The FCA has now published its second Consultation Paper on implementing MiFID in the UK. Apart from numerous references to the continued need to implement MiFID in light of Brexit, the paper also makes clear that further Consultation Papers should be expected, and the hoped-for 2016 Policy Statement will now be pushed back into 2017.
Notification of MiFID Rule Breaches
MiFID now requires investment firms to notify all breaches of MiFID's rules to the FCA. This will be a significant change, as the nearest existing UK obligation – in General Principle 11 – has a level of materiality contained within it. That is removed in the FCA's new draft rules where MiFID is concerned.
Conflicts
The FCA makes clear in its consultation how important it sees the management of conflicts of interest to be. Indeed, it is increasingly being talked of by the FCA as the key issue for investment firms in the current regulatory environment. As well as emphasising that disclosure is a measure of last resort, and that all disclosures must be stated to be because the firm's organisational and administrative arrangements to prevent or manage the conflict are not sufficient, the FCA states that it intends to apply the MiFID disclosure obligations to all firms in relation to all business. Given that the MiFID conflict requirements were controversial at the time they were being discussed and adopted, this is a sign of how far the FCA's thinking has moved, in that they are now seen as the gold standard that all regulated firms should comply with.
Client Money
Much of the FCA's approach to applying the client money regime is straightforward, and indeed much of the UK's approach at the moment is already in MiFID II. One important comment the FCA does make is in relation to the extra flexibility given by MiFID on the 20% rule (which states that no firm may hold more than 20% of the client money that it handles with a bank in the same group as the firm). MiFID applies proportionality to this rule, without giving much detail. The FCA has turned that into a precise proportionality statement. The FCA says that only a "CASS small firm" can use the MiFID exemption to the 20% limit.
Complaints
The FCA proposes to adopt a new definition of a "MiFID complaint", and firms must follow a different process (as set out in MiFID) for such complaints, with the existing FCA approach applying to non-MiFID complaints.
Application of Rules to Third Country Branches
The FCA will continue with the tricky existing approach of trying to apply MiFID's obligations to third country branches on a different basis depending upon the type of requirement. As a policy matter, the FCA wants to apply common sets of rules where they can see no difference between what a third country branch, and a UK firm, should do. This is the approach that will largely be taken in relation to COBS requirements. Equally, there are other rules that simply cannot apply in the same way to third country branches, and therefore need to be applied as Guidance, and this is the approach that will be taken in relation to the prudential requirements. Other examples will be dealt with on a case by case basis, and may involve the application of no rules at all to the third country branch – although the FCA must also always grapple with the general MiFID requirement thatno member state may treat a third country branch preferentially to a MiFID firm.
Extra Territoriality – Application of Rules to Non-EU Branches
As noted above CP16/19 takes into account the position of UK established branches of third country firms. It also sets out MiFID II's extra-territorial effect in two other places. In relation to the first reference, FCA makes a passing reference to the scope of the commodity position limits regime. Here the FCA notes that MiFID's restrictions will not apply to non-EEA investment firms engaging in otherwise in scope transactions (paragraph 2.6). This does not perhaps significantly limit the regime, but those weary from the extra-territoriality of other market abuse measures may take some comfort from the joined up thinking between the FCA and HMT on this issue (although as the FCA's amendments to Chapter 10 of its Market Conduct Sourcebook show, the MiFID II commodity regime is breathtakingly ambitious). The second more important point is that the FCA is not seeking to alter the MiFID I position in relation to the application of conduct rules to non-EEA branches of UK investment firms. In brief, the rules do not apply. FCA has retained the SYSC provision at 2.15 (SYSC 1 Annex 1 Detailed application of SYSC) that states: "The common platform requirements, except the common platform record-keeping requirements, apply to a firm in relation to activities carried on by it from an establishment in the United Kingdom…." This might be termed the "what happens in Vegas, stays in Vegas" approach to non-EU branches, as local standards of behaviour will apply. For firms there continue to be unanswered questions with regard to the territorial scope of MiFID and non-EEA branches, but this looks like a helpful step.
