Blog, MiFID II:Articles

MiFIDII Culture and Conduct – Consistency and Control


By Claire Savage, COO, AQMetrics

In light of the recent global financial crisis, and with MiFIDII fast approaching, the UK’s Financial Conduct Authority (FCA) along with other regulators in Europe, has been placing an increasing emphasis on culture and conduct. A number of FCA publications – including a dedicated Thematic Review – as well as recent speeches from the Bank of England[1], have referred specifically to why having the right culture and conduct is critically important to the industry as a whole.

It is clear that financial firms need to take this matter seriously. But how can culture be measured? How can firms build the necessary KPIs to monitor and improve it? And how can they leverage technology in this regard?

When measuring culture, there are three key elements that firms need to consider:

  • Remuneration policies
  • Treatment of clients
  • Approach to risk management


In their Thematic Review, the FCA discussed various issues around performance-related payments, bonuses and remuneration rewards. But another area that firms should consider is how to achieve greater transparency around the monitoring and reporting of commission structures throughout the supply chain.

One way to achieve this is through rules-based fee management where, in the event of a breach, alerts are triggered and reported at a supervisory level. For many firms, this will mean examining legacy and long standing relationships in their supply chain to ensure that rules are being conformed with. The net benefits will be positive however; the greater the level of granularity disclosed, the higher degree of comfort both investors and regulators will have.

Fair treatment of clients

Organisational culture is not just about internal-facing matters such as remuneration, of course. Firms also need to look outwards towards their clients and ensure they are treating them fairly.

From a buy-side perspective, investor protection is key. In particular, investment firms dealing with retail customers need to ensure that exact costs and charges on distributions are sent to the investors through the appropriate PRIIPs/KID documentation. Any rules-based fee management module implemented by firms should monitor for compliance with these best practices, so that they can prove to investors and regulators that a transparent, supervised, automated and audited approach exists.

Risk management

One of the most significant aspects of organisational culture is how the firm approaches risk management at every level: the operational layer; the supervisory layer; and most strategically, at the board level.

Board members should always be open to challenges about their approach to risk management, encouraging a pre-emptive approach to resolving any issues or perceived areas of weakness within the firm. It is also good practice for them to regularly engage in proactive conversation with regulators.

Risk silos within the firm are best avoided. Firms cannot afford to have ‘micro-climates’ within the organisation where disparate approaches to risk management can occur. Where firms are investing in technology for risk and compliance management, this can be an ideal opportunity to ensure a standardised, cohesive framework is put in place, to provide greater insights into the business.

Taking a holistic approach

Many investment firms today maintain multiple systems for measuring different types of risk, such as market risk, liquidity risk, credit risk, portfolio risk, operational risk, and so on. These are typically a mix of third-party packages, in-house built systems and, in many cases, Excel spreadsheets.

This lack of consistency and control makes it challenging for such firms to instil good culture and to maintain the right levels of conduct within their organisations. In order to achieve better outcomes, firms need to take a more holistic approach to risk management and reporting. Fortunately, technology now exists that can provide the requisite monitoring, detection and deep data analytics of different types of risk across the firm, without the wholesale replacement of existing legacy systems.

Bringing it all together

So how can firms gather this ‘golden source’ of data? In reality, most firms are not going to have a single hub where all their data is flowing through. There would typically have multiple databases, multiple administrators, multiple data formats and so on.

The answer lies in cloud-based platforms that are able to rapidly extract, transform and load all of these disparate data sources into a common, normalised format, contextualise that data and then run the necessary calculations and analytics on it. This not only provides the firm with the required holistic view of its risk, but also can satisfy a wide range of regulatory reporting requirements.

One of the key advantages of a platform such as this is that it is not a ‘black box’ from a niche risk management supplier, providing output with no detail of how that output has been created. Because the platform accesses source data, the business workflow matches the firm’s business operating model, providing the information needed at each of the three levels within the organisation: operational; supervisory; and board.

This kind of platform not only makes things easier when a regulator comes to audit, but it also enables data to be understood at every level in the organisation.

The result? Better culture, better conduct, and better outcomes for the firm. And this shift towards self-regulation, whereby it becomes integral to a firm’s core values and culture to conduct operations in a controlled, ethical and transparent manner, can lead directly to a range of good outcomes, including increased confidence in the market, better customer experience and stronger customer loyalty.

[1] In May 2016, Andrew Bailey of the BoE stated “the culture of firms and the people that make them up – and of course therefore the culture of industries insofar as it can be generalised – is of the utmost importance to financial regulators. Culture matters a great deal.”