UK: MiFID II: A Summary

Last Updated: 23 March 2015
Article by Nicholas Thompsell and Toby Price

You would have had to be living in a very remote, dark cave to have missed the spectre of MiFID II (to give it its full name: the second Markets in Financial Instruments Directive ("MiFID II")) over the past 12 months. However, notwithstanding the numerous column inches penned on the subject, many people are still left asking what MiFID II is really all about and, more importantly, whether it will have an impact on their business. The answer to the latter question, if your business involves the distribution and trading of financial instruments in the EU, is highly likely to be answered in the affirmative and this note aims to provide a concise explanation in respect of the former.

MiFID II and the accompanying Regulation on Markets in Financial Instruments and Amending Regulation ("MiFIR") are both pieces of legislation (often referred to without distinction simply as "MiFID II") originating from the European Commission and; together, seek to provide a European-wide legislative framework for regulating the operation of financial markets in the EU. MiFID II represents a major overhaul of the existing law, building on and extending the scope of the first Markets in Financial Instruments Directive, which originally came into force in November 2007.

In broad terms, MiFID II is concerned with the framework of trading venues/structures in which financial instruments are traded, whereas MiFIR focuses on regulating the operation of those trading venues/structures, looking to processes, systems and governance measures adopted by market participants and to their future supervision.

Objectives and key themes

The legislation has several core objectives, including: (a) increased investor protection; (b) alignment of regulation across the EU in certain areas; (c) increased competition across the financial markets; and (d) introduction of reinforced supervisory powers. In seeking to achieve these objectives, MiFID II contains a broad range of complex provisions. Some of the key themes are summarised below.

Investor protection: MiFID II places a heavy emphasis on improving investor protection. Its remit in this respect extends to the introduction of robust controls to avoid conflicts of interest, to encourage greater transparency both pre and post-execution and to ban commissions payable in respect of investment advice and portfolio management. In short, MiFID II will introduce stringent requirements in terms of communication, disclosure and transparency in favour of investors.

Conduct of business: MiFID II will see additional and reinforced powers of supervision, coordinated with the European Securities and Markets Authority (ESMA). Interventions will be permitted on both a pre-execution basis, in relation to product development, and post-execution basis, in relation to sales, with wider general powers to oversee governance processes and to intervene where deemed necessary.

Organisational requirements: MiFID II will further emphasise the importance of market participants compliance, audit and risk management functions, particularly as they relate to the production and marketing of new financial instruments, reporting and conflicts of interest. Governance is a further focus, with MiFID II seeking to establish more robust requirements for management functions based around, for example, qualification and overarching principles of prudent management to promote the interests of clients and the integrity of the financial markets. Undoubtedly, the effect of MiFID II will be felt heavily by market participant's back-office teams.

Importance and implementation

MiFID II is widely viewed as significant legislation which will fundamentally reshape European financial markets, the products and services that market participants provide and the relationship between market participants and their customers. It is therefore important to be aware of the presence of MiFID II and to appreciate the need to seek support proactively (both legal and operational) in order to ensure that, when MiFID II comes into force on the 3 January 2017, businesses are able to comply with its requirements.

Planning for compliance is currently a difficult process as there is still some uncertainty as to how MiFID II will be translated into practically applicable rules and regulations. This uncertainty stems from the fact that MiFID II requires the UK government to pass domestic legislation to adopt the EC 'Level 1' framework legislation, embodied in the MiFID II directive, into UK law. This will be achieved through the passing of 'Level 2' implementing measures, based on 'delegated acts' which are drafted on the basis of advice by the European Securities and Markets Authority ("ESMA"), and 'technical standards' which are drafted by the ESMA.

These Level 2 implementing measures will ultimately contain much of the detail required to enable market participants to fully prepare for the new MiFID II regime; however, the ESMA is still in the middle of its consultation process, with the landing slot for finalising delegated acts and technical standards not falling until July 2015 at the earliest. The UK government is then required to amend or implement new legislation by 3 July 2016. This will leave a relatively short period in which to prepare for MiFID II coming into force from 3 January 2017.

In contrast, MiFIR has 'direct effect' from 3 January 2017 and will apply to the UK without the requirement to pass further 'Level 2' legislation. It is likely that the requirements of MiFIR will be incorporated into the FCA Handbook, although the FCA is still to consult on any proposed changes.

Notwithstanding the timeline for implementation of MiFID II, market participants should be working to establish operational systems which will ensure compliance and considering how they will respond to the new requirements, now, as well as carefully monitoring the ESMA and FCA's progress with regard to Level 2 implementing measures so that they can act quickly as and when further guidance is available.

Further guidance

For more detail, please see our briefing paper " MiFID II – An update" which we published last year

To discuss any aspect of the MiFID II/MiFIR regime in greater detail and to get further information on how Fieldfisher can offer practical assistance to help ensure your firms' compliance with the new requirements, please contact Fieldfisher's regulatory team or your usual Fieldfisher contact.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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