MiFID II - The knowledge zone
Information on how this impacts you and your clients
The rules set out by the Financial Conduct Authority to enact the Markets in Financial Instrument Directive II (MiFID II) took effect on 3 January 2018.
MiFID II presented the UK financial services industry, particularly the wealth management sector, with one of the most significant regulatory challenges it faced in recent years. Its implementation imposed new mandatory requirements on us, you and your clients. This section summarises those requirements and explains what information we need from you.
The link below contains a number of popular questions we have received regarding MiFID II. If you have any further questions, please email us at information@7im.co.uk.
Top MiFID II Questions
MiFID II is a complex directive that imposed significant requirements on regulated firms and on all participants in the securities markets. The two key objectives are transparency and investor protection. Some aspects of the directive, such as client reporting, are visible to investors, but others less so. Its aim was to increase the efficiency and integrity of markets and enhance the ability of regulators to supervise and analyse the activity of market participants.
MiFID II impacts various areas in your and our business, with some consequences for clients. We’ve compiled a list below which is followed by a series of articles. This list is by no means exhaustive.
Transaction reporting - Client Identifiers
To facilitate market supervision, all transactions undertaken in securities transacted on a recognised market had to identify the account holder and the individual/firm making the decision. This requirement applies to all such securities, including Exchange Traded Funds and Investment Trusts, but not to authorised Collective Investment Schemes such as those managed by 7IM.
This development enabled the regulator to have a greater ability to identify instances of market abuse, which, if successful, will benefit all market participants.
Read the Transaction Reporting chapter below for more details.
Information to clients - costs & charges
MiFID II required an increased level of information on retail customer costs and charges. Our periodic reporting includes details of the costs and charges associated with a client’s account. We will continue to look for ways to improve our clients’ understanding of all the costs and charges impacting their investment.
Reporting
Periodic portfolio reporting (including valuations) moved from bi-annually (in most cases) to quarterly. There was also a new requirement to communicate to clients if their portfolio’s value fell by 10% over a single reporting period. Wherever possible, we will be looking to facilitate electronic reporting.
Suitability & Advice
MiFID II included additional requirements for obtaining information about each client’s risk tolerance and capacity for loss.
Appropriateness
MiFID II meant that fewer products are treated as ‘non-complex’. The types of products that are subject to ‘appropriateness tests’ at the point of sale also changed. For example, structured deposits and shares or bonds that embedded derivatives or incorporate structures that made them difficult for clients to understand will be deemed complex. However, suitability obligations will address these issues for discretionary and advised business.
Telephone recording
This refers to both the recording of telephone conversations and retention of electronic communications relating, or which could relate, to transactions concluded and advice given in relation to client order services. Changes related to the reception, transmission, advice and execution of client orders. All calls at 7IM are recorded under the regulation.
Inducements
No monetary benefits and no more than ‘minor’ non-monetary benefits are permitted under MiFID II. This means that we are still able to support events that clearly benefit clients, but traditional forms of hospitality are unlikely to be acceptable.
Best execution
The definition of ‘best execution’ was amended slightly under MiFID II. Firms have to take ‘all sufficient’ steps to provide best execution to their clients rather than ‘all reasonable’ steps. Firms have to provide evidence that they have undertaken best execution to both the regulator and its clients on request, and we periodically publish data concerning where we execute transactions via the website.
Product governance: distribution
Product providers needed to enhance governance arrangements to ensure that the products and services they sell were compatible with the needs, aims and characteristics of their target market both at launch and on an ongoing basis. Distributors, an extensive term which applies to anyone in the chain between product manufacturer and ultimate investor, have to obtain and provide enough information to ensure that the products and services they provide are not mis-sold. They also have to identify any group of investors for whom these are unsuitable. This impacted products and services that are accessed on platforms where additional information needed to be obtained and provided.
Terms & Conditions
We reviewed and updated our Terms & Conditions in line with the regulatory changes.
As explained in the summary above, the rules on transaction reporting were designed to facilitate market supervision. All transactions undertaken in securities transacted on a recognised market had to identify the account holder and the individual/firm making the decision. This requirement applied to all such securities, including Exchange Traded Funds and Investment Trusts, but not to authorised Collective Investment Schemes such as those managed by 7IM.
The intention behind this requirement was to enable the regulator to have a greater ability to identify instances of market abuse, which, if successful, would benefit all market participants.
What does this mean for you and your clients?
For personal accounts you manage, they are identified by National Insurance numbers, which you would already hold as a basic client onboarding requirement data. However, for non-personal accounts, this identification must be the Legal Entity Identifier (LEI), which is an alphanumeric code. Each non-personal account will only need one LEI, which can be used with multiple providers.
There are several organisations that issue LEIs, but there is only one in the UK. A full list of the authorised issuers can be accessed from the Regulatory Oversight Committee.
Unavista, a division of the London Stock Exchange, is the UK’s LEI provider. You can find more details on their website here: http://www.lseg.com/LEI. There is a cost to obtaining and maintaining an LEI. At present, Unavista charges £115 (+VAT) to allocate an LEI and £70 (+VAT) to renew the code each year.
Key points to consider:
- Each account needs an LEI
- Each LEI needs to be updated and paid for each year
- You need to supply an LEI for each of your client accounts and the renewal date
- Unavista is the UK provider of LEIs.
We have recently reviewed our Best Execution policies, and these can be accessed below.
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