Regulatory Bulletin: MiFID II

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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:

  • Brokers and dealers
  • Discretionary investment managers
  • Investment advisers
  • Corporate finance advisers and arrangers

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.

Key topics:

1 Increased standards of investor protection, including:

  • Stricter rules for dealing with Conflicts of interest
  • New independent advice rule
  • Higher standard of Best Execution
  • Clearer requirements for Information provision to the clients
  • Wider scope of Suitability and appropriateness rules

2 Stricter requirements for transparency

  • Pre-trade transparency
  • Post-trade 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)


Investor protection

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.

  • Receiving inducements: forbidden unless disclosed and improve the service quality.
  • Giving inducements: allowed only if disclosed and will lead to service quality improvement. These should not influence recipients’ behaviour
  • See more here

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.


Best execution

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

  • Client must be informed of the type of service he or she is being provided
  • Clear information should be provided regarding the financial instruments the client is dealing with, including associated risks and warnings, regardless of whether the client is a sophisticated investor or a retail client
  • All information regarding the cost of the service, including the costs of financial instruments and how the client can cover those costs
  • Client must be informed if the advice is provided on independent basis (as stated above)
  • Firms must provide the client with information on whether the advice is provided on a broad or limited analysis (IMPORTANT in order for client’s objectives to be met)

Where packages of products and/or services are offered:

  1. Information should be provided as to whether the client can obtain the products/services in question separately
  2. should be provided
  3. Packages should also be Suitability/Appropriateness checked.


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.


  • Firms must take into account client’s attitude towards risk: tolerance and ability to bear losses
  • Firms must provide a Statement of Suitability in order to demonstrate how the advice matches client’s objectives
  • A Periodic Assessment of Suitability must be carried out


  • The Scope of appropriateness has been extended in MiFID II, more financial instruments have been included

Pre- and post-trade transparency

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)


Pre-trade transparency

  1. Application: does not apply to derivative transactions of financial counterparties which are objectively measureable as reducing risks directly relating to those parties’ commercial or treasury financing activities
  2. Operators of trading venues must make current bid, offer prices and depth of trading interest publicly available throughout trading hours
  3. Note: these requirements may vary depending on the type of trading system (order-book, quote-driven, hybrid, periodic, auction trading system and for non-equity financial instruments– voice trading systems)
  4. Waivers: national competent authorities will, as under MiFID, have the option to waive pre-trade transparency obligations, however there is criteria to be met and for NCA to grant the waiver it:
    • Financial instruments for which there is no liquid market
    • Orders which are large in scale
    • Request-for-quote and voice trading systems that are equal or larger that the size relevant to this specific instrument
    • Orders held at an order management system
  5. Note: reference price waiver is still available for equities and equity-like instruments. However, there is a “volume cap mechanism”, limiting the amount of trading that can take place under waivers:
  • 4% per trading venue
  • 8% in aggregate across the EU


Post-trade transparency

  1. Application: regulated markets, MTFs, OTFs and investment firms trading over the counter (OTC)
  2. Rule: Investment firms trading outside a trading venue, operators, and firms operating a trading venue must make publicly available details of trades: price and quantity
  3. Post-trade data must be available as closer to the trading time as it is possible (15 min after the execution until January 2020; 5 min after January 2020)
  4. Waivers: there are none for post-trade reporting, however the process can be delayed for maximum of 48 hours (subject to the following criteria:
  • Large scale transactions
  • Transactions with instruments for which there is no liquid market


Limits on positions held

  1. National regulators (FCA in the case of UK) will be required to set limits on positions held in each commodity derivative contract.
  2. Scope: regulated markets, MTFs, OTFs, and “economically equivalent” OTC commodity derivatives contracts
  3. Limits:
  • Will be set in aggregate, so on the basis of all positions held by a person (or on behalf of a person)
  • Will be published through Market Conduct Sourcebook
  1. National regulators have the right to impose sanctions for non-compliance with position limits.
  2. Buy-side firms: the risk of breaching those limits is considered to be comparatively low.


Third country access

 New rules in order to enable third country firms to access EU markets

  1. This rule depends on the type of client firms wish to provide service for:
  • Generally, when the clients request the services themselves (act as initiators), a third country firm can operate without the firm having to establish a branch within the EU
  • Services to retail and sophisticated (professional) clients might mean that third country firms will need to establish a branch
  • Services to professional clients and certain eligible counterparties do not require branch establishment

 Organised trading facility (OTF)

Definition and general rules

  • Multilateral system that is not an RM or MTF
  • General rules are similar to those for MTFs, under which OTFs must:

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

OTF-specific rules

  • OTFs can only trade in non-equity instruments
  • The limitations on matched principal trading and trading on own account are less strict
  • Must exercise discretion
  • OTFs have clients so must comply with client facing rules
  • Operators of OTFs must have procedures in place for prevention and dealing with conflicts of interest
  • Best execution policies must be established
  • Firms operating both SI and OTF must prevent information sharing
  • Dealing on own account is allowed but only with regard to sovereign debt instruments which do not have a liquid market

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:

  • Conducting a bespoke scoping exercise to determine your firm’s obligations;
  • Preparing and submitting Part IV authorisation applications and Variation of Permission applications;
  • Providing a MiFID II-compliant suite of documents and policies;
  • Conducting ad-hoc and ongoing monitoring projects to ensure compliance.

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.