All firms that conduct investment business will be affected by Mifid II, regardless of their current or future Mifid status. Where your firm is an article 3 Mifid exempt firm, you still need to consider a number of areas covered by Mifid II.
Mifid II does maintain the article 3 exemption but the FCA is obliged to apply “at least analogous” requirements to these firms in a range of areas. In simple terms, this means the FCA must apply requirements substantially the same (if not identical) to those applicable to Mifid firms.
Here are 10 more things you need to know, all subject to a final policy statement due by the end of this month.
1. Telephone call recording
While there has been a lot of talk about telephone recording, the changes cover all electronic communications relating to the reception, transmission and execution of client orders, including internal communications, and will affect all Mifid firms. This includes DFMs and exempt CAD firms, that is, advisory firms that are opted into Mifid.
Article 3 Mifid exempt firms will be able to choose whether or not to record calls or take a written note of them. The FCA will be providing more detail on exactly what it expects but it is unlikely current record keeping requirements will fulfil this adequately.
2. Structured deposits
Structured deposits are being brought within the scope of Mifid II, and will be a new investment type to add to your firm’s various investment permissions (for example, advising, arranging and managing investments). They will also fall within the independence requirements.
There is currently a free online notification process if you wish to add structured deposits to your permissions. If you decide to wait and add them after the 3 January 2018 Mifid II implementation date, there will be a charge for the variation.
3. Transaction reporting and legal entity identifiers
Transaction reporting relates to trades in certain financial instruments and is designed to combat market abuse. It currently only applies to firms that execute transactions.
The reportable financial instruments and definition of execution are wider under the changes. An exemption for order transmitters may be applicable for many firms, provided certain conditions are met.
Linked to transaction reporting is the requirement to have a Legal Entity Identifier. The transmission of a reportable order will require any firm transmitting the order to hold an LEI (irrespective of whether or not they are exempt from transaction reporting), so it is likely all investment firms will need to apply for an LEI by 3 January 2018.
4. Conflicts of interest
There will be a requirement to prevent, as well as identify and manage conflicts of interest. Where you cannot prevent or manage a conflict from arising you will need to make an enhanced disclosure to your client which details the conflict and includes a prescribed statement that the disclosure is being made because your arrangements have been insufficient to protect the client’s interests.
5. Independent advice
Mifid II introduces a new definition for independent advice. The need to undertake a “comprehensive analysis” of the market will be replaced by a need to undertake a review which is “sufficiently diverse”. You will not be required to advise on all retail investment products. A new concept of focused independent advice appears to allow more scope to apply independence in a narrower form provided this is made clear to clients.
The Mifid II independence stand-ards apply to some investments that do not currently fall within the definition of retail investment products, such as shares, bonds, derivatives and structured deposits.
Many existing standards of best practice are being formalised into explicit regulatory requirements. Two key changes being introduced are:
- Suitability must be assessed and a report issued where investment advice has been given, irrespective of any transaction (that is, advice to hold a fund)
- Introduction of periodic suitability assessments, requiring suitability to be re-confirmed at least annually where ongoing services are provided.
7. Client disclosure
Most significant is the requirement to provide clients with aggregated information about costs and charges. This includes service costs levied by your firm and those you have introduced (for example, a DFM), as well as costs and charges associated with the manufacturing and management of the relevant investments.
8. Knowledge and competence
T&C requirements will be extended to individuals providing information as well as advice on investment products and services. There are exemptions but those caught will need to take an appropriate qualification, where one exists.
9. Product governance
The Mifid II requirements cover understanding of the product, ensuring distribution to an appropriate target market (including ongoing review of this) and providing product manufacturers with information on sales.
Investment committees will need to be strong on assessment of target markets and product risks. Oversight and monitoring of product governance measures and systems to provide information to product providers will also be important.
10. Periodic reporting for discretionary managers
Mifid II introduces changes to periodic reports issued by discretionary management firms. The frequency of periodic reporting will be increased to quarterly from half-yearly, and clients will need to be informed of a 10 per cent depreciation (and multiples thereof) of their discretionary portfolio values from the valuation at the beginning of each reporting period.
Phil Young is managing director at Threesixty
Phil Young is discussing the future of regulation at Money Marketing Interactive, which is being held at the Majestic Hotel in Harrogate on 14 September. To join over 100 advisers and register to secure your free place, click here