‘Handbooking’ MiFID: FCA outlines its approach
HM government and the FCA (alongside the PRA and other relevant bodies) are continuing work reforming the UK Markets in Financial Instruments Directive (following on from the Wholesale Markets review started by the Conservative government, aiming to reform the UK’s financial services regulatory framework for capital markets).
Current reforms focus on three key areas:
One; further legislative changes to the MiFID framework as part of the government’s commitment to reinvigorate UK capital markets (i.e., with a focus on growth across the UK).
Secondly, revocation of firm-facing requirements in the Markets in Financial Instruments Regulation (MiFIR) for the transaction reporting regime, with the new regime delegated to the FCA. Ostensibly, this will allow some change identified during the Wholesale Market Review, potentially saving firms time and money.
Third, HM Treasury will revoke regulations within the Markets in Financial Instruments Directive (MiFID) Organisational Regulation so that they can be replaced in the FCA’s handbook. As EU regulation, such rules applied but were not necessarily implemented or even located in the FCA Handbook. The FCA has been tasked with implementing the regulation within the Handbook, with a view to ultimately reviewing the regulations in due course (i.e., depending on the direction of change dictated by UK government and the FCA’s own views, which is currently ‘reducing the regulatory burden’ whilst protecting consumers).
It is the third reform which is the focus of this section, as the FCA has published CP24/24: The MiFID Organisational Regulation which sets out the regulator’s view on ‘Handbooking’ this MiFID regulation has now been published.
Essentially the CP describes how the FCA intend to retain the substance of existing requirements however they will not just be copied and pasted into the Handbook where there is a possibility to amend into the ‘Handbook’ style. Also, content which exists elsewhere already (e.g. in the Handbook/legislation) will not be ‘re-added’ to the Handbook.
Whilst potential amendments/changes are flagged/referenced most of this is put off for the future. The purpose of this consultation is essentially simply setting out how the regulation will end up in the Handbook (where/what) with a description of the minimal changes, where needed. There are helpful tables which describe this and if there are changes.
Chapter 4 is much more interesting, which describes future thinking on potential changes i.e. amalgamating various similar EU legislation and even remove some rules to provide a more outcome focussed approach, or just remove if not needed. This includes the potential for consolidation of rules for different business models/categories of firms. While this sounds encouraging, the caveat is that such changes may lead to less rules, but a more general high standard applied to all firms. So, removing any proportionality/tiering for firms which ostensibly have ‘lower risk’ or where certain rules would be overly burdensome.
The proposals and commentary on use of the corporate finance/venture capital contacts regime, and elective professional status are perhaps an example of this, and of the FCA taking the opportunity to amend rules where they see risk crystalising for consumers currently.
We urge firms to consider these sections carefully, given how these could be particularly relevant for managers/corporate finance firms. Whilst the FCA has not chosen to consult on these issues separately, and they may be missed, they could lead to a sweeping re-imaging of the opt up process/client categorisation from financial promotions to onboarding of clients/investors, which may be burdensome for smaller firms, in particular.
Other areas of consideration which are particularly notable include potential changes to rules concerning conflicts of interest as well as changes to the Conduct of Business sourcebook (which governs areas such as personal account dealing, best execution and record-keeping). FCA’s suggestion of changes for rationalising rules on conflicts of interest/best execution and personal account dealing overtly refer to consolidating/rationalising rules and do ask if the nuances of specific regimes should be maintained.
FCA also address Article 3 MiFID Optional Exemption Firms (Article 3 firms). This is reasonable, however the proposal is largely one saying ‘let’s just apply all MiFID rules, as most rules apply anyway’, rather than suggesting Article 3 firms should be subject to less rules. This is a rational approach, but disappointing, given many of the would-be affected firms consider their business models to be very simple, with an argument to remove MiFID requirements rather than add to them.
Firms should consider responding to this paper in order to voice their thoughts on these proposals, to ensure the FCA does not simply proceed in the absence of constructive criticism.