivery activities to ensure adequate progress and quality are achieved.
Build firm programme foundations
This phase is about starting from a known position. We have already discussed the complexity of MiFID in terms of its broad scope and its effect on firms that currently operate or plan to expand their businesses into multiple EU member states. Given this complexity, it is essential that the right internal and external stakeholders are identified and engaged before critical decisions are made.
The next step is to establish a steering group to bring the principal representatives from a wider group of stakeholders. Typically, this group will include central operational representation from legal and regulatory compliance, IT, HR, risk management, corporate strategy, marketing and communications. It will also include representatives from product line or asset class and from the relevant geographies according to the internal governance structure of the company. Finally the firm's customers, either institutional or retail as appropriate, must be represented.
Getting the programme governance right is vital to enable the timely strategic decision-making that is necessary in the next phase. It is therefore important to establish an agreed remit or process to ratify decisions, proposed objectives and potential approaches throughout the programme lifecycle. Once the right steering group is in place, roles and responsibilities have been agreed and any initial funding has been acquired, it is important that the group is empowered with a common level of basic understanding of MiFID and of the challenges that lie ahead. The firm must determine the level of education that the group needs, depending on its level of involvement in MiFID to date.
These early education sessions represent a good opportunity to sow the seeds of strategy and gather the group's early thoughts on the threats and opportunities the directive presents. The team's first task should be to define the high-level vision for MiFID and outline some specific business outcomes that it will target through the programme.
At this point, the programme begins what most would see as the starting point of the initiative. The firm needs to perform a risk-factored impact assessment of MiFID to begin to highlight the main areas of risk and opportunity facing the business. The main challenge here is to understand that the final, detailed requirements are not known and make sensible probability-based assumptions about them.
This should allow the team to analyse the potential effect of MiFID and start to plan those activities that are mandatory to achieve compliance. The team will also be able to consider more strategic options that would allow the firm to gain other benefits, such as modernisation, process improvement, cost efficiency or competitive advantage. This is also the point at which the existing business strategy for the coming years might be affected by the programme and vice versa. The firms can also begin to look at its internal change delivery capability and begin to address shortfalls through recruitment rather than through the costly contracting market.
Set strategy, direction and pace
Only by starting from a common ground can firms achieve common goals. This phase is about agreeing the target strategy for the firm in the light of MiFID. There are many ways and means that a firm can develop and communicate a strategy, with varying degrees of depth and complexity. Given the potentially wide group of stakeholders involved with MiFID implementation, simplicity and ease of communication are important at this early stage. Firms should endeavour to capture their high-level strategy on a single page.
If the development of this "one-page-strategy" is carefully managed and achieves buy-in from principal stakeholders, it will become a major reference point. It will enable the organisation to develop, communicate, challenge and agree its overall approach to MiFID at the macro level. If successful, this will be referred to throughout the programme providing a main reference point for the various projects and work streams.
It is vital that the strategy does not exist in isolation from the other business approaches of the firm. MiFID needs to find its place in the business priorities; in particular, the opportunistic elements of the MiFID strategy — as opposed to simply achieving compliance — need to find their place among the other priorities for the business and be managed appropriately. Positioning MiFID as a central strategic initiative, rather than a collection of regional compliance projects, ensures that the firm can manage priorities, risks and necessary changes in approach to achieve the desired end state.
Without this level of visibility and control the final result for any organisation is unlikely to be fully understood until implementation is complete. Remember: MiFID is likely to bring aggregated risks and opportunities, particularly to larger, more diverse organisations. Taking the macro view is essential to identifying these hot spots that individually may pass unnoticed but could, at the enterprise or group level, significantly affect a firm's competitive advantage and its balance sheet.
Keep on track and manage changes in a controlled manner
Once the strategy has been established and the right decision making put in place, the next objective is to establish an efficient, transparent and controlled implementation programme. Although this stage is perhaps more familiar territory for firms, running programmes as diverse in nature as MiFID represents unique challenges.
Maintaining a single set of shared common values and goals against which the individual projects are measured requires a high degree of communication. The landscape will inevitably change, as will the business priorities. Mergers and acquisitions will continue, the drive for greater efficiency and cost saving will persist, market forces will fluctuate and new market opportunities will present themselves, constantly challenging the draw on resources and funding within the organisation. The MiFID programme needs to handle all of these eventualities and maintain its place in the business.
Managing MiFID delivery demands a ruthless approach and the mettle of the steering group will undoubtedly be tested frequently before November 2007 is upon us. The programme presents the need for much improved transparency and control than is in place in most organisations. It will not be easy to plan, track and communicate progress, measure the benefits of MiFID, track costs in a pan-European environment and make decisions. To this complexity a further degree of challenge is presented through the need to incorporate any existing software modernisation programmes and manage suppliers and third parties, including outsourced and offshore functions.
There are more horror stories than successes in the field of complex pan-European change-delivery programmes. MiFID will push the boundaries for all but the very best prepared financial services firms and will demand special attention if the desired outcomes are to be achieved and the dangerous pitfalls avoided.
It is clear, given the MiFID timescales, that there is much effort needed up front to establish a successful response. This means that firms need to make some tough decisions, mobilise key resources and move forwards even though the detailed requirements are still being finalised. To return to our chess analogy, firms need to learn from past experience and put the work in well before the first pawn is moved if they are to develop a strategy that will help them win the game. Once MiFID is underway, any wrong move could prove impossible to recover in the tight constraints of this rapidly evolving and far-reaching regulatory overhaul.
To request a version of this article which includes diagrams, please e-mail linda.pearse@paconsulting.com
