RegTech Intelligence

FCA third MiFID II consultation paper aimed at investor protection

The Financial Conduct Authority (FCA) published its third consultation paper (CP3) with regards to the implementation of the revised Markets in Financial Instruments Directive (MiFID II) on 29 September 2016.

MiFID II, which comes into effect on 3 January 2018, is aimed at making markets more efficient, transparent and responsible.  Strengthening consumer protection is one of the key elements of MiFID II and CP3 reflects these standards by focusing on the investor protection aspects of this revised directive.

The first two CPs published by the FCA covered topics such as market issues, commodity derivatives and systems, and control requirements.  In addition, it is expected that the FCA will release one more CP by the end of this year.  All of these CPs reflect the FCA’s aim of promoting competition and market integrity in both the retail and wholesale investment markets.

CP3 outlines three key changes that offer more protection to investors, including disclosure of costs and charges, regulated advice and taping.

  1. Costs and charges

One of the key proposals of CP3 discusses the implementing requirements for the full disclosure of costs and charges.  This means that UK brokers will no longer be able to charge ‘bundled’ rates for services once the new rules come into force.  The FCA believes that, by requiring financial firms to identify separate charges for each service, it will create more competitive pressure on firms to justify the value of each component.  This helps to protect investors because they will be able to see exactly what they are being charged for, rather than a package price in which investors may not understand where the costs are coming from.

  1. Advice

In addition, the FCA wants to align the definitions of regulated advice with the new MiFID rules.  Currently in the UK, regulated advice is defined as ‘advising on investments,’ while the MiFID definition is based on a firm giving a customer a personal recommendation.  CP3 proposes to amend these two definitions so consumers only receive ‘regulated advice’ when offered personal recommendations.  By strengthening the research and advice rules, CP3 hopes to drive better competition and ensure that research and advice is only produced, consumed and paid for where it adds value to investment decisions.

  1. Taping

The FCA has also proposed stricter rules regarding recording all telephone calls and electronic communications, otherwise known as taping.  This would extend the requirement of taping to financial advisors and those who deal with corporate finance activities, such as advice on capital raising and mergers.  Additionally, CP3 will remove the exclusions currently in place for corporate finance businesses and retail financial advisors.  Along with taping conversations between themselves and their clients, firms will also have to keep these recordings for five years, instead of the existing six-month retention, which is likely to have some cost implications.  The aim of this is to help firms and clients resolve disputes in a quicker and more cost-effective manner, as well as hoping to clamp down on insider trading and other market abuses.  For smaller firms, the FCA is open to receiving and exploring alternative approaches to accomplish a similar level of consumer protection in taping but at a lower cost.

As it pertains to Brexit, FCA chief executive, Andrew Bailey, confirmed the regulator’s intention to implement the rules in full despite the UK’s vote to leave the EU.  He reminded firms of their responsibility to “continue to abide by their obligations under UK law including those derived from EU law.”

The deadline for comments on the paper is 4 January 2017 – just under a year before the regulation takes effect.  This excludes comments on Chapter 16 (supervision manual, authorisation and approved persons), which should reach the FCA by 31 October 2016.  The FCA will consider the feedback it has received from all four CPs and publish a policy statement in the first half of 2017 covering all aspects of MiFID II implementation.

To keep up to date with the MiFID II discussion, join our LinkedIn Group or subscribe to our alerts.

To promote global dialogue on how to deliver regulatory change JWG post hundreds of focused articles a year to thousands of subscribers. Get involved and join the mail list.

By hitting the subscribe button you agree to our Privacy Policy