The Markets in Financial Instruments Directive (MiFID) is due to come into force across the European Union on 1 November 2007. MiFID is a core element of the EU's Financial Services Action Plan that aims to create a truly single EU market in securities and remove obstacles to cross-border investment business by harmonising EU legislation as closely as possible. MiFID replaces the Investment Services Directive adopted by the EU in 1993. This article aims to provide a high level overview of certain aspects of the new regime.
MiFID will impact on all firms operating in the investment services sector including investment banks in relation to investment business and financial advisers holding assets on behalf of clients. While the UK, through the Financial Services Authority (FSA), was one of the few EU states to incorporate the necessary changes into national law by the 31 January 2007 deadline, it seems that most EU states should have the necessary laws in place by 1 November when the national law provisions must take effect.
In broad terms, relevant firms' organisational systems and procedures for the conduct of business will be the main areas affected by MiFID. There will also be new operational rules for participants in equity markets such as regulated markets (e.g. the London Stock Exchange), multilateral trading facilities (MTFs) and "systematic internalisers" (SIs) (primarily large investment banks who systematically trade shares on their own account). As well as prescribing the organisation and operational requirements that apply to relevant firms, MiFID also clarifies the rules that apply where a firm "passports" into another member state by providing services from its home state.
Even if authorised firms do not come directly within the Directive's scope, they will be affected by the changes being made to the FSA Handbook. In particular, from 1 November the FSA will introduce a completely new Conduct of Business Sourcebook (COBS) which will replace the existing Conduct of Business Sourcebook (COB). As well as implementing the conduct of business requirements of MiFID, COBS is intended to simplify the UK conduct of business regime and is the first major part of the FSA Handbook to be reviewed as part of the FSA's move towards principles-based regulation. Other affected parts of the FSA Handbook include Client Assets (CASS), Market Conduct (MAR), Senior Management Arrangements, Systems and Controls (SYSC), Supervision Manual (SUP) and Recognised Investment Exchanges and Recognised Clearing Houses (REC).
Given the key focus on uniform information capture, data handling and reporting as a means to achieve market efficiency, MiFID has perhaps impacted most on relevant firms' IT, outsourcing and information management systems. Under the MiFID regime:
- Organisational requirements: Relevant firms and markets will need to adhere to comprehensive rules covering internal systems, risk management and audit. Firms need to comply with extensive record keeping requirements in relation to business conducted and contractual arrangements for outsourcing (including existing agreements) will need to conform to prescribed requirements. It may also be necessary to notify the FSA of the terms of such arrangements if they relate to critical or important operations.
- Transparency requirements: To ensure transparency in the securities market, MiFID sets out comprehensive trade-data publication requirements. In general, certain prescribed trading information - pre-trade data (for sell side trading platforms and SIs) and post-trade data (in relation to trades by all investment firms, whether conducted over the counter or through a regulated market) - must be made available as close to real time as possible (and not later than three minutes) through a chosen reporting venue. Firms are also obliged to ensure that such post trade transaction data is accurate and made available to market participants on reasonable commercial terms.
Conduct of Business Sourcebook
As indicated above, the existing COB is being entirely replaced by COBS. There are new rules on client categorisation. While the categories under the new regime do not exactly match those under the old regime, broadly speaking, the existing categories of "private", "intermediate" and "market counterparty" will be replaced with the new MiFID categories of "retail", "professional" and "eligible counterparty". Firms are also required to secure "best execution" in relation to a client's trade order depending on the client categorisation. COBS also contains new guidance in a number of areas including communications with clients and financial promotions, client agreements (previously terms of business letters) and suitability/appropriateness.