The U.K. Financial Conduct Authority (FCA) issued a policy statement on the implementation of MiFID II that sets out final rules on conduct of business, client assets and guidance on certain other matters. In many areas, the policy statement delivers the minimum requirements in the MiFID II directive, but the FCA noted that it has gone beyond the minimum standards in three broad areas.
MiFID II, which regulates investment services within the European economic area, is intended to help improve the functioning of the EU single market by achieving a greater consistency of regulatory standards. The fact that a key objective of MiFID II is to maximize harmonization gave the FCA little discretion as to the standards that are imposed on those subject to the provisions. However, it did extend some of the standards to firms or business to which they are not directly applicable.
Wider application. In the policy statement, the FCA stated that it went beyond the minimum MiFID II standards by applying the standards in MiFID II to a wider range of firms or business than required by the legislation to achieve consistency of regulatory standards and to avoid arbitrage. In addition, it set standards above the minimum in MiFID II to those covered by the legislation to preserve existing U.K. regulatory standards. Finally, the FCA set standards above the minimum to those covered by the legislation as a result of new policy decisions.
The FCA believes the additional requirements will promote investor protection and market integrity, and avoid distorting competition between different types of firms conducting designated investment business. The FCA acknowledged that there will be some additional costs for firms arising from going beyond the minimum, but the regulator believes that the benefits will ensure the costs do not impair the attractiveness of the U.K. as a location for financial services. In the FCA’s opinion, clients will want to use firms that are adhering to regulatory standards that support their efforts to act in their clients’ best interests, to focus on good outcomes for clients and to act with integrity.
The FCA said that there were some areas where it chose not to extend new MiFID II provisions to firms that were covered by the implementation of MiFID, such as some enhanced best execution requirements. This is because the FCA thought that costs would exceed benefits.
There is one area in which the FCA applied the standard in MiFID to non-MiFID firms, but where it will not do so when MiFID II is implemented. Portfolio managers and firms operating pension funds that are not authorized under MiFID, must currently report transactions. The FCA believes these firms would experience a significant increase in the burden of transaction reporting if they were subject the new rules under MiFID II. Consequently, the FCA will remove the obligation to report transactions from these firms for now.
Impact of public feedback. The FCA received considerable feedback as it developed the policy statement for MiFID II. In some instances, the regulator made changes to the standards based on the feedback.
With regard to inducements in relation to research, the FCA decided to apply these provisions to collective portfolio managers and not only to the investment firms that are subject to MiFID II. Other than this discretionary extension of scope, the policy statement does not go beyond the MiFID II regime.
In response to feedback the FCA amended its guidance on how quickly research charge deductions should be passed into a research payment account (RPA), allowing greater flexibility. It also clarified that it does not intend to require investment managers to have a single RPA per research budget.
Best execution. In the area of best execution, the FCA stated that, contrary to its proposals, it will not apply the changes in the best execution rules in MiFID II to alternative investment fund managers. The FCA maintained its view that collective investment undertakings other than Undertakings for Investments in Transferable Securities (UCITS), including non-non-UCITS retail schemes and investment trusts, are neither automatically non-complex nor automatically complex.
The FCA decided not to apply a requirement for recording phone conversations and electronic communication to all investment services and activities carried out in relation to corporate finance business. As proposed, the FCA will remove the current partial exemption in the taping rules for discretionary investment managers, while making some modifications to the way the rule applies. In addition, where Article 3 firms decide to take a note rather than record a telephone conversation, the note must include key details of any orders taken and the key substance of the main points of the conversation.
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