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| Financial Law Update | Back to article summary. |
| Getting client facing requirements right | ||
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| With less than 60 working days to go until the introduction of the Markets in Financial Instruments Directive ("MiFID") (Directive 2004/39/EC), affected firms will need to take particular care to ensure that all client facing documentation and processes are compliant at the 1 November deadline. The Financial Regulator has been working with industry representatives on a number of aspects of MiFID including its conduct of business requirements and recently published a very useful document entitled The Markets in Financial Instruments Directive (MiFID) Feedback on Discussions of Conduct of Business Industry Working Group upon which this note is based, writes Joe Beashel | ||
| Client Categorisation The key driver in determining client documentation requirements will be a client's classification in accordance with MiFID's three tier system: retail clients, professional clients and eligible counterparties. On classifying a client within one of the three categories, MiFID requires firms to inform clients of their categorisation and, where they satisfy the relevant criteria, that they may request to move from: In each case, clients must be informed of the procedures for and the main consequences of such changes, though it should be noted that firms are not required to facilitate a change of category. Provision of Information The amount of information which firms are required to provide to clients before providing MiFID services will depend on both the client category and the service being provided as illustrated in the summary table below:
1. Retail Clients With the greatest protection afforded to retail clients, MiFID sets out the firm's obligations to provide retail clients with information so as to enable them to make an informed decision prior to making an investment. Broadly, this includes general information, information about the nature and risk of the investment, details of the costs and charges applied or associated to the investment and a description of the client category and protection afforded under MiFID. The general information requirements are set out in Regulation 82. They include: Potential or actual retail clients must be given information on costs and charges. Investment firms must provide the total price to be paid by the client in connection with the investment in the financial instruments or if unknown, a method of calculation, whether the total price is in or partially in a foreign currency and the exchange rate applicable, as well as a notice of the possibility that other costs, including taxes may be imposed. The total price should include costs or charges levied by the investment firm in connection with the financial instrument or services and include all related fees, commissions, charges, expenses and taxes payable via the investment firm. 2. Professional Clients Professional clients are regarded under MiFID as being knowledgeable investors, sophisticated and experienced in investment markets and the risks involved. As such, the information requirements on firms are substantially less then those for retail clients. The Regulations require firms to provide professional clients with a summary of inducements and the essential terms of the arrangements the firm has in place in relation to charges, fees and commissions or non-monetary benefit. MiFID also requires that firms notify clients of their classification, a description of the financial instruments including the nature and risk having regard to the clients' category. Where there is a potential risk of damage to client interests, Regulation 74(2) requires firms to disclose the general nature and/or sources of the conflicts of interest before undertaking the business on the clients' behalf. Similar to the requirement for retail clients, Regulation 98(3) and 106(3) require firms to provide appropriate information on their execution policy to professional clients. The nature of the information which is to be provided will vary according to the firm's activities, whether executing the orders or simply receiving and transmitting orders for execution by another firm. Clients must consent to a firm's 'execution policy'. 3. Eligible Counterparties The full conduct of business rules and detailed disclosure requirements do not apply to clients classified as eligible counterparties. The only notification requirements to be applied to eligible counterparties is information in relation to the client category and the possibility of changing that categorisation. Existing clients Existing clients must be informed if their classification has changed but not otherwise. Firms will have to provide existing clients with a supplementary terms of business letter, management agreement (if applicable) or Execution Policy depending whether the firm executes client orders, transmits or places those orders for execution and a summary Conflicts of Interest policy. Ongoing reporting requirements Under MiFID, clients must be provided with certain information on a regular basis and in sufficient detail depending on the service provided to them. 4. Portfolio Management For the service of portfolio management, a periodic statement must be sent in a durable medium at least every six months or every three months if requested. For retail clients detailed requirements are set out in Regulation 96(10). For professional clients there is only a general obligation to provide the client with a periodic statement in a durable medium. The content and frequency of this is not prescribed and may vary according to industry practice. 5. Execution of Orders other than Portfolio Management The primary obligation is to provide contract notes in respect of each transaction. If the service is provided to retail clients, the contract notes must contain all the information laid out in Regulation 96(6) and must be sent to the client as soon as possible, no later than the first business day following execution or receipt of the confirmation from a third party. For professional clients, the information must be sent on a durable medium with "essential information concerning the transaction". 6. Reporting obligations relating to financial instruments or funds belonging to clients The Financial Regulator is updating its client money rules to take MiFID into account and it is understood that these revised rules will be available shortly. Summary The Financial Regulator's work with industry representatives and its publication of the Feedback on Discussions of Conduct of Business Industry Working Group paper has been useful in addressing those common questions which many firms have. While MiFID has a broad range of obligations, with the implementation date approaching, affected firms will need to focus on ensuring that all client facing documentation and processes are ready for the live date. In particular any pre-live date notifications to existing clients will need to be appropriately prioritised. |
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