3 January 2018 draws ever closer, and 3 July 2017 (the date by which all transposition measures for MiFID 2 must be finalised) is closer still. The UK regulators have moved up a gear and, following FCA's publication of its applications and notifications guide, Treasury has now made a final piece of the legislative jigsaw, while FCA has published "near final" rules on certain elements of its MiFID 2 project. There is still more to come, but firms are now increasingly under pressure to be sure they will be ready for January, as the regulators seek to give them no cause for delay or reason for excuse.
Changes to UK laws
Treasury had already consulted on its proposals for legislative change, and announced its policy decisions. On 28 March, the Financial Services and Markets Act 2000 (Regulated Activities) Amendment) Order 2017 (the RAO Amendment Order) was made. It makes several amendments to FSMA and secondary legislation, primarily the RAO, as part of the UK's implementation of MiFID 2. Its provisions take effect partly on 1 April – primarily to allow FCA to start to accept applications, and determine them.
- create the enabling powers to allow applications for authorisations or variations of permission that relate to MiFID 2 changes to be made and determined (from April 1, as mentioned above). The appropriate regulator has to determine all complete applications received before 3 July by 3 January 2018
- update various defined terms and references in the current RAO to reflect MiFID 2, including definitions of Organised Trading Facility (OTF) and structured deposit
- introduce the new regulated activity of operating an OTF
- apply the regulated activities of dealing as agent, arranging, managing and advising to structured deposits, and providing that an authorised person with appropriate permissions who notifies the regulator before 3 January 2018 of their intention to carry on permitted activities relating to structured deposits will automatically be considered to have the permission after 3 January (FCA has now further encouraged firms to do this). Further changes add structured deposit-related activities to those which appointed representatives can carry out
- amend the overseas persons exclusion to reflect activities carried out under a MiFID 2 equivalence regime. This means the overseas persons exclusion will not apply to third-country firms, established in jurisdictions subject to an equivalence decision and carrying on activities in relation to which it applies (as these persons can lawfully carry on the activities without the need for an exclusion)
- insert a new investment type of emission allowances and amend the definitions of the derivatives categories of investment
- apply FCA's integrity objective to the purposes for which it may make product intervention rules
- include in annexes key extracts from EU measures setting the scope of certain expressions.
There are also various consequential amendments to related primary and secondary legislation.
There are further changes to come, not least the separate set of rules setting the framework for Data Reporting Services Providers.
FCA's near final rules
On 31 March FCA published a Policy Statement with feedback on its first two consultation papers (except for those parts that relate to client assets and perimeter guidance), and some feedback on its third and fourth consultations. The paper also annexed some "near final" form rules, which FCA advises firms they should rely on, as any changes will be minor, mainly to refer to EU and other measures which have not yet been finalised.
FCA highlights the areas of its relevant consultations that received the most feedback – and the issues it is still considering as a result.
- Multilateral systems: FCA is of the view that activities that will be regulated as a trading venue under MiFID 2 are broader than under MiFID 2. It intends to publish perimeter guidance on this, but is awaiting ESMA's guidance before it decides how to address its own interpretation.
- Post-trade transparency deferrals: FCA has decided to allow trading venues to use the maximum permitted deferrals.
- Transaction reporting and collective portfolio managers and pension funds: FCA has confirmed that transaction reporting requirements will apply only to firms that MiFID 2 applies the relevant requirements to. As a result, collective portfolio managers and pension funds will not be required to transaction report under MiFID .
- Transaction reporting and third parties: FCA confirms that firms may use third parties to help them with transaction reporting, but must submit their reports to FCA directly.
- Handbook guides: FCA will proceed with its plans to issue Handbook guides on MiFID 2's markets provisions and systems and controls requirements. Ultimately, these guides will include a link to the MiFID 2 transposition table.
- Taping: FCA has decided to require Article 3 retail financial advisers either to tape all relevant conversations or keep a contemporaneous note of them. It is still considering other feedback it received on its taping proposals.
- Asset management market study: FCA has confirmed its remedies for the problems this market study identified will be consistent with MiFID 2.
