FCA MiFID II policy statement

Video | July 2017 | 00:12:28

Video Details

FCA MiFID II policy statement

Simon Lovegrove: Hello everyone and welcome to our latest MiFID II video.

The FCA has recently published its second MiFID II policy statement.

Hannah, before we get into the detail at a macro level, how important is the policy statement?

Hannah Meakin: I think it is really important for a few reasons. Although MiFID II firms have understood what requirements are going to apply to them for some time because they have been in the directive and the regulation, there are many other firms that are not actually MiFID II firms, to whom the FCA has been proposing to extend some of the requirements in MiFID II and so these firms are now seeing for the first time exactly which requirements are going to apply to them, and how.

There are also a few policy decisions that the FCA has made in relation to how it applies all of these requirements to all types of firms and so again those are really being confirmed for the first time.

I think the other thing that is important about this policy statement is that many firms have been waiting for it in order to really kick start their re-documentation exercise under MiFID II. So that is both thinking about the internal policy documentation that will need updating and also the client facing documentation they have, that they are going to need to resend or renegotiate with clients. And I think that, as I say, many people have been waiting to see the detail in the final version of the rules in order to really get going with that process in earnest.

Simon Lovegrove: And now turning to the detail, let's start with client categorisation Imogen.

Imogen Garner: So the big point on client categorisation that the policy statement addresses is the whole question around local authorities. So if you remember what MiFID II does, it treats local authorities as being by default retail clients, and if you want to opt them up to elective professional client status, that is where there have been some challenges, because what MiFID II does, it allows member states, their national regulators have a discretion to apply an addition or as an alternative to the existing elective professional opt up criteria, their own elective professional opt up criteria for local authorities that would be set out in terms of those national regulators feel are appropriate. So what the FCA had done when it set out its consultation paper was identify a recalibrated test for local authorities. The qualitative test for assessing elective professionals stayed the same, it is the one we have always known, but a recalibrated version of the quantitative test which included in relation to the test for portfolio size of financial instruments, an amount that local authorities would have to meet, which was set at £15,000,000.

So in the final rules, what you have essentially got is the qualitative tests that we have always known, the quantitative test you have a choice of meeting the £10,000,000 threshold, the ten transactions per quarter test, the test around having worked in the financial sector for a year or a fourth test which simply says are you subject to the local government pensions scheme regulation in relation to the your pensions administration business. The whole idea there is to enable local authorities when they are administering their pension schemes to be able to be opted up.

So just one final point on client categorisation in local authorities. The tests that I have just described will effectively be applicable except where you are dealing with a local authority or local government that is based in another EU member state where that EU member state has decided to apply its own alternative or additional criteria for opting up local governments. So the whole idea is that where national competent authorities in other EU member states have decided to apply their own criteria, we need to defer to that. Where those haven’t been set or your local government or local authority is not based in the EU then the UK tests would apply.

Simon Lovegrove: And Hannah, now let’s turn to the interesting topic of inducement and research. The FCA has made certain clarifications.

Hannah Meakin: Yes, absolutely, there is quite a lot actually to say about inducements and research.

So just to pick up on some of the highlights. First of all is that the rules that apply to MiFID II investment managers and advisers are going to be extended to all collective portfolio management firms in the UK. The FCA has also provided some useful clarification in response to questions it was asked about research payment accounts. So, for example, there is some information that we didn’t have previously around sweeping charges and also about using a combination of owned funds and research payment accounts to buy research.

The other area that I think is worth mentioning are the new rules that will apply to sell side firms, so firms that provide both execution and research services. These rules will apply to them where they are providing those services to MiFID II firms in the EEA but they won’t apply to them where they are providing those services to third countries firms.

Simon Lovegrove: Thanks Hannah. Now just keeping on the topic of research, there has been further clarification as regards trial periods.

Imogen Garner: Yes, that is right. So trial periods is one of the areas where the FCA got quite a lot of questions after its consultation paper came out. What the industry wanted to know was could they receive free trial periods of research without breaching the new regime. The whole argument in favour of that is of course that firms need to have access to new services before deciding to commit contractually and sign up a new research provider, being kind of compelled to do that by the rules without getting a chance to try before you buy in relation to the research, the argument was that it was not necessarily in the best interests of firm’s clients and their investors.

