After a long, grueling marathon, the finishing line for Mifid II is in touching distance. On Monday the UK’s Financial Conduct Authority (FCA) published its 1,068-page Mifid II Implementation Policy Statement, offering clarity on many issues.
Michael Hufton, managing director at ingage, says: ‘We’ve reached the point when the rubber meets the road for Mifid II. The final rules are out, adopted and will be in force in just six months’ time. Companies are likely to accelerate their implementation work as we go through the second half of the year in order to meet the January 3 deadline.
‘For me there are two key takeaways from the policy statement: first, the robust stance on inducements, aligning the FCA four-square with the European Securities and Markets Authority (Esma) and its April Q&A document. Second, the close integration with other FCA work streams, notably the senior managers and certification regime. This tells us a lot about the regulator’s likely enforcement strategy.’
The new rules will be implemented from January 3, 2018, and the FCA says it expects ‘firms to take reasonable steps to meet this deadline’. It then goes beyond the minimum required, in both scope and substance, with confirmation that it will apply Mifid II to non-UK firms that have branches in the UK.
Non-compliance with the inducements rule will be considered a serious failing. ‘A firm that fails to comply with the inducements rule is to be regarded as not having fulfilled its obligations in relation to conflicts of interest and the requirement that the firm must act honestly, professionally and in accordance with the best interests of the client,’ the FCA notes in its statement.
This is particularly significant for corporate access as Esma’s document is explicit both in its requirement that intermediated access must be separately priced at true commercial levels and in its statement of best practice, which removes the primary inducement or conflict-of-interest risk:going direct or paying a third-party provider that does not provide other Mifid services.
‘There remains the option for an investment firm wishing to meet with a corporate issuer individually to approach it directly and/or pay for a third-party corporate access service provider to facilitate meetings that do not provide other Mifid investment services,’ says the Esma Q&A document.
‘This removes the primary potential conflict of interest or inducement risk that could arise if meetings are provided by another Mifid firm with which [the investment firm] has other commercial relationships.’
There is confirmation that firms will be required to block receipt of free research, via methods such as automatic filtering or using compliance to monitor. This will require material change to existing market practice.
A few small clarifications and changes include a research unbundling carve-out for private equity firms and commercial property funds, a free trial of up to three months of a new research provider in any 12 months, and connected research as part of a capital-raising being considered a minor non-monetary benefit.
‘The IR Society welcomes the FCA’s implementation of Mifid II,’ says John Gollifer, general manager of the IR Society. ‘Legislation around the use of dealing commission rules and research are critical for supporting market principles such as competition, value for money, consumer choice and transparency of pricing, and Mifid II is clearly only going to help strengthen these principles.
‘Mifid II will also lead to fundamental changes taking place in terms of how the investment industry operates, including how asset managers, an important end-audience for our members, are interacting with other IR stakeholders, such as sell-side analysts.
‘As the Mifid II regulations come into force in January 2018, direct communication between listed companies and their stakeholders will become more important than ever. As such, IR professionals, along with executive managers, will play an ever-increasing role in the efficient functioning of the capital markets, and we would encourage them to remain open, accessible and communicative to all stakeholders.’
