26 June 2017

MiFID II: common misconceptions

When it comes to the changes brought about by MiFID II, there are a number of misinterpretations and common misconceptions, as we outline.

With under seven months to go until its implementation date, MiFID II is one of the most talked-about topics in the financial industry. However, we are still finding that a number of firms fall victim to some misinterpretations and common misconceptions about the changes brought about by MiFID II.

Brexit

With the UK having voted to the leave the EU, some firms believe that they will not need to make changes to meet the requirements under MiFID II.

Even though we have voted to leave the EU, MiFID II will still be implemented in the UK on 3 January 2018. The FCA’s official position is that the UK is firmly committed to meeting the implementation date and that it expects all firms in scope to continue to abide by their obligations under UK and EU law, at least until official Brexit terms have been finalised.

Transparency

Firms must not be misled into thinking that transparency is only achieved through transaction reporting.

All firms in scope of MiFID II must determine the actual scope of application of the new transparency requirements for them, including any exemptions. Firms should understand that dedicated Data Reporting Service Providers (DRSP) and Approved Reporting Mechanisms (ARM) will be authorised by the FCA to collect and submit all relevant data, and how these new entities may interplay with their own reporting requirements. There are many areas affected by the MiFID II changes, including market structure, governance and Conduct of Business that firms will need to be fully aware of. 

There will be a new regulated platform – an Organised Trading Facility (OTF). This has been created to enforce transparency on trades currently executed on non-regulated platforms.

The MiFID II rules also strengthen the requirements that apply before and after financial instruments are traded, increasing pre and post trade transparency. Market participants and operators of trading facilities will have to publish information on the prices and volumes of financial instruments traded.

Non-MiFID firms

Firms currently not carrying out any MiFID or MiFID II activity may be under the misconception that they will not be subject to any changes as a result of MiFID II.

However, the FCA has made clear its intention to extend some of the key principles and requirements of MiFID II to non-MiFID firms, such as CIS operators and AIFMs. Therefore firms are advised to keep an eye on the policy statements issued by the FCA, as it plans to introduce changes derived from MiFID II in some areas of the Conduct of Business rules that will apply to non-MiFID firms too.   

Best execution

There is a misunderstanding amongst a number of firms that obtaining the best possible results for clients when executing transactions, or transmitting orders on their behalf, is all about obtaining the best price. This is not the case.

The FCA has previously set its own expectations around best execution on the basis of the concept of ‘total consideration’. Now MiFID II confirms that firms need to determine whether they have obtained the best possible results for their clients by measuring all relevant execution factors including, but not solely based on price. Firms will need to take account of all internal and external costs, the speed of execution, the ability to fill client orders, the choice of the most appropriate execution venues and any other factors that are specific to their client base.

Telephone recording

A common mistake many firms make is assuming that simply holding telephone call recordings will meet their regulatory obligations. MiFID II goes further.

Firms will need to record all forms of communication where there is an intention to instigate a trade or provide a service, including fixed and mobile telephone conversations, emails, SMS messages, chat services and also face-to-face meetings. The latter will need to be documented in a ‘durable medium’.

Governance

Some firms appear to have misinterpreted the breadth of the governance and organisational changes required to comply with MiFID II. Firms must not underestimate the new requirements that will become applicable to all MiFID investment firms and market operators. 

MiFID II extends the definition of ‘Management Body’; it introduces strict measures regarding the assessment of the competence and suitability of individuals appointed in governing functions. There is also a requirement for the decision-making process to be subject to ongoing scrutiny.

Firms should understand that these MiFID II requirements may call for substantial changes in their governance structure. Firms should also bear in mind that these requirements will be applicable in parallel to the upcoming Senior Managers and Certification Regime, once this has been extended to all firms.

Key Dates

  • June 2017: FCA publishes its second Policy Statement on the implementation of MiFID II.
  • 3 July 2017: Deadline for submission of complete applications for variations of permission or authorisation for investment firms and DRSPs.
  • 31 July 2017: FCA to open the passporting gateway.
  • 31 October 2017: Deadline for operators of MTFs to provide information and apply to register as an SME growth market.
  • 2 December 2017: Notification deadline for cross-border services.
  • 3 January 2018: Implementation date.

How we can help

If you have not done so already, we encourage firms to start identifying the changes being introduced by MiFID II that are relevant to your business. We recommend firms take action now, as failing to have the correct permissions or passports on implementation date will result in being unable to conduct regulated activities and provide cross border services. Firms are encouraged to undertake a gap analysis to determine if and how they fall in scope of MiFID II, and whether they need to submit applications for authorisation or variation of permission by 3 July 2017 to avoid delays and interruption to their businesses.

If your firm requires assistance then please do not hesitate to contact us. We can assist in a number of ways, from standard packages to tailored services, to ensure your firm is fully compliant with the new MiFID II requirements.

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