IMPLEMENTATION - THE OVERALL APPROACH
Final implementation must take place by 1st November 2007. Member States are required to adopt legislation, rules and guidance to give effect to the Directive's provisions, as described above, by 31st January 2007.
The FSA and Treasury say that their objective is to implement MiFID in as pragmatic and cost effective way as possible whilst meeting the requirements. However, there is a very short time before the fundamental changes must be made to meet the EU implementation deadlines. Implementation in the UK will also aim to meet the principles of the Better Regulation initiative.
The Better Regulation objectives as applied to the implementation of MiFID are:-
- The FSA will use 'intelligent copy-out' - that is, as far as practicable using the Directive language in the FSA Handbook. This is to avoid placing any unintended additional obligations on firms.
- Where the FSA is proposing to add or retail rules that "gold plate" the MiFID requirements (i.e. go beyond the strict requirements of the Directive) it will consult fully in the usual way.
- The FSA will include MiFID issues as part of the planned overhaul of existing requirements, particularly in the area of retail Conduct of Business (COB). It will look to remove rules that are no longer effective or proportionate, and move away from detailed rules towards higher-level rules wherever possible.
- Where it is appropriate and proportionate the FSA will amend the regime that applies to firms and activities outside the scope of the Directive. One area is the impact on substitutable products and services, some of which fall within the Directive's scope and others outside. The appropriateness of sustaining regulatory requirements in such cases will need review, taking account of costs and benefits;
- The FSA will have a dialogue with interested parties as part of the consultation and formulation process
The EU has included a provision (Article 4) to limit the ability of Member States to add additional obligations at the national level. However, neither the Treasury nor FSA have ruled out retaining or imposing rules which go beyond the requirements of the Directive are required, although the case for their retention or imposition will be considered - presumably these will be included in the consultation documents in due course.
IMPLEMENTATION - THE CONSULTATIONS AND DISCUSSION DOCUMENTS
The EU has not yet finalised the "level 2" implementing measures. The Commission expects to adopt Level 2 in mid-September with publication in the Official Journal in the fourth quarter of 2006. However, in order to allow adequate time for firms to prepare for the introduction of the new Directive, the FSA must issue detailed consultation proposals in the absence of these measures. This means that firms should be aware that the proposals in the consultation papers on systems and controls and implementing MiFID by markets and firms may differ from the eventual requirements. Both these consultations will be issued before the adoption of the level 2 requirements. The implication is that the eventual rules could differ from those contained in the consultation documents in these areas. This will affect the two consultations at 3.a.(i) and 3.a.(ii) below.
The provisions implementing the Directive - that is, the entire package of Level 1 and Level 2 measures - are due to take effect, and apply to firms, from 1 November 2007. However, the Treasury and thus the FSA have committed themselves to having the necessary legislation and rules "made" no later than 31st January 2007 - which is the "transposition date" in the Treaty. A heavy programme of discussion, consultation, feedback and policy statements is therefore imminent. The Treasury will need to place the relevant final version of the legislation before the Westminster parliament on measures affecting UK legislation by the end of 2006 if this deadline is to be met.
3.a MAJOR CONSULTATIONS
There will be four major consultation documents as follows:-
3.a.(i) SYSTEMS AND CONTROLS - GENERAL
This is planned for May 2006 and will set out proposed FSA rules and guidance to implement the organisational requirements in both MiFID and in the related but separate Capital Requirements Directive (CRD). It will propose a unified set of requirements applying to firms subject to either or both Directives, the "common platform".
It will include transitional provisions to deal with the different implementation dates for CRD and MiFID. It will propose that between 1st January and 1st November 2007 firms subject to the CRD should have a choice whether to comply with the full common platform (which will include requirements derived from MiFID) or a regime based simply on what is necessary to implement the CRD.
Until 1st November 2007 the common platform will not be mandatory for firms that are subject solely to MiFID. Such firms will, however, have the option of adopting the common platform from 1st January 2007 if they wish.
The CP will not consult on the implementation of the following MiFID Level 2 provisions:
- conflicts of interest provisions specific to investment research; and
- the conditions for outsourcing retail portfolio management services to non EEA service providers.
3.a.(ii) IMPLEMENTING MIFID FOR FIRMS AND MARKETS
This consultation will is planned for July and will cover MiFID provisions on market transparency, transaction reporting, authorisation and permissions, passporting and enforcement and cooperation. It will also include other requirements that apply to certain types of investment firms, for example the capital and Professional Indemnity Insurance (PII) provisions in Article 67 of the Level 1 text. It may also cover implementation of the client assets provisions.
There will be relatively little change of FSA rules on authorisation and passporting, as the MiFID requirements in these areas are generally drafted at a high level.
3.a.(iii) REFORMING COB REGULATION
This is due for publication in October 2006 (after the EU implementing measures have been adopted) and will cover:-
- implementation of the MiFID Conduct of Business requirements;
- the implications for business that falls outside MiFID scope in retail markets;
- the results of the work on COB simplification;
- organisational requirements not included in the SYSC CP (mentioned above);
- consequential changes for other Handbook modules (for example, in relation to the eligible counterparty regime and complaints handling); and
- implementation of the Unfair Commercial Practices Directive.
The COB proposals will be laid out consistently with the new structure for the COB Sourcebook, which was described in CP05/10 published in July 2005.
3.a.(iv) Marketing Communications
This CP is due in October 2006 (again after the EU implementing measures have been adopted). It will cover the implementation of relevant MiFID requirements, but will also include proposals resulting from the FSA's financial promotions review.
3.b OTHER PLANNED RELATED CONSULTATIONS AND DISCUSSION DOCUMENTS
The FSA has trailed its plans to review and amend various other areas of the Handbook, but has deferred these until it can be done in conjunction with MiFID. Further publications will therefore include:-
- Discussion on Best Execution - to consider how the MiFID requirements are to be interpreted depending on what investment service the firm is providing and what types of clients and orders (May 2006).
- an "informal" paper on client categorisation - which the FSA plans as the basis for discussions with industry and other stakeholders (June 2006).
- consultation on disclosure - including the possible replacement of the Key Features Illustration with a Quick Guide (October 2006).
- consultation on general Handbook Development issues, which will include the impact of MiFID on the Approved Persons regime (greater than the FSA first thought) as well as other Handbook issues. This might have been a minor paper, except that the aim is to make large areas more principles-based. This is due in Q4 - so will be before Christmas 2006.
The timetable may be subject to change, depending on what results from the EU process. However, there is a firm commitment by the UK Government to have the necessary legislation and therefore FSA Rules in place in time to meet the transposition deadline of 31st January 2007. The timetable can be summarised as shown
