The MiFID II Review #13 - FCA's fourth and final CP on MiFID II: an end of year sweep up before the real work begins 

The FCA has published its final consultation on MiFID II on 16 December 2016 (CP16/43).  This is the fourth consultation from the FCA on MiFID II and covers a range of technical issues which were not set out in the other papers.  Many of the proposals are simply to bring the FCA handbook in line with other MiFID II changes for some of the specialist regimes but there are a couple of points that are worth noting by the wider audience.  We summarise these below. 

Transaction reporting outsourcing

In relation to the relevant aspects, there is guidance on transaction reporting, including trading venues’ use of Approved Reporting Mechanisms (ARMs). Specifically, the FCA notes that two key issues were raised:

•  whether trading venues could, where required to transaction report on their own behalf or on behalf of certain persons, report to FCA through an ARM; and
• whether investment firms could aggregate group reporting via an internal hub.

The FCA proposes guidance that makes clear that it believes trading venues (whether operated by market operators or investment firms) can use ARMs to make transaction reports to the FCA. This is a useful confirmation for those who were worrying about whether such intermediation was permitted (given that known debates have occurred at European level over the issue). Secondly, the FCA has confirmed that it is permissible for a group to aggregate its reporting via an internal hub provided the hub uses an ARM or is an ARM. This could have gone further and more explicitly referred to delegated third party transaction reporting (where the third party processes such reports and routes them to an ARM); a missed opportunity but enough for most to become more comfortable that such a structure is possible. The FCA could have also taken the opportunity to clarify that this logic also applies to post-trade reporting, but did not. 

Energy market participants (EMPs) and oil market participants (OMPs)

COBS 18.2 (which deals with energy market activity and oil market activity) includes rules for MiFID and non-MiFID firms trading commodity derivatives.  MiFID II has requirements for MiFID firms on the taping of telephone conversations and investment recommendations.  The FCA is proposing to apply the MiFID II requirements on taping to non-MiFID business related to commodity or exotic derivative instruments.  

Corporate finance business

For corporate finance firms, the FCA proposes inserting a list of provisions into its handbook (in the form of a table) that will apply to corporate finance boutiques that undertake optional exempt business under Article 3 of MiFID II.  The table lists the provisions of COBS which apply to optional exempt business and include information disclosures, inducements, client categorisation, communication to clients and suitability, amongst others.  

Residual CIS operators, AIFMs and UCITS management company

In CP16/29 the FCA proposed that MiFID II standards on best execution and inducements and research should apply to residual CIS operators, AIFMs and UCITS management companies.  One key issue of these requirements is that, should a fund manager wish to begin using a research payment account (RPA) in an authorised fund, it would amount to either a fundamental change requiring unitholder approval or a significant change requiring prior notice to investors.  As a result, the FCA are amending the COLL handbook to introduce a transitional provision to allow the authorised fund manager to treat the introduction of a RPA as a significant change (requiring notice but not authorised approval) for a period of up to two years after the new rules take effect, which should give the manager enough time to put the RPA in place, even if it pays for research out its own fees to begin with. 

Tied agents

The optionality of the tied agent regime under MiFID has led to some interesting situations.  In the UK, tied agents of MiFID investment firms are also appointed representatives (ARs).  Tied agents of UK MiFID investment firms that do not carry on activities in the UK are not ARs. So there were many definitions in the FCA handbook.  Under MiFID II, the tied agent regime is no longer optional.  

The FCA is amending its handbook to reflect the fact that all Member States must implement the tied agent regime.  It is also introducing new definitions of MiFID 'optional exemption AR' and 'structured deposit AR' to define new populations of AR to which MiFID requirements on tied agents will also apply. 

MiFID II states that the provisions on tied agents applies to an investment firm or credit institution when selling, or advising clients in relation to structured deposits, which suggests that tied agents of investment firms or credit institutions should be able to advise on and sell structured deposits.  The FCA is clear however that tied agents will not be able to avail themselves of their principals' passport rights under MiFID.  

SME growth markets

SME growth markets are a subset of MTFs, introduced by MiFID II.  An MTF can register as a SME growth market, and the FCA has set out guidance on how to do this (although has not produced a formal application form).  The FCA can deregister an MTF as an SME growth market if the firm applies for deregistration or where the percentage of issuers of SMEs falls below the 50% threshold for three consecutive years or where there is non-compliance with other eligibility requirements.

Product Governance

The FCA has included a clarification in the new PROD rules which gives more guidance on the effect on territorial scope of the rules.  The FCA has added that, where a UK firm carries on MiFID business from a branch in another EEA State, organisational requirements, including rules implementing product manufacture obligations, are "home state" requirements (therefore FCA responsibility).  This doesn't change the FCA's previously stated position but does make it more explicit.

Structured deposits

MiFID II applies certain conduct of business and operational requirements to firms selling or advising clients on structured deposits, including requirements relating to suitability, appropriateness, inducements, product governance, costs and charges and post-sale reporting disclosures.  Currently, the FCA sets out rules on structured deposits in the BCOBS chapter of its handbook which applies to deposit takers.  The FCA is proposing amendments to BCOBS so that all firms, not just deposit takers, selling structured deposits are subject to the BCOBS requirements.  The BCOBS chapter will also be amended in light of the PRIIPs KID Regulation, so that firms who are required to produce a KID under the PRIIPs KID Regulation, are not required to provide the same information under BCOBS.  

Pre-trade and post trade transparency waivers and deferrals

The FCA has previously consulted on trading venues making applications to use pre-trade transparency waivers and seeking authorisation to use post-trade transparency deferrals.  Following response from industry requesting more information on what the FCA needs to evaluate an application for pre-trade transparency, the FCA has said it will shortly be publishing more practical information on its forms and processes.  

Next steps

Member states have until 3 July 2017 to bring their domestic laws into line with the requirements under MiFID II, six months before MiFID II applies (3 January 2018).  The FCA says that it will finalise changes to its handbook in the first half of 2017.

Should the FCA identify further issues under MiFID II that need consulting on, they will do so via their Quarterly Consultations.  It aims to produce two policy statements, the first in March 2017 which will deal with issues raised in CP15/43 (which we covered in our briefing here) and a second which will cover the remaining three consultations (CP16/19, CP16/29 and the consultation we have looked at in this briefing CP16/43).

There is also the Applications and Notifications Guide which the FCA expects to publish shortly and which will set out information about the FCA's forms and processes.