The Council of the EU and the European Parliament have agreed on the amendment of the Markets in Financial Instruments Directive (MiFID). The new legislation takes the form of a recast directive (MiFID II) and a new regulation (MiFIR).
While the deadline for implementation of MiFID II and the time at which the provisions in MiFIR will apply are still some time away, it is now time to start considering how the amendments will affect your business.
The headline changes focus on market infrastructure with, for example, new requirements relating to position limits, algorithmic trading and transparency, as well new concepts such as organised trading facilities.
There are also several small amendments to the conduct of business requirements, covering client categorisation, acting in the best interests of clients, information requirements, investment advice, reporting, best execution, client order handling and suitability.
There is insufficient room here to cover all these issues, so I will briefly focus on the position concerning commission.
Currently, the payment of fees or commissions and other non-monetary benefits between firms and advisory firms must not be an inducement nor create any conflicts between a firm and its clients. Any payments must be assessed to ensure they do not impair the firm’s duty to act in the best interests of the client, that they “enhance the quality” of service provided and are disclosed to the client.
MiFID II and MiFIR introduce a number of changes. For example, for firms providing investment advice on an independent basis or portfolio management, in most circumstances there is a complete ban on retaining any fees, commission and monetary or non-monetary benefits received from third parties. These payments/benefits can be received and passed on to clients, but cannot be received and retained by firms.
Minor non-monetary benefits are excluded from the ban, but must comply with the inducement rules. The meaning of minor non-monetary benefits is not yet clear. Firms will be unable to offset any payments from fees owed to them. Clients must be informed of all the fees, commissions and benefits the firm has received in relation to the investment services provided.
MiFID II now enters the critical phase of amending the existing level-two measures and the new requirements will be fleshed out in more detail. It would be well worth keeping track of developments to assess the impact on your business.
Simon Lovegrove is a lawyer with the financial services team at law firm Norton Rose LLP
