Private equity firms regulated by the Financial Conduct Authority could be “woefully behind” in their preparation for a financial markets reform which many assumed did not apply to them, according to a regulatory lawyer.
The second Markets in Financial Instruments Directive comes into force in January, and the UK watchdog has, unlike its European peers, imposed call recording obligations on private equity managers.
“Some private equity firms might assume MiFID II does not have any impact because they are not trading shares, bonds, or financial instruments on a regular basis, but clearly there are aspects of MiFID II that will apply. Compliance is required in six months’ time, and firms should carry out an analysis to find out what their obligations are,” Leonard Ng, regulatory partner at Sidley Austin in London, told pfm.
Under the rules, firms will be required to record any calls that fall into the category of “arranging a transaction.” This is not expected to include an introductory call, but will be focused on the final stage of the deal, including conversations around pricing.
“It could be that some firms need to put a new system into place to record and archive these calls, which need to be kept for five years,” Ng said.
Firms will also need to consider the new costs and charges disclosures imposed by MiFID II. The FCA recently described costs disclosure in the private equity industry as being “opaque” in its Asset Management Market Study, so firms should pay particular attention to this aspect, Ng said.
The British regulator is the only European agency to apply MiFID II to private equity firms, which has resulted in criticism, he added.
“The FCA does get complaints about the application of MiFID giving UK funds a competitive disadvantage, but in general the FCA takes the view that there is not sufficient evidence to show the competitive disadvantage, and in any event the FCA has not extended MiFID II to all aspects of fund management, for example by excluding AIFMs from transaction reporting and best execution,” Ng said.