The FSA has included informal guidance in a summary note in the September meeting of the Pre-Consultation Liaison Committee ("PRECLC"). PRECLC meets under FSA chairmanship and consists of senior members of trade associations and representatives from the Treasury and FSA. It has been set up to discuss strategies for UK implementation and the state of preparations by the FSA, the Treasury, and by the industry at large and in relation to specific sectors.
MiFID requires that firms obtain the prior express consent of their clients before proceeding to execute their orders outside a regulated market or a multilateral trading facility ("MTF"). CESR considers that this entails an actual demonstration of consent by the client which may be provided by signature in writing or an equivalent means (electronic signature), by a click on a web page or orally by telephone or in person. For many firms, obtaining express consent in this manner from existing clients is proving to be extremely difficult and there will be many instances across firms where prior consent will not be obtained by 1 November.
Executing orders outside a regulated market or MTF in instances where express consent has not been obtained may violate the requirement for prior express consent. However, declining to execute such orders at all may conflict with (i) the requirement to act in the best interests of the client (COB 2.1.1), (ii) the requirement to pay due regard to the interests of its customers in FSA Principle 6 and (iii) the firm's duty to perform its contract with the client.
The FSA addressed this question at the September session of the PRECLC and published its views in Q&A format on its website. The FSA has said that the responsibility for deciding whether or not a firm should execute an order off a regulated exchange or an MTF, in the absence of the required consent, remains with the firm. If a firm determines that it is appropriate to continue executing orders from an existing client who has not provided express consent, then the requirement to take all reasonable steps to obtain the best possible result for the client is "overarching", even if it means that the firm will execute those orders outside a regulated market or MTF.
FSA clarification on this issue is welcome and, no doubt, many firms will be relying on this informal guidance, even though it does not have the status of FSA Guidance. However, for those who did not know about the PRECLC discussions, it is unlikely they would have found this guidance as it is hidden away in an obscure area of the FSA website. It is unfortunate that useful pieces of guidance are not given greater publicity. If their purpose is to inform and guide firms, surely they should be made more prominent, even if only as informal guidance?
The issue of firms' approach to the requirement to obtain prior express consent was discussed at the MiFID webinar hosted by Herbert Smith on 17 October.
Statement of FSA supervisory priorities arising from the November handbook changes and MiFID coming into force
The implementation of MiFID will bring about an overhaul of the conduct of business regime for investment business in the form of a new Conduct of Business Sourcebook ("COBS") on 1 November. Given the volume of change, the FSA has published a statement setting out its supervisory priorities arising from the November Handbook changes. The aim is to give firms a better feel for what the FSA views as priority areas of attention so that firms can focus on those areas.
The FSA envisages that in Q1 2008, it will confirm delivery of implementation plans and discuss any issues that arise with relationship-managed firms. It will also sample firms to obtain examples of the documentation firms are giving to customers (in particular, retail customers). The Statement suggests that this is likely to focus on "new" documentation such as that used to disclose IDD and Menu information, the form of risk warnings used for riskier products, suitability reports and possibly, best execution policies. The review will continue into Q2, but there will be a shift to a more formal review of implementation of the relevant priority areas.
COBS supervisory priorities for predominantly retail business
The FSA will look at firms’ responses to: (a) changes in the regime for disclosure of information about services, products and remuneration; (b) changes concerning the provision of product information through a simplified prospectus document; (c) changes to the requirements regarding inducements; (d) the reformulated suitability regime; (e) the new appropriateness obligation for a range of “non-advised” services; and (f) the new regime for financial promotions and other communications.
COBS supervisory priorities for predominantly wholesale business
The FSA will look at firms’ responses to: (a) the revised best execution regime; (b) the amended client categories for conduct of business; and (c) the new requirements for investment research.
It is not too surprising that the FSA is prioritising the best execution regime and client categorisation. However, it is somewhat more surprising that investment research features on this list as the changes brought about by MiFID should not cause significant changes to the existing practices of most firms.
Senior Management Arrangements, Systems and Controls ("SYSC") supervisory priorities
The FSA will examine firms’ responses to: (1) changes in the requirements for managing or disclosing conflicts of interest; and (2) changes in the requirements on outsourcing. Internal governance is not listed amongst the priority issues, as the scale of the particular SYSC changes is not major for most firms and such matters will remain a key focus of the FSA's ongoing supervisory activities.