FSA Calls for Advance MiFID Planning

Transcription

1 10 March 2006 A Legal Upate from Dechert s Financial Services Group FSA Calls for Avance MiFID Planning Impening legislation from Brussels is about to trigger a significant rewrite of UK financial services regulation. The Markets in Financial Instruments Directive (MiFID), ue to replace an exten the ol Investment Services Directive ( ISD ), will impose significant emans on many FSA-regulate investment firms - both in terms of their ay-to-ay business operations an their interaction with customers. For reasons outline in this upate, implementation of the rules is shaping up to present a significant exercise for the sector. The timetable is changing continuously. With the new rules planne to come into operation in November 2007, the FSA is expecte to begin a series of consultations on UK implementation from April onwars. Although the etail has not yet been agree, broaly speaking, MiFID will: apply etaile conuct of business rules for the first time throughout the EU. New regulatory regimes have to be introuce all over Continental Europe, requiring the FSA to unertake a major re-write of the UK rules; apply new transparency principles to equity ealing (which may be extene in the future to bon an other markets); inclue investment avice, commoities broking, an multilateral traing facilities (hitherto usually known as Alternative Traing Systems or Electronic Communications Networks) which will now be entitle to the European passporting facility; run in parallel with new capital requirements to be introuce uner the Capital Requirements Directive. MiFID has been evelope at the European level through two principal legislative tiers: Level 1 - the Directive itself Level 2 the technical implementing measures, issue by the European Commission in February, an now being reviewe by the European Parliament. How will your business be affecte? MiFID will impact on all firms carrying on esignate investment business essentially broker-ealers, asset managers, an corporate finance avisers. It generally oes not affect commercial banking, occupational pension schemes, UCITS collective investment schemes, or mortgage an insurance broking. expan the range of EU core investment services an activities to

2 Specific MiFID Issues See Appenix for overview chart 1. Internal Organisation MiFID specifies that: the firm s compliance function must be operate inepenently; there must be an effective an inepenent risk management function; there must be separate internal auit; there are new rules an requirements for outsourcing an recor keeping. These look broaly similar to existing UK requirements. The FSA interpretation of what is require to achieve inepenence will be an important issue but is require to be proportionate, an the risk function requirement will be new. 2 Outsourcing The requirements are similar to the existing FSA rule, but coul have significant impact in some situations. The new requirements will exten to any outsource service, whether or not this is a regulate activity. Outsourcing to suppliers outsie the EU will be more ifficult it is restricte to authorise firms subject to pruential regulation, an to jurisictions with whom the EU has a cooperation agreement in place. No elegation of responsibility is allowe this coul be a particular problem for custoians an brokers elegating to unfamiliar markets. The requirement for pruential regulation appears to prevent the UK subsiiary of a US asset manager elegating asset management to its parent. The requirement for a cooperation agreement to be in place appears to prevent outsourcing to Japan. Outsourcing through letter box operations will not be allowe, which may force some activities on-shore. 3. Marketing communications Impact uncertain but there will be changes. Historic simulate figures are to be banne, putting an en to the use of historic figures by clone funs. The FSA has promise a major overhaul of financial promotion on the back of the MiFID changes, with a possible move to a more principles-base regime. 4. Client classification An area of major change. The three existing categories are preserve uner new names but with more client protection an more clients being shunte into the protecte categories. This will impact on firms with mixe client bases or which currently seek to eal only with intermeiate customers an market counterparties. Retail firms will be largely unaffecte. 5. Information provie to clients New formal isclosure requirements will be introuce, incluing the firm s conflicts of interest policy, best execution policy, an how it hols client assets. The new requirements will mean that many client accounts will have to be repapere again. A big impact for firms with large client lists. 6. Suitability The uty to assess suitability is extene to intermeiate customers an counterparties who receive avisory an iscretionary services, applie on a transaction-by-transaction basis. The suitability assessment must be base on certain know-your-customer information. The impact coul be significant, but is ifficult to assess. The iviing line between execution an avisory services coul be a key issue. 7. Appropriateness an Execution Only Firms which o not provie avice or iscretionary management will still have a uty to assess whether the service is appropriate to the client. If the conclusion is that it is not appropriate, they must warn the client of this before proceeing. 8. Conflicts of Interest A firm must have a written conflicts of interest policy which ientifies circumstances which constitute, or 10 March

