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| Financial Law Update | Back to article summary. |
| Update on MiFID, the Markets in Financial Instruments Directive | ||
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| Joe Beashal of Matheson Ormsby Prentice explains the ‘Markets in Financial Instruments’ Directive, also known as ‘MiFID’, the updated Investment Services Directive, and assesses its possible impact on the industry. | ||
The EU’s Financial Services Action Plan (‘FSAP’) necessitated the introduction of 42 new EU measures, 39 of which have been implemented at European level. Not surprisingly, this has led to ‘regulatory fatigue’ as industry has sought to digest and implement a large number of changes in a relatively short space of time. Although the European Commission (the ‘Commission’) has said that it will not launch a new FSAP II, the time lag between the finalisation of a Directive at European level and its implementation in Member States, means that a number of important measures under the original FSAP still require implementation in Ireland. One of the cornerstones of the FSAP is an updated Investment Services Directive (Directive 93/22/EEC) or, to give it its proper name, the ‘Markets in Financial Instruments’ Directive (‘MiFID’) (Directive 2004/39/EC).
What is MiFID? MiFID will replace the Investment Services Directive which allowed ‘investment business firms’ to operate in Member States on the basis of a home state ‘passport’. MiFID:
Why is MiFID relevant now? The original date for implementation in April 2006 has been moved to 2007 but some important implementation measures are due to be published by the Commission in December 2005 or January 2006. These implementation measures, which take into account industry submissions and advice from the Committee of European Securities Regulators (‘CESR’ pronounced ‘Caesar’), will help remove the large degree of uncertainty that currently exists as to the precise requirements of this Directive. What is clear is that, for those covered, a very broad range of changes will be introduced which will affect almost every aspect of their business and as such will, in the course of 2006, require the attention of senior management, compliance, legal, operational and sales teams. Which firms will be affected? In general, MiFID will cover most, if not all firms, currently subject to the original Investment Services Directive plus some that currently are not. The upcoming Commission draft implementation measures may add particular categories of firms depending on how certain definitions are drafted. It is certain that it will include:
Retail banks and building societies will be subject to MiFID for some parts of their business, including the sale of securities or investment products which contain securities. ORGANISATIONAL REQUIREMENTS The organisational requirements will be more detailed than the current Investment Services Directive and are likely to cover:
Many of the above are already covered in the Financial Regulator’s existing authorisation and regulatory requirements but they are likely to change as new pan-European standards are introduced. CONDUCT OF BUSINESS Client classification The client classification regime is the starting point for many of the conduct of business changes that will affect firms. It defines firms’ specific regulatory obligations for the business they conduct with each category of client. MiFID envisages a three-tier client classification system: retail client, professional client and eligible counterparty. There will be some flexibility for clients to move between categories to obtain more, or less, regulatory protection. The regulatory protection afforded to each category of client will be different according to the nature of the clients. The full conduct of business rules will apply to retail clients, a lighter regime to professionals, and an exclusion will apply when dealing with ‘eligible counterparties’. Client protection and suitability MiFID requires firms to keep a record of the document or documents agreed with their clients effectively covering the terms on which they provide investment services. We expect that a number of specific information provision, notification and consent requirements are likely to be required. Where firms usually incorporate such provisions in client agreements, it would be advisable to plan for a review of the agreement content and consider amendments for existing clients. Additionally firms are likely to need to revise their agreements or terms of business for all clients acquired after MiFID implementation. MiFID will also require firms to review:
It is hoped that any changes which the Financial Regulator proposes to introduce, later in 2006, as part of its new Consumer Code, will be consistent with the evolving MiFID requirements. Appropriateness and execution-only services Under MiFID, an execution-only service can be provided only where:
For other investment products, MiFID introduces a new requirement for firms to obtain information from clients about their relevant knowledge and experience, and assess whether the service is appropriate for that client. If the firm assesses the product or service to be inappropriate it must warn the client of that; if the client does not provide sufficient information then the firm must warn the client it has not been able to carry out the assessment. Some useful clarification is provided on the meaning of ‘initiative of the client’ in the context of execution only services. As mentioned above, we hope the Financial Regulator will seek to ensure that any new requirements introduced in this area, as part the new Consumer Code are consistent with MiFID requirements. ‘Best Execution’ Obligations MiFID also contemplates substantive best execution and timely execution duties. It moves in the direction of ‘best result reasonably achievable’ in terms of price, costs, speed and the likelihood of execution (rather than merely best price). MiFID requires a firm to provide to its clients adequate information on the service provided. In particular it sets out requirements to ensure that clients are promptly advised of the essential details of a transaction and receive a regular statement with essential information on their investment portfolio. As with all aspects of MiFID implementation this will require a comprehensive documentation review to ensure all information sent to clients is consistent with MiFID requirements. CROSS-BORDER BUSINESS, BRANCHING AND PASSPORTING Currently, firms that are authorised in one Member State can provide Investment Services Directive services in other Member States either cross-border or through a branch without having to be authorised separately in each Member State in which they wish to do business, this is known as the ‘passport’. MiFID extends the range of activities and instruments covered by the passport and clarifies the home/host supervision of passported firms. Under MiFID, a passported firm’s home state regulator has supervisory responsibility for both conduct of business requirements and organisational requirements, except in some circumstances where the relevant host state regulator takes responsibility for conduct of business requirements. So, where a firm provides services on a cross-border basis only home state requirements will apply. Where a firm establishes a branch in another Member State, under MiFID the branch must comply with home state requirements relating to organisational requirements and it must comply with host state requirements on conduct of business insofar as its activities are within host state territory. Where a passported branch provides services outside the territory of its host state, only home state requirements should apply. Not having to grapple with a range of Member State conduct of business rules will, if it works in practice, be an important improvement for firms offering cross-border investment services. Whether it in fact works in practice, of course, remains to be seen. CONCLUSION Although significant aspects of the MiFID package have yet to be agreed at European level it is clear that although MiFID will bring inevitable implementation costs it will also bring potential new business opportunities. Firms that are well prepared will be best positioned to make the most of these opportunities. Although implementation is not due until 2007 the Commission’s implementing measures, due to be published shortly, will remove many uncertainties which will allow more effective planning for implementation but more importantly, an assessment of the opportunities and threats which MiFID is likely to bring. Further information on the firm is available at www.mop.ie |
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Joe Beashel, Regulatory Risk Management and Compliance Group, Matheson Ormsby Prentice. He can be contacted by phone: +353 1 619 9000 or by email: joe.beashel@mop.ie Further information on the firm is available at www.mop.ie © Matheson Ormsby Prentice 2005 |
