DP15/3: Developing our approach to implementing MiFID II conduct of business and organisational requirements

The FCA has published Discussion Paper 15/3: Developing our approach to implementing MiFID II conduct of business and organisational requirements (DP15/3). In DP15/3 the FCA discusses the implications of certain MiFID II conduct of business and organisational requirements for firms primarily contained within Articles 24 and 25. The FCA also discusses certain changes it needs to make to its domestic rules to implement the new minimum regulatory framework required under MiFID II for exempt firms (Article 3 exempt firms), and suggests options for alternative domestic criteria for the categorisation of local authorities. DP15/3 does not cover implications for wholesale markets.

The structure of DP15/3 is as follows:

chapter 1 overview;
chapter 2 explores the extent to which the FCA applies MiFID II provisions to insurance-based investment products and pensions, particularly in light of the emerging Insurance Mediation Directive. In particular, respondents are asked whether they agree that, in principle, insurance-based investments and pensions should be governed by the same conduct of business rules as MiFID II investments;
chapter 3 sets out three options for how the FCA incorporates MiFID II’s investor protection measures for structured deposits into its Handbook. The first option is that the FCA could copy out the relevant MiFID II provisions into its BCOBS sourcebook, only applying them to firms advising on and selling structured deposits. The second option is to apply the relevant MiFID II-derived requirements to structured deposits through COBS, turning on only the relevant MiFID II provisions (whilst retaining relevant BCOBS rules and guidance). The non-relevant parts of COBS would need to be expressly dis-applied to structured deposits. The third option is to incorporate these products fully into COBS (whilst retaining relevant BCOBS rules and existing guidance), effectively switching on both the MiFID II requirements and some additional rules. These would include some additional rules on client communications;
chapter 4 seeks feedback on whether the FCA should look to ban discretionary investment management firms from accepting commissions and other benefits. While MiFID II bans retaining third party commissions and other benefits, it allows firms to accept these payments, provided they rebate these back to the client as soon as possible after receipt. The FCA wants to seek views on whether consumer outcomes would be improved by putting in place similar rules to the RDR and banning the acceptance of such commissions, fees and benefits, and therefore, client rebating, for discretionary investment management activities;
chapter 5 sets out the FCA’s proposed policy options for changes to the criteria for local authorities to be treated as elective professional clients. The FCA notes that the changes under MiFID II mean that it is no longer possible to treat local authorities as per se professional clients on the basis of meeting the large undertakings test and so COBS 3.5.2A R must be amended. For non-MiFID business, local authorities are categorised as per se professional clients, subject to no restrictions, as provided in COBS 3.5.2 R (3)(f). The FCA states that this provision would be deleted should it decide to categorise local authorities as retail clients for the purposes of non-MiFID business. The FCA outlines three possible options for exercising its discretion in relation to the opt-up regime for local authorities on which it invites comments from stakeholders. Whilst the FCA’s initial preference is to strengthen the opt-up criteria for local authorities requesting to be treated as professional clients, it will only finalise its policy position once it has considered stakeholder responses;
chapter 6 details MiFID II’s approach to adviser independence, and discusses how it adopts new requirements for independent advice on shares, bonds, derivatives and structured deposits. On the latter point the FCA does not consider it proportionate to include shares, bonds and derivatives in its existing definition of retail investment products. The FCA is therefore seeking stakeholder views as to how it should implement MiFID II’s independence standard for these products domestically;
chapter 7 explores the extent to which the FCA could apply MiFID II’s remuneration rules for sales staff and advisers to non-MiFID firms, in light of domestic and European policy developments;
chapter 8a identifies where the FCA needs to make changes to its existing regime for the recording of telephone conversations and electronic communications, to implement a regime for the purposes of Article 3 of MiFID II which is ‘at least analogous’ to that established under Article 16(7), and invites views on how this may apply in practice;
chapter 8b sets out the FCA’s proposal to remove the current exemption from the rules on the recording of telephone conversations and electronic communications for discretionary investment managers in the UK domestic regime;
chapter 9 discusses practical aspects of implementing and aligning MiFID II’s requirements relating to costs and charges disclosures. The FCA notes that while some of the technical challenges of implementing the costs and charges requirement are likely to be addressed by the European Commission in the final implementing measures, it is aware that firms may still face some challenges. The FCA is keen to explore with firms these challenges so that they can be addressed;
chapter 10 sets out the likely approach to the enhanced MiFID II inducements rules for advisers, discretionary investment managers, and other firms. MiFID II significantly strengthens the existing MiFID I standards relating to the types of third party inducements firms can receive. The chapter sets out these new standards – affecting both advised and non-advised business, and the FCA’s likely approach to implementation in the UK. The FCA does not discuss the issue of the receipt of research as an inducement for portfolio managers or independent advisers which was the subject of Feedback Statement 15/1; and
chapter 11 sets out the likely restrictions on products able to be classified as ‘non-complex’, and discusses the practical application of the appropriateness test. In particular, the FCA understands domestic concerns that non-UCITS collective funds will likely be ‘complex products’ while similar non-structured UCITS may be ‘non-complex’. The FCA is therefore highlighting this issue now with firms, setting out its expectation that the types of products that are considered ‘non-complex’ will be significantly limited. In addition, non-UCITS collective investment schemes (such as NURSs) are likely to be considered complex, and therefore subject to the appropriateness test.