UK: MiFID implementation deadline approaches

Last Updated: 15 September 2005
Article by Simon Morris and Nick Paul

Timelines for firms to get ready for MiFID (the "Markets in Financial Instruments Directive") are tight. According to newly proposed deadlines, EU Member States will have until 30 October 2006 to implement MiFID, and firms and markets must be MiFID- compliant no later than 30 April 2007. With the Commission’s informal consultation on draft regulations coming to a close mid- September and HMT and FSA expected to commence their consultation process in November, there is already considerable information available for firms to assess the likely impact of MiFID on their businesses.

FSA has announced that MiFID will bring about the biggest change to the FSA Handbook since it took over regulation of the financial services industry in December 2001, including:

  • a new conduct of business sourcebook
  • changes to the scope of regulation
  • significant changes to systems and controls requirements and conflicts management in particular
  • a new approach to client classification
  • changes to best execution, suitability and client order handling requirements
  • new transparency and reporting regimes.

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MiFID will replace the Investment Services Directive ("ISD"), which over the last decade has been the basis upon which investment firms across the EU have provided their services (cross border and/or through a branch office) in other EEA jurisdictions without the need for re-authorisation in the respective host state. However, ISD has not created a true single market and investment firms continue to operate in differing regulatory environments under their European passport. This situation is expected to change with the implementation of MiFID.


The single most important change that MiFID will bring about is the harmonisation of conduct of business rules across the EU. Although MiFID is, to a large extent, based on UK conduct of business rules (e.g. senior management responsibility, complaints handling), changes in other areas are potentially significant and will require considerable amendments to existing FSA Rules. FSA envisages a "big bang" approach to its conduct of business sourcebook ("COB"). It will issue a completely new COB module incorporating relevant changes required by MiFID implementation and other projects. FSA has said that it will use MiFID implementation as an opportunity to rationalise existing rules. Although "gold-plating" is not intended generally, FSA announced that it will (only) impose requirements that go over and above those required by MiFID if there is clear market value in doing so and subject to a properly justified cost benefit analysis. If, along with current Commission proposals, Level 2 measures take the form of directly applicable regulations, FSA will proceed by "intelligent copy-out" of those regulations but it will give guidance where and as appropriate to explain what it considers the provisions to mean in a UK context.

Compliance costs and costs associated with systems changes and IT upgrades necessitated by MiFID are potentially large in scale and MiFID may impact on how firms are currently doing business on a passported basis.

Scope of regulation

MiFID is broader in scope than the Investment Services Directive ("ISD") that MiFID will replace. MiFID will extend to (i) investment services (ii) ancillary services (which may only be passported if provided in conjunction with an investment service) and (iii) financial instruments not previously covered by ISD.

  1. The provision of investment advice will be upgraded from a non-core/ancillary service to an investment service and will offer new passporting opportunities to firms whose scope of authorisation covers this activity only. Operating multilateral trading facilities ("MTF") such as ECNs and ATSs will, under MiFID, be an investment activity in its own right.
  2. New ancillary services will cover the provision of investment research/financial analysis relating to transactions in financial instruments as well as investment services and ancillary services concerning the underlying of certain derivatives that are connected to such services.
  3. Finally, financial contracts for difference, commodity derivative contracts (whether settled physically or in cash) and other derivative contracts such as those relating to climatic variables and freight rates will fall within the scope of MiFID. However, it should be noted that not all firms trading commodity derivatives will benefit from MiFID as they may fall within one of the MiFID exemptions.

Systems and controls/managing conflicts of interest

Under current proposals conflicts of interest will extend to acts and omissions of group companies and outsourcers. Unless changes are made to the draft regulations, we expect that this will raise concerns with firms whose outsourcers are independent contractors and/or located overseas due to the firm’s lack of control over the outsourcer’s activities. Moreover, investment firms will be required to manage conflicts so as to prevent damage to client interests. To this end, the draft regulations require firms to implement one or more of the prescribed organisational structures or to put in place alternative means provided always that these can be shown to be as effective as the prescribed methods. According to current proposals, the customer UK "disclosure and consent" does not appear to be a valid means for conflicts management and may only be used as a measure of last resort. In consequence, firms will have to review and (re)write any existing conflicts of interest policy and may be required to effect changes to their organisational structures to achieve independence (effectively separation) between relevant persons engaging in potentially conflicting activities.

Client classification

Many firms are currently taking full advantage of the relief that existing FSA Rules offer in the context of client classification (best execution, client money, disclosure and suitability requirements). MiFID may change the situation significantly. MiFID distinguishes between (i) professional clients (ii) retail clients and (iii) eligible counterparties. These categories do not mirror existing FSA client classification and may require re-classification of firm’s existing clients.

  1. Professional clients are those who possess the experience, knowledge and expertise to make their own investment decision and assess relevant risks. MiFID sets out certain categories of persons deemed to be professional clients. The term "professional clients" includes some persons who, under FSA Rules, would be categorised "intermediate customers" or "market counterparties" but there is also the possibility that customers classified "intermediate customers" under FSA Rules may be "retail clients" under MiFID.
  2. Retail clients are all non-professional clients. Retail clients may ask to be upgraded to professional status in certain circumstances and may waive some of the protection afforded to them by the conduct of business rules.
  3. Best execution and certain other conduct of business rules will not apply when investment firms bring about (arrange) or enter into (execute) transactions with "eligible counterparties". This third client category includes some (but not all) professional clients and it does not appear to include private individual investors.

Interestingly, MiFID and the draft regulations do not seem to distinguish clearly between conduct of business rules applicable to retail clients and professional clients. This does not make sense and it remains to be seen how the Commission will resolve this uncertainty and give effect to the status of a client as "professional" Best execution, suitability and client order handling

New rules on best execution and suitability are intended to work in tandem to ensure better consumer protection. According to current proposals, investment firms

  1. must have in place an order execution policy, including a list of all execution venues (including regulated markets, MTFs and systematic internalisers). We consider that this will be impracticable and disproportionate in certain circumstances.
  2. must provide best execution to all clients, retail and professional, unless they deal with eligible counterparties or if specific client instructions are obtained. This is in stark contrast to existing FSA Rules.
  3. shall treat "total consideration" payable as the most important factor for determining the best possible result for a retail client. We disagree with this because MiFID itself does not rank relevant criteria that firms may wish to take into account in determining the best possible result for a retail client.
  4. must, subject to limited exceptions, obtain all relevant information from both retail and professional clients, which will enable them to assess the suitability or appropriateness of the envisaged service or product. This will apply to both advised sales/portfolio management and non-advised sales respectively.
  5. must, in principle, carry out client orders sequentially and promptly. This may raise questions for firms who receive client orders simultaneously over the phone, the internet and/or by email.

Transparency and reporting requirements

Finally, MiFID imposes new pre-trade reporting requirements on investment firms that deal on own account by executing client orders internally on a systematic basis (so-called "systematic internalisers"), MTFs and regulated markets. Systematic internalisers trading liquid shares that are quoted on a regulated market will be required to publish firm bid and offer prices on a continuous basis during trading hours, which are close to comparable quotes in other relevant markets. Similarly, MTFs will have to publish best bid and offer prices together with an indication of the depth of trading interest for all shares admitted to trading on a regulated market and traded within their system. All equity trades (whether traded on or off market) will be subject to increased post-trade reporting requirements. The content of transaction reports is expected to increase post-MiFID and EEA passported branches will have to report to their host state regulator.

These are but a few changes that MiFID will bring about for the UK regulatory regime.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 14/09/2005.

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