The Financial Conduct Authority (FCA) has laid out plans for increased monitoring and assessment of compliance with MiFID II rules around conflicts of interest, according to its 2018/2019 business plan.
The UK financial watchdog outlined its focus on ensuring firms are complying with specific changes under the new regulation including research unbundling, best execution and restricting the practice of payment for order flow.
“Our supervision work will focus on ensuring that firms are complying with these changes and we will assess if the rules are working as intended,” the report said. “Over 2018/19 we will monitor firm compliance with new requirements to address conflicts of interest in producing connected research.”
The FCA added the introduction of MiFID II’s requirements around conflicts of interest and a lack of clarity by market participants about the capacity they are acting in causes harm to markets.
Also among the regulator’s MiFID II objectives is increasing its supervisory efforts on monitoring compliance of systems and controls for both traders and venues related to high frequency trading (HFT).
“We will use existing diagnostic work on HFTs, circuit breakers and mini-flash crashes to inform this work,” the FCA said. “This will enable us to anticipate and deal with potential harms this kind of technological advancement may create.”
For the investment management sector, the watchdog plans to take a closer look at the rise of passive investing and its wider impact of markets with a new study exploring the key aspect of market performance.
The rise of passive investing and exchange traded funds (ETFs) has been highlighted by market participants as a worry, including JP Morgan’s chief Jamie Dimon who expressed his concerns in a letter to shareholders.
“Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation,” Dimon wrote.
The FCA concluded it will continue to monitor whether investment management firms are passing on gains from economies of scale to their customers following its asset management market study.
Last week, the regulator moved forward with a new requirement for asset managers to publish annual assessments relating to the costs and value for money of funds.
Despite an initial backlash and claims the requirement is misguided from some asset managers, implementation of the assessment is expected from 30 September 2019.