Welcome to our latest financial services video. In this one we are going to be looking at how some of the investor protection obligations under MiFID II apply to firms in the sell side. So by sell side what we really mean is quite a range of different types of firms actually ranging from anything from introducing, executing and clearing brokers through to systematic internalisers and organised trading facilities and multi-lateral trading facilities and even actually proprietary trading firms as well. So because there’s such a range of firms within this grouping the obligations are obviously going to apply to them in various different ways.
In terms of some of the challenges we are seeing affecting the firms on the sell side I would say that they come in two different forms. First of all it’s really trying to marry up some of the markets obligations under MiFID II with those conduct of business obligations. One thing that is really important is to know which investor protection obligations apply, you really need to understand what your categorisation is under MiFID II. So for example, if you are a systematic internaliser your obligations are going to be different, from if you are an organised trading facility or a multi-lateral trading facility or even just an ordinary broker and if you are a proprietary trading firm who perhaps doesn’t have any clients then actually the conduct of business obligations could be quite limited for you.
There are also some challenges I think for the sell side in terms of really understanding what their buy side clients are wanting from them and I think that although that discussion has started to happen there is probably still quite a long way to go with that.
So the real question I guess for the sell side is which of the conduct obligations should we be focusing on. There are quite a number under MiFID II and to some extent there needs to be some prioritisation in order to get things done in time for 3 January 2018. So the areas that I think are of most interest to the sell side would include best execution and conflicts of interest. Although those areas were actually the framework of the legislation is broadly speaking the same, there are some new obligations in there and there are certainly some enhanced standards in terms of moving from reasonable steps to sufficient steps or appropriate steps and certainly the regulators have been much more explicit about the standards that they are going to expect from firms in terms of things like policies and procedures and communications with clients.
The other area that I would flag is actually product governance. We have probably thought about that as being an issue that is primarily relevant to the retail side to date but actually it’s going to become increasingly important and relevant for the firms that are dealing with institutional clients as well going forward and I think particularly on the sell side, it’s worth thinking about whether you are a manufacturer or a distributor and therefore need to look at these new obligations.
The other thing that we are noticing in relation to MiFID II in conduct is actually that it’s raising various questions that are not necessarily MiFID II questions and have actually been around for a number of years but are actually quite important to be revisited in the MiFID II context. The first of those I would say is thinking about who is your client. Do you actually have a client in the first place and if so which of the several parties might that be and that’s really important in order to be able to categorise the client in the right way so you know which obligations you need to comply with in relation to them.
One of the other areas that has come up recently is in relation to payment for order flow. Again it’s not specifically a MiFID II issue in the sense that the FCA has been concerned about it now for many years but actually it is being brought back into focus in the context of MiFID II with enhanced requirements around inducements and best execution and then also I think really importantly, conflicts of interest.
I think the other issue that’s really important in sell side context is actually issues to deal with territoriality. These are not necessarily dealt with very explicitly in MiFID II and actually it’s quite frustrating for clients when they are trying to think about their business models which really operate on a cross-border basis to understand how they need to comply with the MiFID II conduct of business requirements in that context and in particular in relation to models that follow the sun which actually are fairly prevalent in a trading context so where you have a UK firm which might hand off to colleagues in the US overnight those are issues that need to be thought about again in this MiFID II context.
So those are obviously some of the key issues for the sell side in relation to MiFID II conduct obligations. There are obviously a number of other issues as well and they tie in quite closely with some of the markets issues in MiFID II.
If you are interested in discussing any of them in more detail we have a lot of information on the Pegasus part of the Norton Rose Fulbright website and we are always happy to have a chat so please do let us know.
Hannah Meakin discusses some of the key investor protection topics in MiFID II affecting sell-side firms.