Fintech on Friday: omni-channel under MiFID II – eradicating risks and ramping up revenues

With implementation looming less than six months away, wealth managers conducting business in Europe will be painfully aware of the scope of MiFID II. Barely any area of operations remains untouched by this incredibly wide-ranging legislation, but – as ever – the devil is in the detail. Firms having (hopefully) addressed the headline disclosure and reporting requirements, it is digital client communications now keeping compliance officers awake at night.

Doubly exposed

The new rules for documenting client communications are among the most contentious elements of MiFID II, and may seem at face value to be a serious brake on the sector’s further digitalisation. Rapid adoption of “omni-channel” has reinvigorated a highly traditional industry and pointed the way to winning over millennials. Yet the injunction that all interactions with clients must be recorded and stored for seven years, including those via social media, might leave management teams feeling doubly exposed to the risks of regulatory censure on the one hand and losing business to innovators on the other. The FCA is already actively fining firms for non-compliance and the rules around digital interactions continue to tighten.

MiFID II is unequivocal that all communications “intended to result in transactions” must be recorded, which clearly brings every single interaction with clients – or potential ones – into its ambit, across all the many channels a wealth manager is likely to use today. Further, these interactions must be stored in an easily retrievable, incorruptible format. Recording-keeping for channels within the institution’s own domain, like email, websites, client portals and mobile apps, poses challenges enough; the prospect of monitoring a plethora operated by third-parties, like voice over internet rotocol  (Skype), social media (LinkedIn, Twitter, Facebook) and messaging platforms (WhatsApp) must have some CTOs wishing for a return to simpler times.

But dialling back on digitalisation clearly is not an option, and nor should the industry wish it to be.

Traditional calls and meetings remain important, but relationships in every aspect of life are now largely digitalised. Research shows 70 per cent of HNWI’s are avid social media users, both for investment information and communicating with their advisers, while the average person touches their smartphone thousands of times a day. Choosing not to engage with clients via their preferred channels will prove an expensive error for incumbents as robo-advisers and other challengers snap at their heels. Wealth managers must ambitiously pursue the huge business gains digital communications offer, rather than be cowed by regulations that are challenging but far from insurmountable barriers.

Worrying signs

The compliance onslaught has made manual workarounds and technological “sticking plasters” inevitable, but at great expense – and risk – to those not thinking sufficiently ahead. Worryingly, some wealth managers have not even thought about recording online interactions yet, while those that have recognised that this is an absolute must are often making do with dedicating (very expensive) staff to taking screenshots of websites, or managing social media surveillance manually. Even those which have automated monitoring of their online channels are often doing so only in a very limited way. With so much digital interaction at play, institutions can capture an abundance of information on clients’ behaviours and attitudes, but few are doing enough to generate actionable business intelligence. After next year’s January 3 deadline, many might also find – to their very great cost – that they have not done enough to fend off accusations of wrongdoing either.

Compliance is soon expected to consume 10 per cent of firms’ total revenues, and MiFID II preparations will cost the industry $2.1bn this year alone. Eradicating risk is paramount, but helping firms wring maximum business benefits from this forced spend is now the raison d'être of regtech providers like ourselves. The technology now exists to record and replay all client interactions in forensic detail – every mouse movement, URL click and word typed.

Coupled with today’s cost-effective ways to store and analyse data, wealth managers really need not fear MiFID II’s communications record-keeping rules, nor any others that may come. For forward-thinking firms, leveraging real client insight and protecting themselves are increasingly one and the same thing.

Patrick Barnert is chief executive of Qumram, a Switzerland-based provider of cross-channel intelligence, surveillance and compliance software to simultaneously address digital marketing and regulatory needs