The policy statement specifically addresses feedback on:
Markets: FCA's proposal was that, in principle, it would signpost the many directly applicable provisions, rather than copying them out. Only a few respondents asked for copy out. Some respondents disagreed with the way in which FCA was reflecting MiFID 2 provisions on the management body of a market operator, and said that FCA's requirement that only MiFID investment firms or CRD credit institutions could provide direct electronic access put MTFs at a competitive advantage. Many also said FCA had gone further than it needed to in requiring RIEs to have written agreements in place with all investment firms pursuing a market making strategy on trading venues the RIE operated. FCA noted it has now addressed some of the issues, where its draft rules had been based on Treasury draft Regulations which have now been amended in a way that deals with the concerns. It also noted that some of the apparent differences between its rules in REC and other rules are because of the different way in which FSMA treats RIEs as opposed to how it treats MTFs which are investment firms
- MTFs: FCA has proposed new sections in Chapter 5 of its Market Conduct Sourcebook on the functioning of an MTF, suspension and removal of financial instruments and systems and controls for algorithmic trading. Changes to other parts of MAR 5 would address matters such as changes to the trading processes and trade transparency. Most respondents were supportive, but some asked for specific clarifications. In response, FCA will proceed with its plans, and has confirmed its view that investment firms can (if they have the right permissions) execute orders against their proprietary capital or engage in matched principal trading outside the MTF they operate.
- OTFs: FCA had proposed a new section of MAR, in chapter 5A, to address this new structure requiring new permissions. Respondents were happy with this, but had some specific questions, including on what is meant by "discretion" in the context of an OTF, as this is one distinguishing feature of the venue. On this particular issue, FCA said it was awaiting publication of relevant ESMA guidance
- Systematic internalisers: Respondents agreed with FCA's decision largely to delete existing provisions in MAR because the SI regime is governed by directly applicable EU law. Some queried FCA's interpretation of elements of the level 2 Regulation, but FCA said this was not part of its consultation
- Transparency: In consultation, FCA had asked whether respondents agreed it should be able to use its powers to grant waivers from pre-trade transparency in certain situations. Respondents did agree. They also supported FCA's decision to provide further detail on the process of applying for waivers and the introduction of a template for minimum content information. On post-trade transparency and deferrals, FCA will also authorise these where MiFID 2 permits.
- Market data: FCA is adding a new Chapter 9 to MAR to address authorisation and supervision of Data Reporting Services Providers (DRSPs), and will provide a table of authorised UK DRSPs on its website. This will be a whole new regime. However, it is relevant to managers of collective investment undertakings and pension funds, insofar as FCA proposed not to apply the transaction reporting obligation to these firms – and it is proceeding with these plans.
- Algorithmic and HFT requirements: FCA will build in relevant protections for trading venues in MAR 5 and 5A, and will introduce a new chapter MAR 7A to set out the additional requirements that an algorithmic trading firm, a firm providing DEA to a trading venue or a firm acting as a general clearing member must comply with, in addition to the SYSC requirements. Respondents raised several technical queries, which FCA says it will try to address
- Passporting and EEA firms: FCA notes the ITS that will be directly applicable to investment firms when passporting, which will be prescriptive on the notifications they must provide – in particular that separate notifications for each Member State are required. FCA will see if it can minimise the inevitable duplications that this will cause. It is also working on transitional arrangements to help firms bring their passports into line with relevant changes in scope that MiFID 2 introduces, and there will be a transitional provision in SUP to deal with this. FCA will also implement its proposal to require non-EEA firms with UK authorised branches to comply, in the main, with MiFID 2 rules, so they are not at an advantage over UK and EEA firms
- Application of Principles: FCA has extended the application of Principles 1,2,3,6,7 and 8 to firms when they conduct ECP business – noting that the concept of "fairness" in some will apply in the context of their specific business. More controversially, FCA is updating Annex 1 of PRIN to delete the possibility of local authorities being treated as ECPs for PRIN purposes in respect of non-designated investment business. FCA will respond to the general comments it received on treatment of local authorities in its June feedback statement
- Commodity derivatives: FCA has created a new MAR 10 to address the new regime of position limits, position management and position reporting for commodity derivatives. All respondents thought this was a good idea in principle, but several details still remain to be finalised, because of the EU measures that were not final at the time FCA consulted.
