The current Markets in Financial Instruments Directive has been replaced by a new Directive (Revised MiFID) and Regulation (MiFIR). This is the MiFID 2 package. With limited exceptions, the changes take effect from 3 January 2017. Before then, governments and regulators have much work to do to change relevant laws, regulations and regulatory expectations.
This article highlights the major areas of change and the timescales for achieving it.
For UK businesses, MiFID 2 means little change in some areas, minor change in many and significant change in a few organisational and many trading-related areas of business. Specifically:
- Organisational requirements: key changes focus on:
- Governance arrangements for effective and prudent management, to bring investment firms up to the standards now required of banks, and to include (in principle) appointing at least two suitable persons to direct the business;
- Limits on directorships;
- Proper resources evidenced by time commitment, collective knowledge, training and diversity;
- Conflicts management - with a greater emphasis on prevention than on disclosure;
- Remuneration with a focus on not creating unsuitable incentives.
- Conduct of business: changes include:
- Changes to the client classification rules, especially in respect of certain professionals and eligible counterparties;
- Greater requirements around fair, clear and not misleading information;
- New requirements around product governance, including on liability and interfaces between manufacturers and distributors;
- The most controversial change - a ban on all inducements other than minor non-monetary ones;
- Increased restrictions around independent advice;
- More onerous suitability assessments, and an extension in the range of products requiring an appropriateness assessment;
- Rules and restrictions on product cross-selling and bundling.
- Trading and transparency: this is the area of most change, including:
- Extending transaction reporting to non-equity derivatives, with new definitions of key terms and changes to reportable details;
- The obligation to execute OTC derivatives on trading venues provided that there is "sufficient third party interest", a concept that is proving controversial. This trading obligation complements the clearing obligation under the European Market Infrastructure Regulation (EMIR). Notably, it includes Organised Trading Facilities (OTFs) (see below) among the trading venues where trades must be executed;
- Changes around commodity derivatives, not least to extend the current definition to include physically settled trades executed on an OTF, and to eliminate or restrict existing exemptions for commodity dealers.
Where are we now?
The European Securities and Markets Authority (ESMA) issued a lengthy paper on MIFID 2 in December. This paper included its Technical Advice to the European Commission on many aspects of Level 2 measures and a raft of draft Regulatory and Implementing Technical Standards (RTS and ITS). ESMA followed this up with a paper in February dealing with transparency requirements in relation to four non-equity asset classes. The consultation on the main paper closed on 2 March and on the follow up on 20 March. ESMA must submit the final RTS and ITS to the EU Commission by the beginning of July. The Commission then has three months to decide whether to endorse them, after which the European Parliament and Council have six months to object. Absent an objection, the Delegated and Implementing Regulations based on the RTS and ITS would then be published in the Official Journal. The target date for this is 18 months after the entry into force of MiFID 2 and MiFID - so technically at the end of 2015, but this seems unlikely, on the current timings.
The key deadline is 3 July 2016. This is the deadline for transposing MiFID 2 into Member States' laws, so that from 3 January 2017 the laws apply.
In the UK, Treasury, the PRA and the FCA will each need to make changes to laws and rules respectively. FCA is likely to make the lion's share of the changes. It plans a discussion paper for the end of March, followed by detailed consultations.
What should you do?
All firms will need to carry out a gap analysis and work out the extent of change to their business in relation to conduct of business, trading and transparency. And they should do this now, and not wait for FCA's final rules. By then, it will be too late.
While banks have already gone through the CRD 4 prudential changes, MiFID 2 will fundamentally affect the way they trade, and what products they offer.