Financial services firms are preparing to implement changes required by the European Commission’s “Markets in Financial Instruments Directive”, or MiFID. In the interview below, PIMCO Senior Vice President David Viana, an expert in international compliance issues, explains what MiFID is, and how it will affect both asset management firms and their clients.
Q: What is MiFID and what is its purpose?
Viana: MiFID stands for the “Markets in Financial Instruments Directive”. This directive is a key part of a package of European Union laws aimed at creating a single, more competitive market in financial services across all EU member states. In particular, MiFID aims to harmonise the rules governing the activities of financial services firms, to promote easier cross border business, increase market transparency and improve investor protection. It replaces the Investment Services Directive (ISD), which has been in place since 1995.
Q: Who is impacted by MiFID?
Viana: MiFID will impact directly investment firms with registered offices in an EU state. While there are a number of exemptions and nuances in the definitions, in broad terms the scope covers investment banks, portfolio management firms, stockbrokers and broker dealers, corporate finance firms, many futures and options firms and some commodities firms. Other entities such as retail banks and building societies will be subject to MiFID for some parts of their business – for example, the sale of securities – but not for others.
As a practical matter, most asset management and advisory firms based in the EU will be caught within its scope.
Q: When does MiFID come into force?
Viana: National authorities within the EU are required to implement MiFID in their respective countries with effect from 1 November 2007. The relevant changes to UK law were made earlier this year and the UK Financial Services Authority (FSA), the primary regulator of PIMCO Europe Limited, has virtually completed its work in translating the new law into its rulebook.
Q: Is everyone ready for MiFID?
Viana: We understand that the various national regulators within the EU are at different stages in their preparations for the implementation of MiFID and there is some concern within the industry that some countries might not meet the November deadline. If that were to happen, that would create a certain amount of regulatory inconsistency and uncertainty for firms that do business across borders within the EU. However, the FSA in the UK remains firmly on track to implement MiFID by the November deadline and, as an FSA regulated firm, we expect to adhere to this deadline.
Q: How does this impact you as an asset manager?
Viana: While some commentators have used extravagant language to describe the scale of the changes arising from MiFID, there is little doubt that this is the biggest change in European financial services regulation for many years. Although MiFID removes some of the regulatory differences and barriers to cross border business, it will also result in a number of significant alterations to the FSA’s rules. In particular, there are extensive new requirements in relation to internal organisational and administrative arrangements within firms, and also new requirements in relation to external client facing issues ranging from Best Execution and trading practices, conflicts of interest, client agreements and reporting.
There are still a number of uncertainties which make it difficult to assess the full impact on individual firms or on the asset management industry as a whole, but it is clear that a huge amount of work is required to implement all of the new requirements within the timetable.
Q: How does MiFID impact clients of financial services firms?
Viana: The new rules require firms to make a number of specific disclosures to both existing and new clients and, in some cases, obtain their consent to a range of procedures, policies and practices. For example, firms must disclose their policies on Conflicts of Interest and Best Execution, and must notify clients of their categorisation under the new regime and what this means in terms of regulatory protections. In other areas, the new rules require firms to obtain more information about the financial position of clients in order to assess the suitability of the management services provided to them.
While there may be differences in the speed with which regulators and firms elsewhere in the EU implement these requirements, we anticipate that UK firms will be issuing similar documentation to clients in a relatively small time window later this year. Clients with a single manager will be asked to consider and, where appropriate, respond to this information in respect of one manager. Clearly, clients with a number of managers will face a correspondingly larger issue.
Q: Does MiFID impact the legal agreements with clients?
Viana: The changes will need to be incorporated into agreements with new clients. Firms will also need to consider how these new disclosures and consents fit with existing agreements with clients. For some, this may have no material impact and the new disclosures and consents can sit comfortably alongside existing agreements. However, others may need to revisit existing arrangements with their clients.
Q: What should clients expect from their asset manager in the next months?
Viana: At PIMCO, we are currently finalising our preparations to ensure that we implement the new requirements on time. In terms of interactions with our clients, our goal is to make the process as simple and easy to understand for our clients as possible. To that end, we aim to contact clients well in advance to explain any significant notifications or matters that require their consent and will issue guidance and explanatory materials in the coming months. We will also be available to advise and help in person on any particular issues, questions or concerns that our clients may have in this area.
At this stage, clients should at least be aware of this development and, if they have not already, should consider their plans for handling it. Clients may feel the need to contact their advisers for guidance ahead of MiFID coming into force on 1 November 2007.