MiFID II

This is the first briefing paper on the implications of MiFID II prepared exclusively for clients of Fulcrum Compliance Ltd. It deals with those issues those thought likely to impact on clients. It does not deal with all of the aspects of MiFID II and their potential impacts.

Background

MiFID II comes into force on 3 june 2018. FCA has committed to having all relevant rules etc. in place by 3 July 2017. To this end, on 31 March FCA issued its first Policy Statement on MiFID II (PS 17/5), containing near-final rules on a number of areas. A further Policy Statement is expected by the end of June.

Fulcrum Compliance will work with clients to ensure that the transition to MiFID II is as seamless – and proportionate – as possible. Please contact us to discuss further any aspect of this Briefing Paper.

First things

But before that can start, some preliminaries. Some clients will need to be in touch with FCA well ahead of 2018 in order to apply for a Variation of Permission or otherwise alter their regulatory status. FCA has made clear that it needs to have completed applications by 3 July 2017 and is currently contacting some affected firms. This will be the case is you are carrying out an activity which is newly authorisable under MiFID II, (for example, operating a Multilateral Trading Facility) or if you are operating under an exemption from MiFID which is due to disappear. But don’t rely on FCA to contact you.

It is our view that few clients will fall into these categories. We are already in touch with clients currently operating under the “Local” exemption. To be sure whether you need to vary your permission, contact us or see the FCA’s separate Application and Notification Guide.

Feedback on CP 15/43

PS 17/5 gave feedback on three previously issued Consultation Papers. Having reviewed the PS, it is our view that clients will not be directly impacted by rule changes arising from CP 15/43 affecting the following businesses:

  • Markets and Exchanges;
  • Multi-lateral Trading Facilities;
  • Organised Trading Facilities;
  • Systematic Internalisers;
  • Data Reporters.

Transparency
Although not directly applicable, clients will be aware that FCA has decided to retain the provision to grant waivers from the rules requiring pre-trade transparency in equity markets. There is a separate process whereby the market or trading venue can apply to FCA for such a waiver.

Such waivers might be of value to listed companies in certain circumstances. Clients who might take advantage of these should consult their legal advisers.

Algorithmic Trading
A new chapter 7A in the MAR and new requirements in SYSC 2.5 are to be introduced for firms who use algorithmic trading strategies. Proportionate compliance with this chapter should prove attainable by affected clients, dealing as it does with highlevel issues such as systems & controls and business continuity.

However affected clients should be aware of a new requirement to notify FCA and the relevant market that they are an algorithmic trader. FCA is still defining the process to enable firms to notify them. They will communicate further on this notification process in due course.

Passports
Firms wishing to passport their business to other EU member states will need to complete new application forms and submit them via FCA Connect. A separate application will be required for each jurisdiction.

FCA Principles
FCA Principles will apply to a wider range of firms than previously. As all clients were either already subject to these or ran their affairs in a manner consistent with them, this change has no impact.

Feedback on CP 16/19

The second consultation of which PS 17/5 gave feedback was CP 16/19. Again, it is our view that clients will not be directly impacted by rule changes arising from CP 16/19 affecting the following areas:

  • Commodity Derivatives;
  • FCA Supervision (breaches remain generally reportable to FCA);
  • Whistle blowing (clients already have appropriate procedures for the internal reporting via an independent and autonomous channel);

Prudential matters
Local firms affected by the withdrawal of the Article 2 exemption will still be exempt from the full requirements of the Capital Requirements Regulation (CRR) if they meet the criteria set out in Article 4(1)(4) of the CRR. Systems & Controls

Over 100 pages of PS17/5 are devoted to changes to SYSC, implementing the organisational requirements of MiFID II. However most of these pages represent mapping of different sections of the new rules to different types of firm. There are few – if any – new rules. Whilst there is an extension of these rules to Article 3 exempt firms, neither this extension nor the MiFID II implementation should directly change processes at our clients, for the following reasons:

  • FCA (and the EU) make clear that all the SYSC changes apply to smaller firms, but these smaller firms may tailor their compliance programmes and personnel resources in a proportionate manner;
  • Such specific rules as are applicable have always been adopted by clients as good practice. Specifically:
    • On Boards of Directors, we have always encouraged clients to fully document the proceedings of the Board and ensure that reporting lines and responsibilities are clear;
    • On conflicts, clients are aware that relying on disclosure is not an appropriate means of managing conflicts and can only be used as a last resort;
    • Pleasingly, the directive allows compliance arrangements whereby a senior director takes responsibility for compliance as well as carrying out other activities.

Remuneration
New chapter 19F of SYSC will spread firm’s existing Remuneration Policies to a wider group of employees. The over-riding requirement is to ensure that remuneration does not conflict with the duty to act in clients’ best interests, and then to ensure that the Remuneration Policy is approved by the Board. Firms need to ensure that their remuneration policies meet these requirements.

Feedback on CP 16/29

FCA gave feedback only on the issue of taping, and these proposals await the second Policy Statement in June for full clarification.

Taping
The current requirements to record calls are to be extended to a wider pool of firms, including corporate finance and retail financial advisers. The latter may be able to meet the requirement by taking and keeping contemporaneous notes of conversations.

Notwithstanding any further clarification, our advice is to use a taping systems where it is cost effective. We are sceptical as to how easy to implement – and reliable – analogous note-taking procedures will be.

Next steps

We will be liaising with all clients in the run up to implementation to ensure that these issues – and those to be covered in the forthcoming June Policy Statement – are addressed.

Clients may on reading this breathe a sigh of relief inasmuch as there may not be much to do – but this is very much the calm before the storm. The next Policy Statement will deal with conduct issues and is likely to exceed PS17/5’s four hundred pages. And firms who are impacted by this PS have plenty to be getting on with now!

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