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Left in the dark as day of Mifid approaches

Legal uncertainties are arising over the readiness of some EU countries for the impending Mifid deadline – November 1 – which could lead to foreign investment firms having to suspend business within the UK.

At the same time, the FSA has renotified its extension of the Mifid rules in four key areas – the conditions advisers have to meet to call themselves independent, the provision of a simplified prospectus or key features document, the disclosure of actual commission and commission-equivalent remuneration in relation to the sale of packaged products and the use of dealing commission.

The FSA’s renotifications, made to the EU Commission on September 18, involve revisions of earlier notifications minus elements over which there was apparent debate, such as its initial disclosure document requirement, which will stop from next month.

Legal questions over conducting business in the UK have arisen after the last Commission questionnaire revealed that only 15 out of 30 member states have so far implemented Mifid ahead of the November deadline, with a further seven reporting that they expect to be complete by the end of October. This leaves a fair few working past the deadline including Poland and Spain.

The UK was first to implement its solution but the unpreparedness of other countries may impact on business here. For example, if a Spanish-owned firm is conducting investment business within the UK, such as selling stocks, dealing with derivatives or providing some other service covered by the EU directive, then can it continue to do so after November 1 or will it have to suspend activities?

The main goal of Mifid is to enable a harmonised financial services market across Europe, part of which includes better enabling the passporting of services across borders. Passporting of funds is largely covered already under Ucits rules while Mifid covers areas such as promotions, marketing and the selling of other financial instruments including stocks, bonds and derivatives.

Under Mifid, a group must adhere to the rules of its own country when selling within another EU state. This is different from the existing rules, under which a group must follow the rules and regulations of the host nation for conduct of business. If a country is not ready on November 1, can it continue to sell or operate financial services covered by Mifid within a country that is ready?

Such is the scope of this question and the problems it may bring that the Committee of European Securities Regulators is busy – with only a month to go – trying to come up with an interim solution. Speaking at a hearing on retail financial services in Brussels in mid-September, Cesr chairman Eddy Wymeersch said the group is working to cover the legal gap and prevent firms which are passported in from having to suspend business because their home state is late.

Cesr is attempting to pull together a proposal for the Commission which could provide a temporary measure to tide over companies until a more permanent solution is reached or until their home state has implemented the relevant laws to enact Mifid. The proposal is expected to cover only a few weeks.

Outside this uncertainty there remain other concerns for the UK market. Earlier this year, the FSA tried to extend Mifid’s coverage, which is hardly a surprise considering the regulator’s penchant for gold-plating or super-equivalenting most things that come out of Europe. However, in an effort to come up with a more harmonised EU financial arena, Mifid cannot really be altered by countries when they go to implement it into national law without prior notification to the Commission under Article 4.

The UK is the only country believed to have made use of this facility so far and it has done so in more than one area.

Having stumbled in its efforts earlier this year, the FSA has now modified and resubmitted its notifications, once again trying to have the fee-based remuneration and whole-of-market requirements to be part of how advisers label themselves independent although it has now conceded that its IDD will die from November 1.

The FSA says it does not believe the fee requirement contravenes Mifid but its whole-of-market stipulation may. It is looking for Mifid rules to apply to life-based packaged products as otherwise it could be seen as confusing to have a set of advisers in the UK who are only independent investment advisers.

Consumers in the UK retail investment market rely on advice to a greater degree than in other EU member states, according to the FSA. It says: “For example, in 2005, over 90 per cent of UK sales of pension products in terms of APE and over 80 per cent of unit trust and Oeic gross retail sales were through advisers. There are around 5,000 firms, primarily independent financial advisers, offering whole-of-market advice in the UK. Such whole-of-market advisers account for more than 65 per cent of total life product and pension sales in the UK and more than 75 per cent of unit trust and Oeic sales.”

With regard to dealing commission, the FSA does not believe Mifid goes far enough in its restrictions and is seeking to extend the rules to prevent services such as seminars, external publications and data price feeds being provided by brokers to portfolio managers out of dealing commission and then recharged to clients, something it notes has happened in the past.


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