RegTech Intelligence 
On 16 December 2016, the Financial Conduct Authority (FCA) published their fourth and final consultation paper (CP) on implementing MiFID II regulations into domestic regulation by 3 July 2017, which will be applied to firms from 3 January 2018. MiFID II aims to bolster competition in the EU’s financial market by creating a single market for investment services, whilst also protecting consumers and restoring trust in financial markets through increased transparency and accountability.
The FCA have previously released three CPs. The first covered issues pertaining to UK regulation on secondary trading of financial instruments. The second covered a range of fundamental issues, such as position limits, reporting for commodity derivatives and systems and controls requirements for firms providing MiFID investment services. In our previous article, we noted that the third CP outlined three main changes to improve investor protection: disclosure of costs and charges, regulated advice and taping. This final CP is an eclectic mix of technical standards that were not addressed in the previous CPs and proposes very few fundamental changes. There are, however, relevant changes to specific types of businesses and firms. This article will focus on the most significant changes for certain specialist regimes and tied agent regimes.
Specialist regimes
The FCA’s Handbook has tailored conduct regimes for different investment businesses and this CP has proposed certain changes to a long list of investment businesses. The main changes are to (i) energy market participants (EMPs) and oil market participants (OMPs) and (ii) residual CIS operators, AIFMs and UCITS management companies.
- Energy market participants and oil market participants
The most significant proposal for EMPs and OMPs is to expand the scope of MiFID II requirements on taping to include non-MiFID business that is related to commodity or exotic derivative instruments. MiFID II introduces an EU-wide requirement for firms to record specific telephone conversations and electronic communications to enhance client protection. Taping requirements already cover non-MiFID firms that conduct relevant activities.
The FCA currently divides EMPs’ and OMPs’ business activities into three categories: MiFID business, non-MiFID business and non-MiFID business related to commodity or exotic derivative instruments. In CP3, the FCA considered whether EMPs and OMPs should be required to adhere to taping requirements and decided that they should due to their involvement in commodities. As commodity and exotic derivative instruments have a similar business model and complexity to EMPs and OMPs, the FCA now proposes that it is appropriate for taping requirements to be applied to EMPs and OMPs that conduct non-MiFID business related to commodity or exotic derivative instruments. The FCA believe that the cost of these firms implementing the taping requirements will be negligible, as they should already have the organisational requirements that align with MiFID II.
2. Residual CIS operators, AIFMs and UCITS management companies
The CP’s main proposal for residual CIS operators, AIFMs and UCITS management companies is in relation to using a research payment account (RPA). If an asset manager requires funds for investment research, then either the firm can pay or a RPA can be used. To use a RPA, it must be funded through a specific charge to each client, undergo a regular assessment of the quality of the produced research and must not be used to fund the manager’s own research. MiFID II aims to provide greater transparency around payments for investment research and would prefer firms to pay for their own research rather than use RPAs.
The FCA propose that the provision in its Handbook for firms to agree the research charge with their clients will only apply if the fund has its own governing body that is independent to a firm. The first example that the FCA provides is a fund that has its own governing body independent of the firm and is a body corporate fund where the firm is not a director of the fund. An example of a fund that does not have its own governing body which is independent of the firm is a fund that is a body corporate where the firm is the sole director of the fund. If the asset manager is introducing a new payment, then the FCA considers this change to be fundamental and would subsequently require prior approval by the fund’s investors. If the asset manager increases the payment, then the FCA considers this change to be significant and would require the fund’s investors to have at least sixty days’ prior notice of the increase.
In addition, the FCA have proposed dividing investment research disclosure requirements into prior disclosure requirements and a periodic reporting document. Prior disclosure would require asset managers to include the relevant information in the prospectus for an authorised fund. The FCA propose that the ‘relevant information’ constitutes: how research purchased through the research payment account may benefit the fund by taking into account its investment objective, policy and strategy; the approach the firm will take to allocate the costs of research fairly among the funds it manages; the manner in which, and the frequency at which, the research charge will be deducted from the assets of the fund and a statement as to where up-to-date information can be obtained. Periodic reporting would require the disclosure of the total costs the fund has incurred for third-party research in the accounting period. It would also include a summary of the providers paid from the account, the total amount each provider was paid, the benefits and services received by the firm and detail of how the total amount spent from the account compares to the budget set by the firm, noting any rebate or carry-over if residual monies are held in the account.
Tied agents
A tied agent is an individual under the complete responsibility of only one MiFID investment firm or third country investment firm to act on and promote investment services and/or ancillary services to clients or prospective clients. The original MiFID I regulation made appointing a tied agent regime optional for Member States. This meant that UK investment firms could appoint a tied agent in Member States without tied agent regimes by having the appointed representative registered with the FCA. The FCA proposes updating its supervision manual (SUP) to reflect the change under MiFID II that all Member States must now have tied agent regimes. For firms, these changes mean very little unless the firm has tied agents in Member States that do not currently have tied agent regimes. These firms will consequently have to pay a small sum to re-register tied agents. The main impact on consumers will be that the regulatory scope of tied agents will be extended to include structured deposits. Article 1(4) of MiFID details how selling or advising clients on structured deposits by an investment firm or credit firm will fall into the regulatory scope of tied agents.
Concluding remarks
With the transposition of MiFID II into domestic legislation due this year, it is essential for firms to remain informed about these sweeping changes and collaborate with other firms by discussing potential issues and difficulties with the implementation process. This consultation is ongoing and comments on the proposals must be submitted by 17 February 2017. The FCA will reflect on the comments submitted to them and will subsequently publish two separate policy statements in March 2017 and July 2017, which will finalise MiFID II implementation.
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