WHAT is it?
The original Markets in Financial Instruments Directive (MiFID) represented a wide-ranging shake-up of European equity markets, as it sought to harmonise rules across EU member states, increase protection for market users, and lead to greater transparency and accountability for all types of investment firms caught under its scope.
MiFID II is set to bring in a similarly seismic shake-up of the rules, and will affect nearly all players in the regulated investment market across the UK and Europe. Firms currently authorised by the FCA as MiFID investment firms – as well as firms seeking to be authorised – will have to undertake major projects to ensure they are ready for MiFID II’s provisions.
Below, we have outlined the key focus areas of the new legislation, as well as concrete steps authorised businesses will need to take before next January’s implementation date. It may still be months away, but there will be many changes needed, so you should start your scoping exercise right away (if you haven’t already!).
The FinTech Compliance team can assist your business with scoping and implementation exercises ahead of the January deadline – get in touch with us as soon as possible if you think you might need our help.
WHO will it affect?
The scope of MiFID II is wide-ranging and you would have to be an unusual investment business indeed to not come under the scope of one or more of its provisions.
Broadly speaking, the legislation will affect all types of investment firms authorised under MiFID (as opposed to businesses authorised under other European directive, such as insurance intermediaries authorised under IDD or UCITS/AIFMD fund managers).
This will include:
This list is not exhaustive and you should consult the FCA’s guidance or get in touch with us if you are unsure whether your firm comes under the Directive’s scope.
WHEN does it come into force?
The final rules are set to kick in on the 3rd of January 2018.
WHAT are the key focus areas?
One of the main changes from MiFID is the scope of II; it now also applies to non-equity instruments, such as commodity derivatives.
Objectives: Building on MiFID, MiFID II is designed to align all regulation across the EU, address the shortcomings of MiFID and take into account recent technological advancements and macroeconomic developments.
1 Increased standards of investor protection, including:
2 Stricter requirements for transparency
3 Limits on sizes of positions held: wider scope
4 New rule: Third country access
5 New category of trading venue: Organised trading facility (OTF)
Conflict of Interest
|Firms must take reasonable steps to manage their conflicts of interest (Firm’s and client’s interests).
If it can’t be managed, this conflict of interest could be disclosed to the firm’s clients.
|Firms must take all appropriate steps (much higher standard than reasonable, since in this context firms will need to identify what the appropriate steps are in a particular situation, instead of doing just enough for it to be reasonable).
If the firm cannot prevent, it can disclose this conflict to the client, whilst also informing them that they could not prevent the conflict of interest from occurring, since their systems are not adequate for prevention.
Independent advice and inducements
1 MiFID II introduces “Independent advice”. There are two main requirements for independent financial advisers:
2 The firm must assess an ‘adequately representative’ range of financial products and must not limits its assessment to its own or it’s related parties’ issues.
3 The firm must not receive and/or keep third party benefits and inducements in relation to services provided to the client.
Regarding “appropriate information” to the client, the client must be informed if they are being advised on an independent basis or not.
It is important to note that the FCA’s own rules on independent advice and inducements brought in under the Retail Distribution Review (RDR) are already very similar to the above rules. IFAs in the UK should not see significant change to the existing rules on independence of advice as a result. Instead, the MiFID II advice rules will bring the rest of Europe up to a similar standard.
One area in which UK regulation will change is that the new inducements rules will also apply to portfolio managers as well, meaning that such firms can no longer receive inducements for investing into a particular product or fund. The impact of this change is likely to be significant, not least on product providers’ revenue models.
|Firms must take all reasonable steps to obtain the best possible results for their clients. The firm must have an Order Execution Policy.||All sufficient steps must be taken. Requirements for order execution policy are higher. (Firms are required to disclose 5 trading venues for each individual type of financial security that their clients are trading through them).|
Information to clients
Where packages of products and/or services are offered:
Suitability and appropriateness
In response to the boom in Fintech, MiFID II now also applies to so-called ‘Robo-advisors’ – i.e. services where a customer answers a series of scripted questions or sets their own intended risk profile in order to have an automated system build a recommended investment portfolio.
|Limited to equities traded on regulated markets||Includes equities, depositary receipts, exchange traded funds, other similar to equity instruments, bonds, structured finance, emission allowances, derivatives.
Expanded range of trading venues: Apart from regulated markets and multilateral trading facilities MTFs), a new category: organized trading facilities (OTFs)
New rules in order to enable third country firms to access EU markets
Definition and general rules
1) create rules around processes
2) establish access requirements
3) pre- and post-trade transparency requirements are the same as for MTFs
4) establish procedures to ensure compliance with regulation
5) investment firms operating an OTF are subject to the same capital requirements as those operating an MTF
WHAT do firms need to do to comply?
Firms will need to conduct a documented scoping exercise to determine whether they will need authorisation or a Variation of Permission (VoP) with the FCA following the new regime. This should be completed as soon as possible as the long lead times for applications and VoPs mean that firms risk being unable to operate in the market with the correct permissions by the 3 January 2018 implementation date.
Even if you are not an investment firm, the wide scope of MiFID means that you may well come under its ambit, so it is essential that you work out whether your business activities touch upon aspects of the legislation.
WHAT can we do to help?
The FinTech Compliance team can assist with all aspects of MiFID II implementation, including:
If you would like to speak to us about any of the above, please do not hesitate to contact us via telephone at +44 (0) 207 100 4058, or visit our Contact page on our website.