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MiFID Connect Guidelines

One of the important deliverables from the MIFID Connect project is MIFID Connect Guidelines.

At the outset of the project it was unclear how much clarity, information and guidance on implementing MIFID would be provided by the European Commission, CESR and individual regulators such as the FSA. The Guidelines were conceived as a means of thinking about the most difficult or most uncertain aspects of MIFID with a view to assisting firms who would have to implement MIFID.

In discussion with financial services firms carrying on business in the UK MIFID Connect identified five areas to work on:

  1. Outsourcing
  2. Suitability and appropriateness
  3. Investment research
  4. Best execution
  5. Conflicts of interest

As matters have developed it has been concluded that the final outputs of MIFID Connect should be three guidelines confirmed by the FSA – on outsourcing, suitability and appropriateness and investment research, one information memorandum for which we have not sought FSA confirmation – on conflicts of interest, and that, in view of helpful material provided by the European Commission, CESR and the FSA following extensive discussions with MIFID Connect we will not produce a best execution guideline.

The Guidelines and further information about them are set out below.

General

The guidelines are intended to be high level and applicable generally across both buy side and sell side business. As they are general in application they may not give answers to all of your questions or to issues specific to a particular sector. Where this is the case you may be able to obtain an answer from your trade association and, in some cases, a trade association may produce additional sector specific information.

The guidelines that have been recognised by the FSA have been prepared in conformity to the FSA’s new requirements for industry guidance and are the first examples of this sort of FSA recognised guidance. They are MIFID compliant as at the date of publication.

There is no regulatory obligation to follow a MIFID Connect guideline – but the fact that a firm has followed a MIFID Connect guideline will be taken into account by the FSA in the context of supervision or enforcement.

It is planned to review the guidelines from time to time to keep them up to date.

Outsourcing Guideline

The outsourcing guideline is FSA recognised and sets out practical suggestions for implementing the outsourcing requirements of MIFID.

Outsourcing Guideline

Suitability and Appropriateness Guideline

The suitability and appropriateness guideline is FSA recognised. Suitability is an existing well recognised concept under existing UK law and the FSA Handbook. The guideline explains the extent to which MIFID affects the existing concept and includes practical suggestions for implementation. Appropriateness is a new concept coming from MIFID and the guideline assists firms to understand when the concept must be applied to dealings with customers and how it can be implemented.

Suitability and Appropriateness Guideline

Investment Research Guideline

The investment research guideline is FSA recognised

The investment research guideline is, essentially, an update of the previous BBA/ICMA/LIBA guideline on investment research so that it is MIFID compliant. It does not cover all aspects of investment research as there are investment research requirements in the Market Abuse Directive and in the FSA Handbook which go beyond the requirements of MIFID. It should, nonetheless, be of assistance to firms. Firms should be aware that, as a result of MIFID, there are some important changes when compared to the previous BBA/ICMA/LIBA guideline.

The BBA/ICMA/LIBA guideline will no longer valid industry guidance from the date of implementation of MIFID (1 November 2007) - Investment Research guideline .

Best Execution

Best execution was one of the most difficult and most important subjects which MIFID Connect considered. MIFID Connect developed a draft guideline (published in January 2007) which was a very influential basis for discussions with the FSA, the European Commission and CESR. The associations which are members of MIFID Connect also responded to the various FSA consultations relating to best execution and presented the industry’s case to them, to the European Commission and to CESR.

One of the most difficult issues was the question of the scope of the application of the best execution requirements – under what circumstances was a firm required to give best execution?

The industry did not agree with the FSA’s initial views on the scope of the obligation but further dialogue with the European Commission led to the EU Commission writing to CESR setting out their interpretation of the scope of the obligation. In essence the Commission said that it is only when acting “on behalf of” a client that a best execution obligation is owed. This means that more often than not in markets which are mainly principal to principal such as dealer markets and OTC derivatives markets best execution will not need to be given (although firms need to think carefully about the situations when it might need to be given).

The Commission’s important letter setting out its interpretation of the scope of the obligation

The actual content of the obligation is also very important. While the MIFID obligation has many similarities to the existing UK approach to best execution there are, nonetheless, important changes also.

CESR has developed guidance to all the European regulators in the form of questions and answers set out in a CESR Feedback Statement. The CESR approach is very much in line with UK approaches and is generally very helpful.

The CESR best execution questions and answers.

Following the publication of these documents we have engaged in further dialogue with the FSA including raising queries which were not covered by either document. In August FSA published PS07/15 which provides additional information and answers to questions.

Finally the European Commission has a website on which it posts some questions and answers. These are general in nature and can cover any aspects of MIFID but a small number of them relate to best execution.

In view of the extensive and helpful nature of these publications MIFID Connect has concluded, in discussion with firms who are members of the associations, that it would not now be appropriate to develop MIFID Connect guideline that was general in nature. There will be issues about how best execution applies to particular markets and some of the trade associations may choose to issue additional sector specific information in this respect.

Conflicts of Interest

MIFID Connect has also carried out substantial work in relation to conflicts of interest. An information memorandum in relation to conflicts of interest is in development and we hope that this will be completed during September.

Information memorandum is available here.

 
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