3 may constitute, a conflict of interest an specify proceures to manage such conflicts. The firm must also have proceures for personal account ealing. MiFID extens this requirement to the staff of firms to whom business has been outsource. 9. Best Execution Express client consent must be obtaine to execution outsie a regulate market or a Multilateral traing facility (MTF). New rules on orer hanling are broaly similar to the existing regime. There is some oubt about whether warehousing will be permitte. Best execution is escribe in language which makes it soun like an absolute stanar. This may be more rhetorical than substantive, but it remains to be seen what approach the FSA will take. The post-trae confirmations regime may become more prescriptive. Examples of new requirements inclue reports on the execution venue, the total expenses an commission charge. There is also a proposal that any leverage account must report monthly, but without a efinition of leverage. 10. Markets an Transparency Pre-trae transparency: The pre-trae publication of quotes in equity shares is impose on Multi-lateral traing facilities an systematic internalisers ( SIs ). An SI is (very broaly) a market maker or similar. have to be publishe in real time. Both parties to the trae have this responsibility. These requirements will have a major impact on broker-ealers, an a knock-on effect on asset managers. 11. Regulatory transaction reporting Uner MiFID, all traing in instruments on a regulate market must be reporte to the relevant home state regulator, which must sen on relevant etails to other EEA regulators. For brokers this is similar to the current regime. For managers there is an expectation that they can rely in most, but probably not all, cases on the brokers reporting. Next steps What shoul you o about MiFID? The FSA has stresse the importance of firms starting their planning for MiFID sooner rather than later. Issues which shoul be consiere inclue: Planning: Ientifying how your business is impacte by MiFID, the ifferent resources which will be neee to aress this (compliance, legal, accounting, IT an systems, staff training, client relationships, etc.); how they will be coorinate into a project; an the project timetable; Paying: What the costs of this will be - both oneoff an continuing, an how these will be pai for; Staffing: how the project will be staffe, ifferent skills an commitments rawn from appropriate internal an external personnel. Post trae transparency: MiFID requires regulate markets an MTFs to publish their share traes in real time. Offexchange traes (incluing crosses) will also 10 March

4 Appenix Proviing Information to Clients New forms for client confirmations an perioic statements. New formal isclosure requirements on a range of matters, such as conflicts of interest an best execution policies. Suitability an Know Your Clients Firms shoul have aequate proceures for capturing an recoring Know Your Client information for avisory an iscretionary clients. Conflicts of Interest Firms must have a written Conflicts of Interest policy ientifying all circumstances which may constitute a conflict of interest an how such conflicts will be manage. Markets an Transparency Pre-Trae Transparency: MiFID establishes minimum stanars for shares trae on regulate markets an Multi-lateral traing facilities (MTFs). Also places obligation on systematic internalisers to publish two-way quotes. Organisation Firms to have: Inepenent risk management function Inepenent compliance function Revise recor-keeping requirements New outsourcing rules with special requirements onto whom services may be outsource. MiFID Appropriateness Assessment Concept of execution-only clients abolishe. For certain types of business the firm nee not give suitable avice if the transaction is assesse as appropriate for the client. Essentially this means a check on the client s knowlege an experience. Regulatory Transaction Reporting All traes in instruments trae on a regulate market must be reporte to the relevant home state regulator (e.g. FSA in UK). Marketing Communications All information must be fair, clear an not misleaing. Detaile requirements reesigne. Client Classification The current categories (private, intermeiate an market counterparty) will be replace by new MiFID categories (retail client, professional client, eligible counterparty). More clients will fall into the retail category. Best Execution Firms must take all reasonable steps to obtain the best possible result for clients, taking into consieration factors such as price, cost, spee, likeliness of execution an settlement.

5 Practice group contacts For more avice on any of the above, please contact either of the lawyers liste or the Dechert lawyer with whom you regularly work. Visit us at Richar Frase Lonon Emilia Diepstraten Lonon UK/Europe U.S. Brussels Frankfurt Lonon Luxembourg Munich Paris Austin Boston Charlotte Harrisburg Hartfor New York Newport Beach Palo Alto Philaelphia Princeton San Francisco Washington, D.C. Dechert is a combination of two limite liability partnerships (each name Dechert LLP, one establishe in Pennsylvania, US an one incorporate in Englan) an offices in Luxembourg an Paris which are registere with the Law Society of Englan an Wales as multinational partnerships. Dechert has over 750 qualifie lawyers an a total complement of more than 1800 staff in Belgium, France, Germany, Luxembourg, the UK an the US. Dechert LLP is a limite liability partnership, registere in Englan (Registere No. OC ) an is regulate by the Law Society. The registere aress is 160 Queen Victoria Street, Lonon EC4V 4QQ. A list of names of the members of Dechert LLP (who are referre to as partners ) is available for inspection at the above office. The partners are solicitors or registere foreign lawyers. The use of the term partner shoul not be construe as inicating that the members of Dechert LLP are carrying on business in partnership for the purposes of the Partnership Act This ocument is a basic summary of legal issues. It shoul not be relie upon as an authoritative statement of the law. You shoul obtain etaile legal avice before taking action Dechert LLP. Reprouction of items from this ocument is permitte provie you clearly acknowlege Dechert LLP as the source. 10 March