MiFID II came into force on 3 January, imposing very extensive changes to the regulatory regime for investment firms and other participants in investment markets. The idea behind it? To protect investors and ensure that financial markets operate fairly and transparently. But what has changed and what impact will those changes have? Financial Services and banking lawyer Tony Watts explains what you need to know.
The most striking thing about MiFID II is the sheer size of the legislative package that is involved. It consists of the MiFID II Directive, the MIFIR Regulation and a heavy package of level 2 and 3 measures (delegated and implementing acts, regulatory technical standards, implementing technical standards, guidelines and recommendations) as well as additional rules and guidance introduced by national regulators. This work will be ongoing – further material and measures can be expected from the FCA.
Many larger firms will be well prepared for MiFID II. Small and medium-sized firms have fewer resources to deal with the heavy demands made by the new rules. They may still be carrying out their implementation plan (and some may have overlooked the significance of MiFID II for them altogether). All firms are likely to face a period when they must digest and embed the changes.
The FCA understands the challenges. It has stated that it will not take enforcement action against firms for not meeting all requirements straightaway if they have taken sufficient steps to meet the new obligations by the start date. It’s not clear how long this window will remain open and what the degree of tolerance is. It is certainly very advisable for firms to complete their preparations as a matter of urgency.
This note deals with some of the areas which have in my experience raised significant issues for small to medium-sized firms of various kinds – including investment managers and advisers, brokerage firms, fintech firms (such as direct investment platforms), retail CFD and derivatives firms and banks. It is selective and is not a checklist; all firms should carry out their own impact analysis. MiFID II ranges much wider than the areas dealt with below. By way of example only, it includes complex requirements on transparency and trade reporting and position limits for commodities trading.
Permissions and scope
The range of financial instruments to which MiFID II applies remains broadly the same, with the addition of some commodity derivatives (so firms operating in these areas should confirm their position). Some conduct-of-business rules will also apply to structured deposits, though these are not technically included as financial instruments.
The scope of exemptions, however (i.e. where a regulatory authorisation or permission is not needed), has been reduced so firms with exemption from authorisation for some or all activities should have considered their position. In particular, the scope of exemption for firms who deal only on their own account (and not for clients) is now narrower.
A major change is that MiFID II introduces a new form of trading venue – an Organised Trading Facility (“OTF”) which facilitates trading in bonds and derivatives. This activity is widely defined. Operating an OTF requires a specific FCA permission. Because the definition of an OTF is wide, some firms offering secondary markets (such as direct investment or crowdfunding platforms) may fall the wrong side of this definition and should consider their position.
If they have not already done so, firms should review whether their regulatory status covers their present activities.
In any event, some FCA rules applying MiFID are extended to firms which would otherwise be outside them – such as MiFID Article 3 firms (a category which will include many high-street IFAs) or collective portfolio management firms (exempt under MiFID Article 2) so these firms should also consider the rules as extended to them.
While some MiFID II requirements appear superficially similar to the old rules, as extended they are in effect more onerous. Areas where particular issues arise are:
Investor protection requirements
The changes are extensive. They include:
Brexit will not affect the obligations of firms to comply with EU obligations in the short or medium term. It may be, in fact, that they will always cast their shadow, particularly if the UK achieves a special status relating to financial services as it has announced that it wishes to do. The European Securities and Markets Authority is already considering its first use of product intervention across the EEA in relation to retail contracts for differences and CFDs. Firms should complete their MiFID II preparations as a matter of urgency. And if they have not yet considered the impact of MiFID II on their business, they should urgently do so.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.