FCA has published its fourth consultation on changes to its rules to implement MiFID 2. This consultation is in many ways a sweep-up to cover all changes not previously covered in FCA's other consultations. To a large extent it covers rules that apply to specialist firms. The changes, although few are fundamental, nevertheless affect most modules of the FCA Handbook.
Chapter 18 of the Conduct of Business Sourcebook (COBS) is divided into sections that customise the general COBS rules for particular, specified, types of investment business. Some of the business carried on by firms within these business types is MiFID business and some is investment business which is outside MiFID. FCA proposes to make changes in respect of the following types of firm – many of the changes are administrative and consequential on FCA's previous consultations, specifically CP16/29 in which it explained its proposals for treatment of firms within the optional exemption in Article 3 of MiFID:
- Trustees: FCA does not plan any substantive changes to this part of COBS – in particular it sees no reason to changes its guidance on which rules do not apply to trustee firms and which are unlikely to apply to them
- Energy and oil market participants (EMPs and OMPs): COBS 18.2 divides business into (i) MiFID business, (ii) non-MiFID business and (iii) non-MiFID commodity derivatives business. FCA's main proposals (not already consulted on) are to extend the MiFID 2 requirements on taping to non-MiFID business that is related to commodity or exotic derivative instruments
- Corporate finance business: FCA has already consulted on how it proposes to treat firms that can opt to be exempt from MiFID and is now planning to add a table to clarify the rules that apply to these firms
- Stocklending: the only changes from what FCA already proposed are to update references
- Residual CIS operators, AIFMs and UCITS management companies: these provisions, in COBS 18.5, 18.5A and 18.5B have already been the subject of consultation, which resulted in FCA proposing to create separate sub-chapters for UK full-scope AIFMs and UCITS management companies (which derive their EU status otherwise than from MiFID) and keeping the original section for small authorised UK AIFMs and other CIS operators. It now plans to add a new section on inducements and research to its proposed changes, and to update terms. It needs to clarify that managed funds are themselves clients of the relevant firm, and individual investors cannot negotiate with the fund manager. FCA rules therefore need to address the need for approvals of different arrangements, and how managers can put research payment accounts in place
- Lloyd's: FCA proposes no significant changes to this part of COBS 18
- Depositories: FCA has already consulted on some changes, and proposes no additional ones
- OPS firms – non-scope business: FCA is looking at enhancing the current rules on best execution, telephone recording and use of dealing commission, but has not yet finished its analysis and will consult on potential changes to bring the requirements on these firms within the MiFID 2 requirements in early 2017
- Investment companies with variable capital: these companies are subject to a bespoke regime, which will change only minimally as a result of MiFID 2
- UCITS qualifiers, AIFM qualifiers and service companies: FCA has already proposed some small enhancements to the (relatively few) COBS rules that apply to these firms
- Authorised professional firms: the main changes FCA proposes is to clarify that how COBS on the whole applies to these firms is determined by the firm's own MiFID regulated status.
FCA will make changes to its rules for tied agents (in chapter 12 Supervision Manual) to reflect legislative changes that Treasury is making. The changes predominantly reflect the fact that, under MiFID 2, Member States no longer have the option to apply the regime at all, nor so many options in how they apply it. The changes should make it more straightforward for UK firms. The scope of both the appointed representative and tied agent status will expand, also, to include certain activities relating to structured deposits. FCA also notes it will need to make further changes consequent on the Treasury changes, where article 3 exempt firms wish to appoint tied agents.
FCA has already consulted on a proposed new chapter in the Market Conduct Sourcebook (MAR) for data reporting services providers, and is now consulting on its supervisory approach to them. It is also proposing some guidance in the same chapter on use of the Approved Reporting Mechanism regime.
The consultation sets out how FCA proposes to apply the new MTF sub-set of SME growth market, by inserting a new MAR 5.10.
MiFID 2 will mean FCA needs to make changes to various other parts of the Handbook, many of which it has already consulted on. This paper includes further changes to the Perimeter Guidance and the proposed new chapter SYSC 19F on remuneration and performance management of sales staff. There will also be changes to both COBS and BCOBS to implement the application of MiFID 2 to structured deposits. There are various other consequential amendments, guidance and transitional provisions, including allowing firms to make MiFID 2 changes in advance of 3 January 2018.
The changes FCA proposes to its Fees rules are to take account of transitional arrangements as it proposes to allow applications for authorisation or for variations of permission to take account of MiFID 2 changes in advance of its effective date. The changes will cover the period between when it starts accepting applications and when the legislative changes that enable it to collect fees for them take effect. The changes will ensure that applications covering existing regulated activities and new ones will be treated as one application.
Finally, FCA has provided feedback and confirmation of the format of its new Form A, which non-MiFID firms applying for permission to carry out MiFID activities, once the MiFID 2 authorisations gateway opens, which FCA plans for January 2017.
FCA asks for comments by 17 February 2017, except for comments on its fees proposals, which it needs by 16 January 2017. It has promised feedback on all its MiFID 2 consultations during the first half of 2017, at which point we will see the full extent of the final changes to FCA's rules. Many parts of the Handbook will be fundamentally different, notwithstanding that MiFID 2 does not make significant change in some areas. For firms to complete their implementation projects will require a detailed mapping exercise from the current rules to the new.