The FCA has published its third MiFID II consultation paper, Consultation Paper 16/29: Markets in Financial Instruments Directive II Implementation – Consultation Paper III (CP16/29).
CP16/29 is split into two parts:
- Part 1 deals with conduct of business issues; and
- Part 2 deals with other matters covering a range of issues not covered in the FCA’s previous two consultation papers, including product governance and additional perimeter guidance.
The FCA considers that the new framework of conduct rules in MiFID II will reinforce and strengthen the retail and wholesale conduct work it has been doing in the UK.
In CP16/29 the FCA address a number of key issues including those on inducements (including adviser charging) (chapter 2), inducements and research (chapter 3), investment research (chapter 11), product governance (chapter 13) and taping (chapter 15).
In an earlier consultation paper (Consultation Paper 16/19: Markets in Financial Instruments Directive II Implementation (CP16/19)) the FCA discussed its approach to implementing MiFID II for firms exempt under Article 3. MiFID II requires that such firms are subjected to ‘at least analogous’ requirements to each of the individual organisational and conduct requirements listed in Article 3(2)(a) to (c) of MiFID II and their corresponding implementing measures. In CP16/29 the FCA proposes to apply the same conduct rules to Article 3 firms as to MiFID investment firms where the conduct rules are on the list of analogous requirements. Where conduct rules are not on the list of at least analogous requirements the FCA proposes to make case-by-case decisions on whether to impose the MiFID II requirements. The issues this approach creates are dealt with in each of the relevant chapters.
In CP16/19 the FCA also discussed its approach to implementing MiFID II for branches of non-EEA firms (third country firms). The FCA said that it would apply the same conduct rules to these firms as it does to MiFID investment firms to ensure they are treated no more favourably than branches of EEA firms. The conduct proposals in CP16/29 for MiFID investment firms also apply to branches of third country firms.
In summary the FCA proposals include:
- inducements, including adviser charging. The FCA’s general approach is to implement the MiFID II provisions for MiFID business and the MiFID-scope business of Article 3 firms, while keeping the existing rules in place for non-MiFID business until it implements the Insurance Distribution Directive (IDD). For retail clients, the FCA proposes to apply MiFID II inducements standards to both independent and restricted advice, continuing to ban the rebating of inducements, and extending this to portfolio management. For personal recommendations on retail investment products to retail clients in the UK, the FCA proposes to keep the existing Retail Distribution Review standard set out in the adviser charging rules, and clarify that it applies to the wider business of providing advice;
- inducements and research. The FCA proposes to replace its existing use of dealing commission rules in COBS 11.6 with a new section in COBS 2 to transpose the MiFID II rules. The FCA also proposes that the MiFID II rules should apply to firms carrying out collective portfolio management, which includes UCITS management companies and Alternative Investment Fund Managers, but who are not subject to MiFID II;
- The FCA proposes to apply the MiFID II independence standard for personal recommendations to recommendations relating to MiFID financial instruments, structured deposits and (in relation to retail clients in the UK) non-MiFID retail investment products;
- The FCA proposes to update the current suitability rules in COBS 9 with the changes required by MiFID II. The changes will apply to MiFID business and to Article 3 firms carrying on MiFID business. The current COBS rules will continue to apply to non-MiFID business pending consultation on the implementation of the IDD;
- MiFID II extends the products classified as ‘complex’, meaning the appropriateness test will apply more widely. The FCA is copying out the changes in MiFID II about the way in which the test operates, including more detailed criteria for determining whether a product is ‘non-complex’. The FCA proposes to apply the revised rules to MiFID business only;
- investment research, The FCA proposes to transpose the MiFID II rules into a single chapter of COBS;
- product governance. The FCA proposes to implement the product governance provisions in MiFID II as rules for firms engaged in MiFID business and as guidance for non-MiFID firms which manufacture or distribute MiFID products;
- recording of telephone conversations and electronic communications (taping). The FCA proposes to update its current taping rules with the changes required by MiFID II. The FCA is proposing that discretionary investment managers be fully subject to the requirement to tape, and the taping requirement applies to corporate finance business. Also, in the FCA’s view taping should be extended to Article 3 firms but it is open to considering other proposals to address consumer protection concerns in this area; and
- perimeter guidance. The FCA proposes new guidance on scope changes in MiFID II. These include foreign exchange derivatives, emission allowances, commodity derivatives and exemptions for professional firms and commercial firms trading commodity derivatives.
In CP16/29 the FCA reaffirms its commitment to keep existing EU legislation in the run up to Brexit. It states: “As with our previous proposals on the implementation of MiFID II we have developed the policy of this CP in the context of the existing UK and EU regulatory framework. Following the result of the UK’s referendum on its membership of the EU, firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for MiFID II and other pieces of EU financial services legislation that are due to come into effect in the UK.”
The deadline for comments on CP16/29 is 4 January 2017, except for chapter 16 (Supervision Manual, authorisation and approved persons) for which the deadline is 31 October 2016.
View FCA publishes third MiFID II consultation paper, 29 September 2016