What will happen?
In April 2014, the European Union approved MiFID II, an updated version of the original Markets in Financial Instruments Directive (MiFID), implemented in 2007. MiFID II is set to take effect on 3rd January 2018, so firms don’t have long to get up to speed with this new regulatory regime. MiFID II is expected to present a significant compliance challenge for all firms already within the remit of MiFID and, potentially, for many more that may come under the new Directive.
The key points for firms to consider are;
Because MiFID II narrows the scope of products deemed automatically non-complex, the appropriateness test needs to be carried out in relation to a wider range of products.
The FCA amended its proposal to require advisers to tape telephone calls under MiFID II by saying they can also make a written note of the conversation. In its policy statement PS 17/05, the FCA said: “Based on the responses received and following extensive industry engagement, we have concluded that additional flexibility for all Article 3 retail financial advisers is appropriate……. As such, the FCA proposes that these firms, irrespective of size, can comply with the ‘at least analogous’ requirement by either taping all relevant conversations or taking a written note of all relevant conversations”.
Client Assets (CASS)
This will be relevant to those firms that have CASS arrangements as critical outsourcing. Title transfer collateral arrangements (TTCAs) with retail clients will be prohibited, and for non-retail clients, firms must carefully consider the TTCA’s appropriateness. Firms will be allowed to agree with a third party that custody assets can be used to satisfy a firm’s obligations to that third party (for example, under a lien) only if required by law, and must record such arrangements in client contracts.
When placing a client’s money in a qualifying money market fund (QMMF), firms will be required to make internal assessments and obtain express client consent.
MiFID II will extend to professional clients the current COBS 8 requirement for firms to enter into a written basic agreement with retail clients. Such an agreement will have to be entered into with professional clients.
It is likely to be necessary to distinguish MiFID 2-based complaints from others. Firms should adjust their complaint recording arrangements to allow for this.
Conflicts of Interest
“All appropriate steps” will in future need to be taken by firms to identify and manage conflicts.
Costs and charges/disclosure
When an investment service is offered together with another service or product as part of a package, the investment firm will have to tell the client whether it is possible to buy the different components separately (this is known as unbundling) and must provide for separate evidence of the costs and charges of each component.
Definition of regulated advice
From 3 January 2018, for FCA regulated firms, the UK definition of advising on investments is to be narrowed in line with the definition in MiFID. For these firms, only providing ‘personal recommendations’ will constitute regulated advice.
The Directive will put the following obligations on an investment firm:
- • to disclose to clients whether or not the advice provided is on an independent basis; and
- • to disclose to clients whether the investment firm will provide the client with a periodic assessment of the suitability of the financial instruments recommended to that client.
Inducement and adviser charging
MiFID II will ban independent advisers and portfolio managers from receiving any (non-minor) monetary or non-monetary benefits from third parties when dealing with retail and professional clients.
Where an investment firm offers or recommends financial instruments which it does not manufacture, it will have to have in place adequate arrangements to obtain the information on the financial instrument and the product approval process, including the identified target market of the financial instrument, and to understand the characteristics and identified target market of each financial instrument.
Under Article 24(10) of the MiFID 2 Directive, an investment firm must not remunerate or assess the performance of its staff in a way that conflicts with its duty to act in the best interests of its clients. In particular, it must not make any arrangement by way of remuneration, sales targets or otherwise that could provide an incentive to its staff to recommend a particular financial instrument to a retail client when the firm could offer a different financial instrument that would better meet that client’s needs.