So what the FCA has said is that actually it thinks that trial periods should in limited circumstances be capable of being seen as an acceptable minor non-monetary benefit and therefore allowed, provided that certain criteria are met and those criteria are that the trial period shouldn’t be for longer than three months. It really does have to be free, which means that there should be no monetary or non-monetary consideration being paid for the trial period. And another limitation is that at firm level you cannot have another free trial within a year of your first free trial or the previous free trial or within a year of your existing relationship with a research provider coming to an end.

Simon Lovegrove: And just to keep with that, the record keeping angle?

Imogen Garner: Well yes, I think that’s really important so as with all of these things it is pretty crucial for all firms to keep appropriate records to demonstrate how they’ve complied with the relevant requirements, So in this particular area I think there will be a number of operational challenges in making sure that these rules around free trials are met and having an audit trail is supportive of what you have done and why. I think it is really key.

Simon Lovegrove: Now turning to best execution Hannah. There has been some changes here.

Hannah Meakin: Yes that’s right. I think actually the changes here are not so much to do with the substantive requirements that will be brought into play in relation to best execution but more around scope. So two things in particular, the new MiFID II best execution standards are going to apply to Article 3 firms and also to UCITS managers. The FCA has decided not to extend them to AIFMD managers at the moment but that may of course change as a result of the AIFMD review.

Simon Lovegrove: Taping received a lot of attention in the press. Imogen what is your take on what’s happened?

Imogen Garner: OK so there are a couple of areas where the FCA has really stuck to its guns and a couple of areas where it hasn’t. So where it has stuck to its guns, well what MiFID II does of course is create a new EU harmonised regime for telephone taping. We in the UK have had our own regime for quite a while and one of the features of that regime is that it allows effectively for a qualified exemption for discretionary investment managers. There is quite a lot of noise in the press in support of the FCA somehow maintaining that qualified exemption for discretionary investment managers. It is not going to do that, it is unclear how it would have been able to do that, even if it had wanted to but it is not going to so implications therefore for discretionary investment managers who have to date been relying on their brokers for telephone taping. Another area in which the FCA has stuck to its guns is in relation to Article 3 firms but this is in a more facilitative way. So one of the things we had a bit of an early indication of in relation to Article 3 optional exempt retail financial advisers was around the FCA considering whether they ought to be given a little more flexibility in relation to how they make their records of relevant communications. In particular what the industry said was, actually, we give a lot of our advice and interaction with clients in face to face meetings. So the FCA has heard that and said there is some flexibility for those firms either to tape or to indeed have notes of face to face meetings, so written notes.

One of the areas in which the FCA has changed its position though is in relation to corporate finance business. So what the MiFID II requirements says is that corporate finance business is subject to these rules where it involves receipt and transmission of orders, execution of orders or own account dealing. The FCA had wanted to go much wider than that and in fact to capture all corporate finance business and there were quite a few concerns raised by the industry in relation to, how was it going to work, concerns raised about the breadth of the regime if it is going to be applied across the board and numerous other concerns. The FCA’s road back significantly and said for corporate finance business it will be in scope, as I just mentioned, when the relevant activities involves receipt and transmission of orders, execution of orders and own account dealing.

Simon Lovegrove: Hannah what can we expect to see from the FCA next?

Hannah Meakin: Well there are a few things still to come from the FCA including a Handbook guide in relation to the market’s provisions in MiFID II and how they’ve been implemented into the FCA Handbook and also a similar guide in relation to the organisational requirements. It’s also important to note that the FCA published a sixth consultation paper on MiFID II implementation at the same time as the policy statement. This deals with a number of miscellaneous points and that is due to close for responses on 7 September 2017 so we should see feedback to that later this year.

Just one other point to note is that for firms that have had to apply for authorisation for the first time or to make variations to their permission statements, the FCA has flagged that if there is a risk that those firms may not have their revised permissions in time for 3 January next year, then they will need to have contingency plans in place as to how they can continue business from that date.

Simon Lovegrove: Hannah, what are we doing next as regards MiFID II?

Hannah Meakin: We have various things ongoing in relation to our MiFID II Academy including the latest webinar which is actually on this policy statement and goes into a bit more detail about some of these subjects. The next webinar after that, the one that we will be producing in September, is a European webinar and we will be getting some of our colleagues from other member states to talk about how these requirements are being implemented in other countries.

Imogen Garner: The other thing that we are doing in September is our 40 minute briefing. So the first Wednesday of September and that’s going to be very focused on MiFID II and it’s not actually going to be forty minutes, it’s going to be an extended version where we will be really diving into the detail of a number of areas.

Simon Lovegrove: Thanks Imogen, that concludes this video. Goodbye.