Preparing for the Markets in Financial Instruments Directive (MiFID) II
For intermediary and adviser use only
Background to the MiFID II
MiFID was introduced in the UK in 2007 to facilitate cross-border investments and introduce common consumer protection within the European Union (EU). It’s responsible for setting a framework of EU legislation for:
- investment intermediaries providing services to clients for shares, bonds, units in collective investment schemes and derivatives – collectively known as financial instruments, and
- the organised trading of financial instruments.
The original MiFID is being followed up with MiFID II which takes effect on 3 January 2018. Reflecting learnings from the 2008 financial crisis and designed to strengthen investor protection, it’s intended to complement the work already undertaken as part of the Retail Distribution Review (RDR).
MiFID II affects firms directly involved in securities trading and investment management, with new provisions around reporting and transparency and other areas.
MiFID II’s provisions for investor protection will directly affect advisory firms and intermediaries who advise investing clients, or enable clients to transact. The good news is that a number of these recommendations are already captured by the RDR. Despite this, there will still be a number of rules adviser and intermediary firms will need to action before 3 January 2018.
We’re making good progress in our preparations for MiFID II. We’ve been regularly meeting with fund managers who are key to providing the data we, as a platform, and our customers will need.
Key areas of consideration include:
- Quarterly statements
- We’ll be moving to quarterly statements from 2018.
- Costs and charges, illustrations and disclosure
- We’ll be enhancing our pre-sale disclosure to provide more information on the investments and services we offer and customer illustrations will display clearer total charges.
- Product governance and target markets
- We’re working with fund managers on the new target market descriptors, designed to help target funds to the right customer more accurately. This may result in some changes to the funds that are available to some customers. Once the fund manager’s data is available on their target markets, we’ll be able to communicate the impact of this to you and your clients.
- Trading of direct financial instruments
- Through our platform we offer the ability to trade directly on the London Stock Exchange in equities, investment trusts and exchange traded funds. MIFID II will affect all clients wishing to invest in these financial instruments and we’ll require the following:
- Legal Entity Identifiers (LEI) – all adviser firms trading on behalf of clients will be required to obtain this code in order to trade from 3 January 2018.
A LEI is a global reference number that uniquely identifies every legal entity or structure, in any jurisdiction, that is party to a financial transaction. You can find further information at: https://www.fca.org.uk/markets/mifid-ii/legal-entity-identifier-lei-update
If you need to request a LEI, you will first need to register yourself as a user on London Stock Exchange’s LEI platform, UnaVista. Once logged in you can then raise a LEI request. You can find further information on how to do this at: http://www.lseg.com/LEI
- Natural Persons Unique Identifier (NPUI) – any client trading directly without an adviser will be required to submit NPUI data in order to be able to trade from 3 January 2018.
For clients who are British nationals, an NPUI would consist of their nationality prefix ‘UK’ and National Insurance Number.
We’ll be in touch shortly for information about your LEI prior to trading on 3 January 2018.
- Appropriateness test
For customers who haven’t been given financial advice about investing in complex funds, an appropriateness test will be required. This test assesses their level of knowledge and experience of investing and whether the fund is appropriate. This means that non-advised clients won’t be able to trade complex funds, and whereas existing customers won’t be affected, they won’t be able to top-up or switch into those funds in the future.
Our approach is to support you building your own appropriate test, so it won’t be directly available via our platform.
MIFID II requires firms to record telephone conversations and electronic communications with a client relating to a trade including email, fax, web chat, calls etc. Any face to face meetings with customers are to be minuted and to be agreed between the two parties. Also a copy of the call, communication and minutes must be kept for a minimum of five years.
Under Article 3 exemption, a firm may be able to manually record details of a telephone conversation with a client.
Staff training and competency
MiFID II requires firms to be in a position to demonstrate to the Financial Conduct Authority (FCA) that individuals giving investment advice or information about investment instruments or ancillary services possess the necessary knowledge and competence to fulfil investor protection obligations.
This is introduced in order to improve investor protection by increasing knowledge and competence of employees providing advice or investment information. European Securities and Markets Authority (ESMA) produced Level 3 guidelines on the assessment of knowledge and competence and more information can be found here:
Firms should be considering their approach to benchmark and demonstrate standards of staff competency taking into consideration minimum and maximum timelines to acquire competence introduced by ESMA guidelines.
We’re creating guidance for advisers and intermediaries and will be issuing regular updates from October. As things develop or if there are changes requiring you to take action, we’ll get in touch.
If you have any further questions about our approach or key considerations to MiFID II, you can email us at email@example.com.
- You can read the FCA consultation papers and user guides at https://www.fca.org.uk/markets/mifid-ii
- Andy Coleman, Managing Director, Retail talks about Getting ready for MiFID II
- ESMA publishes final report on product governance guidelines to safeguard investors - https://www.esma.europa.eu/press-news/esma-news/esma-publishes-final-report-product-governance-guidelines-safeguard-investors