The information contained in this page is for professional Financial Adviser use only.
This article aims to provide a brief history of MiFID II and to highlight some of the key issues. With MiFID II (the European Union’s Markets in Financial Instruments Directive II) and the accompanying regulation (MiFIR) coming into force on 3 January 2018, the industry is starting to ramp up activity to meet the compliance requirements. Over recent months there has been a great deal of discussion around interpreting the new regulatory requirements and the best courses of action.
Investigating the changes in detail has brought into focus the impact on firms and individuals across the industry who are involved in buying or selling ‘Financial Instruments’. This includes assets such as equities and units in collective investment schemes and also derivatives, but not life and pension funds or pure protection insurance products.
Why MiFID II?
MiFID II aims to establish a safer and more transparent financial system by:
- Strengthening investor protection
- Reducing systemic risk
- Reducing the risk of market abuse
- Increasing the efficiency of financial markets
A particular aim is to ‘shine a light’ into ‘darker’ areas largely seen as to blame for the credit crunch, such as derivatives trading. The controls and disclosures for all financial instruments are strengthened too.
Although MiFID I in 2007 established a degree of transparency and a standard of behaviour across the market generally, the 2008 financial crisis showed this was not entirely successful. MiFID II therefore broadens and deepens the penetration of the regime, with more openness and clarity for investors and better oversight for European regulators.
It’s worth emphasising that the UK has made a strong argument for tighter regulation. Anyone who knows the FCA’s Treating Customer Fairly regime, for example, will be familiar with a number of the MiFID topics.
Guidance and the FCA
The EU’s Directive is ‘transposed’ into effect in the UK via the FCA Handbook and that remains the source of regulation for UK investment firms. The FCA’s final Policy Statement came out on 3 July 2017 so the new rules are now available for analysis and implementation.
Despite this, in some areas there is no definitive formal guidance from the EU or FCA and the requirements are dependent on interpretation by industry groups such as the Investment Association. This is the case, for example, for the significant changes around Target Market definition and monitoring and Costs & Charges disclosure. The result is that the interpretation is still evolving and compliance on 3 January will be based on firms taking ‘reasonable steps’ to meet the deadline. We can expect agreement over best practice, and perhaps guidance from the regulator, to emerge beyond this date.
Industry players in the UK have been working together to establish a common understanding so we can progress towards compliance. Ascentric, for example, is consulting with The Investment Association, TISA, UK Platform Group and a number of peers across the industry. We are also working with Royal London Asset Management to share our analysis and input from industry bodies, to understand how best to meet the regulations.
Needless to say, the impact of Brexit (however that plays out over the next few years) has been a regular question. The answer is that it simply makes no difference to becoming MiFID II compliant. With Article 50 triggered, the UK will still be in the two year exit window on 3 January 2018 (and still in the EU and bound by its rules). In any case, if the UK wishes to trade with the EU it will need to meet their standards whether a member or not. The FCA’s stance is:
“Following the result of the UK’s referendum on its membership of the EU, firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for MiFID II and other pieces of EU financial services legislation that are due to come into effect in the UK.”
Key MiFID II issues
MiFID II is an update across the entire investment market with certain key areas for change that Platform Operators, Financial Advisers and Investment Managers need to work towards. These include:
- Transaction Reporting - more detail required around adviser firms’ identities and underlying investment decision makers, especially where someone other than the client is exercising discretion.
- Costs & Charges - a pre-sales illustration and annual post-sales statements showing ALL costs and charges in one aggregate figure and the effect of those charges on the investment.
- Client Reporting – moving to quarterly valuation statements for consumers.
- Product Governance - all Financial Instruments to have a Target Market defined by the product provider (manufacturer), with manufacturers monitoring that distribution fits the Target Market.
- Complex Assets – more assets will be considered Complex and transacting without advice requires an Appropriateness Test.
- Best Execution – annual ‘Venue Report’ to be produced by the executing parties (Exchange member).
You can read the FCA MiFID II guidance and policy statements for the UK by visiting https://www.fca.org.uk/markets/mifid-ii.
The information contained in this page is for professional Financial Adviser use only. If you are a private investor, please visit the Private Investor section or contact your Financial Adviser for more information.