"I am seeing more and more of the acronym 'MiFID' these days and suspect it's not just 'another piece of legislation'. What does it mean in practical terms for financial advisers?"
Simon COllins, Grainger Consulting
The acronym 'MiFID' relates to the Markets in Financial Instruments Directive. This, along with the Capital Requirements Directive or 'CRD', is one of two major new pieces of European legislation to be implemented in the UK during 2007.
Though technically separate, the two are similar in approach and broadly compatible. The CRD, to be applied by 1 January 2007, develops an updated, risk-sensitive capital resource framework for investment firms. New calculation methods are intended to more accurately model the risk posed by the firm's activities to itself, its customers and its operating market. The CRD category applicable to a firm will depend in part on its status under MiFID, due to be implemented by 1 November 2007.
Some of the major changes resulting from the implementation of MiFID will include the following:
lA common EU system will be developed for classifying customers as retail clients, professional clients or eligible counterparties. The FSA will have to adjust its current framework to accommodate these new definitions.
lEEA passport rights will be extended. This means that FSA-authorised firms carrying out an extended range of 'core' activities will be allowed to establish branches in other EU countries. Many jurisdictional compliance uncertainties between the FSA and the host state for the activity will also be clarified.
lAll trading in shares will be subject to minimum pre and post-trade 'transparency' disclosure requirements and transaction reporting.
lInternal systems and control requirements will need amendment, includ-ing record-keeping, conflicts of interest and safeguarding of client assets (where appropriate).
lCommon conduct of business standards will be developed and will require implementation across the EU.
MiFID is likely to be of particular interest to financial advisory firms that currently provide or propose to provide discretionary management services, establish overseas operations or handle client money. Under current rules, low resource personal investment firms are required to hold £10,000 liquid capital plus any excess capital required by their professional indemnity insurance.
Under MiFID, firms wishing to undertake the activities referred to above may need to become limited-licence firms and assume a new capital resource requirement, which will be the higher of a E50,000 (£33,500) 'base capital' requirement (minimum resource at all times) and an 'expenditure requirement' based on 25% of fixed overheads.
At the time of writing, an FSA paper outlining feedback on the proposed detailed changes to the Handbook was due at the end of October. Any firms requiring a bespoke analysis of the effects of MiFID/CRD can contact Grainger Consulting, part of the Compliance.co.uk Group of Companies, on 0161 486 1000 and ask for Simon Collins, Simon Chapman or Andrew Houghton.
www.graingerconsult.comangus milne, ima
The aim of MiFID is to move European financial services closer to a single market, in particular, by aligning local conduct of business rules and applying only one set of rules to firms operating in different countries. The directive also expands the list of 'passportable' services to include investment advice.
If you are currently permitted to hold client money or offer investment advice as a cross-border service, you will be classed as a MiFID firm. For everyone else, though, the way in which you do business may be affected, as the FSA will seek to apply most of the same conduct of business rules to both MiFID and non-MiFID firms, and because dealing with unit trusts and Oeics will be subject to MiFID rules.
Under the new rules it may be simpler to provide cross-border investment advice because you will be able just to follow one set of rules - the FSA ones. However, those holding client money may wish to consider whether you need to, as you may be required to increase your regulatory capital as a result.
The FSA Consultation Paper on the MiFID Conduct of Business rules, which was due out at the end of October, is likely to mean a number of changes for advisers. These changes can be split into four areas:
lClients: The categorisation of private and intermediate clients will change to professional and retail clients, with fewer people likely to be eligible for professional status. Those or retail clients wishing to be considered as a professional client must make a request in writing to be 'opted up' to professional status and will be accepted on the basis of an assessment which will look at a) whether they work professionally in financial services; b) their experience and the frequency of their transactions; and c) the size of their existing portfolios. Those seeking professional status, although able to invest in more complex products such as hedge funds, will not be covered by any of the investor protection rules such as access to the Financial Services Compensation Scheme.
lSuitability: Following the usual factfind, advisers will be required to make a suitability assessment of the product being sold to their client. The assessment must ensure that a) the product sold meets the investment objectives of the client; b) the client is able financially to bear any related investment risks consistent with their investment objectives; and c) the client has the necessary experience and knowledge to understand the risks involved in the product being bought.
lExecution-only business: Although unlikely to be applied to non-MiFID business, the new Conduct of Business rules will bring in an 'appropriateness' test that may reduce advisers' ability to undertake execution-only business. Even where no advice is provided to a client, advisers will have to demonstrate (a) it relates to a non-complex product; (b) the business has been done at the initiative of the client; and (c) any communication sent to the client was not so personalised the client would think it was a recommendation. If the transaction cannot be classed as execution-only, the firms affected by these rules may need to gather additional information in order to reach a conclusion as to whether the product or service is appropriate, although this will not be as extensive as the suitability test.
lInducements: Under MiFID any benefit, monetary or non-monetary, and whether given or received by a firm, must be designed to enhance the service to clients. This is likely to be extended to all firms and investment products. At this stage it is expected initial and trail commissions will be permissible, although, in the case of trail, advisers may be required to offer a form of annual service. Until the publication of the rules, however, it remains unclear how introductory fees and the receipt of shares from platform companies will be treated.
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