The City of London Law Society (CLLS) has published a letter dated 29 December 2017 to the FCA regarding MiFID II and outsourcing in relation to portfolio management services. The letter provides some observations on the FCA’s letter of 19 July 2017 on the topic to the Alternative Investment Management Association.


  • agrees with the FCA that, when delegating the performance of a function, an investment firm should seek to ensure that it is not in conflict with its obligations to act in the best interests of its relevant clients;
  • notes the FCA’s view that, in applying this principle, and the provisions of Article 31 of the MiFID II Delegated Regulation (EU) 2017/565, to the new inducements framework for portfolio managers, a purposive reading of that framework is necessary. The CLLS view is that the FCA is correct when it says that, “the firm will need to take steps to secure for its clients substantively equivalent outcomes”;
  • notes that the FCA’s conclusion is that this will mean the investment firm should ensure that the delegate complies with standards which are very close to the letter of the MiFID II inducement rules. The CLLs argues that there is room for different interpretations and that outcomes could be “substantively equivalent” with a looser alignment between the MiFID II regime and the conduct of the non-EU delegate;
  • note that it does not necessarily follow that a delegate should be required by contract to comply, in a similar way, with standards which seek closely to replicate the detailed requirements of other MiFID II provisions provided that the investment firm is satisfied that a substantively equivalent outcome is achieved for the client, when assessed in a proportionate way relative to the degree of delegation to the third country firm; and
  • argues that the FCA’s statement “disagree with a narrow reading that the inducements provisions fall away” should not be interpreted as meaning the inducement rule in fact continues to apply to the delegate. The CLLS adds that, “it is clear from the rest of your letter that the rule does not apply, but rather, the delegating firm should ensure that substantively equivalent outcomes are achieved. This view is also supported by the FCA’s recent comments in the context of sharing research within buy-side groups. It is both wrong, and unnecessary to support the conclusions in your letter, to assert that the MiFID II rules apply to the delegate.”

View CLLS letter – MiFID II and outsourcing in relation to portfolio management services, 29 December 2017