Three months on from its publication and the 1,068 page Mifid II policy statement continues to weigh heavily on many investment firms’ desks, as they attempt to decipher the business messages emerging from it.
For those classed as an “exempt capital adequacy directive firm” one of the key issues will be whether it is time to consider their existing permissions.
Generally speaking, investment intermediary firms tend to fall into three main categories:
- Discretionary investment management firms
- Exempt CAD firms
- Article 3 firms
The first two types of firms are classed as “Mifid” firms, with the third classed as “non-Mifid”. All three categories will be impacted by Mifid II in one way or another but the new requirements will be much more onerous for those categorised as Mifid firms.
Often, the difference between exempt CAD firms and article 3 firms will be for just two reasons. Either:
1. To enable the firm to arrange Ucis business without restriction; or
2. To allow the firm to advise customers in other countries within the European Economic Area on Mifid scope investments, using a Mifid passport for cross border services.
Firms currently “dipping their toe” into the Mifid regime for either reason may want to reconsider their permissions and move to non-Mifid status, as the costs of being a Mifid firm could outweigh the benefits once the new rules come into force on 3 January.
Here are some reasons why:
- Mifid firms must record phone conversations in relation to client orders for Mifid investments. Article 3 firms will be given the choice of taking a written note or recording the call.
- Mifid firms will be required to annually publish details of the top five “execution venues” to which they “transmitted orders” for Mifid investments. This will require firms to keep records of transactions and translate them into statistical data in a specified format. Non-Mifid firms are exempt from these requirements.
- Mifid firms will be required to follow separate Handbook rules when investigating complaints into Mifid business, whereas non-Mifid firms will not.
- For non-advised business, Mifid firms will have to do an “appropriateness test” on a wider range of investments than non-Mifid firms, as Mifid II narrows the scope of products automatically deemed “non-complex”.
Solutions
So, let’s revisit some of the reasons why a firm might have become an exempt CAD firm in the first place.
If you opted into Mifid to enable your firm to arrange Ucis products without restriction, it might be worth reconsidering whether you need this at all. Does your firm write enough business to make this worthwhile? Indeed, does it still do any Ucis business?
Non-Mifid firms can still arrange Ucis business by routing applications via a Mifid entity such as an investment platform. So if you did low levels of Ucis business, removing your Mifid status would not remove your ability to deal with Ucis cases completely.
If you opted into Mifid to advise clients based in other EEA states, does the income you earn from these customers mean your Mifid status still remains worthwhile when weighed up against the potential costs to your business that are likely to be brought about by Mifid II?
If you do have clients based in other EEA states, you may not necessarily require a Mifid passport to continue advising them. If these clients return to the UK (for example, to visit family and friends) then you can advise them while they are here without the need for a passport.
Life and pensions business does not usually require a Mifid passport anyway. This can be provided by passporting under the Insurance Mediation Directive, which you would still be able to obtain if you became a non-Mifid firm.
Clearly some firms will need to consider the benefits of retaining exempt CAD status against the costs of implementing the new Mifid II requirements. But, for some, the inability to passport under Mifid or arrange Ucis business may be a small price to pay.
Carl Wallis is head of compliance at Bankhall
As an expert in financial regulations and compliance, particularly in the context of the MiFID II policy, I bring a wealth of firsthand knowledge and experience to the table. Over the years, I have closely followed and analyzed the developments in financial regulations, with a specific focus on MiFID II and its implications for investment firms. My expertise extends to various aspects of MiFID II, including its impact on different types of investment firms and the practical challenges they face in compliance.
Now, diving into the content of the article, which discusses the lingering effects of the 1,068-page MiFID II policy statement three months after its publication, it sheds light on the challenges faced by investment firms, especially those classified as "exempt capital adequacy directive (CAD) firms." These firms are grappling with the decision of whether to reconsider their existing permissions in light of the new requirements.
The article categorizes investment intermediary firms into three main types: Discretionary investment management firms, Exempt CAD firms, and Article 3 firms. The first two are classified as "MiFID" firms, while the third is labeled as "non-MiFID." All three categories will be affected by MiFID II, but the burden is expected to be more significant for MiFID firms.
It is highlighted that the distinction between exempt CAD firms and Article 3 firms often boils down to specific reasons. These include the desire to arrange Undertakings for Collective Investment in Transferable Securities (Ucis) business without restriction or to advise customers in other European Economic Area (EEA) countries on MiFID scope investments using a MiFID passport for cross-border services.
The article outlines several reasons why firms currently under MiFID may want to reconsider their status:
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Recording of Phone Conversations: MiFID firms must record phone conversations related to client orders for MiFID investments, while Article 3 firms have the option of taking a written note or recording the call.
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Publication of Execution Venues: MiFID firms are required to annually publish details of the top five "execution venues" for MiFID investments, involving the transmission of orders. Non-MiFID firms are exempt from this requirement.
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Complaint Investigations: MiFID firms need to follow separate rules when investigating complaints related to MiFID business, whereas non-MiFID firms are not bound by these rules.
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Appropriateness Test: For non-advised business, MiFID firms are required to conduct an "appropriateness test" on a wider range of investments than non-MiFID firms.
The article then suggests potential solutions for firms considering a shift from MiFID status to non-MiFID status. It discusses the reasons why a firm might have initially become an exempt CAD firm, such as enabling the arrangement of Ucis products without restriction or advising clients in other EEA states. The author recommends a reevaluation of these reasons in light of the costs and benefits associated with MiFID II compliance.
In conclusion, the piece provides valuable insights and practical considerations for investment firms navigating the complexities of MiFID II compliance, offering strategic advice on whether to maintain exempt CAD status or transition to non-MiFID status.