- Supervision: FCA needs to amend SUP to require notification of breaches of obligations under MiFIR and non-FSMA UK implementing legislation. FCA will also implement appropriate transitional arrangements
- Prudential sourcebooks: FCA needs to make changes to reflect the introduction of the new investment service of operating an OTF and the abolition of the exemption for locals. It notes, following comments, that it is clear that firms that operate both an MTF and an OTF will be IFPRU 730K firms, and that operating an OTF clearly falls outside BIPRU permissions (as a result of the wording in the CRR)
- Systems and controls: FCA will need to make several changes to implement the "at least analogous" requirement for article 3 firms. Generally, respondents were supportive and comment that well run firms should be compliant already. FCA will be applying the common platform requirements and certain requirements in the MiFID 2 Organisation Regulations to Article 3 and non-EEA firms as either rules or guidance, as appropriate. It will also be amending SYSC 10 to align its provisions on conflicts with MiFID 2, and to extend it to firms other than investment firms, and will be extending the scope of SYSC 4.3A relating to management bodies, so it now also covers MiFID and article 3 firms. FCA has been aware of the need for proportionality in making changes to SYSC and related changes to other parts of the Handbook
- Remuneration: A new chapter SYSC 19F will address remuneration and performance management of sales staff. FCA is aware of the complexity and confusion that the various remuneration regimes present, but thinks that separate codes targeted at specific firm types ensures clarity and proportionality in its rules
- Whistleblowing: A new chapter SYSC 18.6 will address this, and will signpost other similar EU whistleblowing obligations.
- Fees: FCA is now in the process of confirming its fees for new fee blocks, and for applications for authorisations and VOPs.
Near final rules
FCA published three instruments with the feedback:
- the Fees (MiFID 2 application fees) instrument 2017 was made and came into force on 2 April
- the Fees (Data Reporting Applications) Instrument is in draft, and will confirm the fees for DRSPs once the necessary legislation is in force
- the Markets and Organisational Requirements (MiFID 2) instrument 2017, the largest instrument, will amend most parts of the Handbook, but primarily the Principles, SYSC, FEES, MAR, SUP and REC as well as the Glossary
On the same day, FCA published its (hopefully) final consultation on MiFID 2 implementation. It needs comments by 23 June on its proposals relating to OPS firms and 12 May otherwise. The consultation focuses on:
Chapter 18 of the Conduct of Business Sourcebook (COBS) contains a tailored conduct regime for (among others) occupational pension scheme (OPS) firms. OPS firms are exempt from MiFID and will be exempt from MiFID 2. FCA has considered whether it makes sense to update the MiFID-based conduct rules to which they are subject by virtue of the FCA provisions, so they reflect MiFID 2. It has concluded that it will make sense to apply the MiFID 2 standards on inducements (including research), best execution and taping to OPS firms. It also proposes to continue to apply the COBS rules on client order handling and personal account dealing, as well as the tailored periodic disclosure requirements. Apart from this, it will switch off the application of COBS rules to OPS firms as it does not think they are relevant. To implement the changes, it will delete the current COBS 18.8 and replace it with new sections explaining which rules apply to OPS firms and how.
Changes to DEPP and EG
FCA will need to make changes to its Decision Procedure and Penalties Manual (DEPP) and Enforcement Guide (EG) to reflect, primarily, the extension of its enforcement powers to persons who are subject to UK MiFID 2 implementing legislation. For example, FCA has a new power to require investment firms, credit institutions and RIEs to remove people from their management boards, and powers over DSRPs.
FCA will also need to amend DEPP and EG in respect of the regime relating to position limits and other requirements applicable to certain authorised and unauthorised firms, with related enforcement powers.
Consequential changes and commodity derivative reporting
The final set of changes will make various consequential changes to rules, and also give guidance to firms on using third parties where they are required to send FCA financial instrument reference data or commodity derivative position reports. Changes will include those addressing emission allowance bidding, reporting to clients, and consequential changes to the Client Assets Sourcebook.
Firms now have significant certainty, particularly on the changes to SYSC and related organisational requirements, which should be quite enough for them to be getting on with. FCA promises feedback and final rules on all outstanding consultations by the end of June. As of now, firms should be actively considering whether they will need to make any notifications in respect of the scope of their business before 3 January in order to be able to continue it after the implementation date, while they are assessing what changes they will need to make to their systems, controls and policies.