Sep 14, 2015
Comments Off on MiFiD II

MiFiD II has been a real talking point with our retail investment advisory clients over the last quarter following the FCA’s Discussion Paper 15/3 “Developing our approach to implementing MiFID II conduct of business and organisational requirements”.

We thought it would be useful to give you a flavour of the key themes and topics as you start working through these requirements and assess the impact on your business.

sound-level-255397_640-2Call Recording

MiFiD II places on obligation on firms to record conversations with clients where there is an ‘intention to conclude a transaction’.

This removes the current exemption for discretionary investment managers who will now need to records calls in a way that complies with the storage and retrieval requirements.

There is also a secondary impact on Article 3 exempt firms too who may have to record all telephone calls and face-to-face meetings with clients. This requirement would impact client experience, create privacy issues and will be complex to implement.

There are, however, a number of benefits from the requirement. The first is reduced risks from FOS because we have a contemporaneous record of what was precisely discussed and agreed with the client.

The second is reduced suitability letters because the recording can form part of the client-file to demonstrate suitability.

The third relates to increased effectiveness of quality assurance activities.


Independence Standards

MiFiD II introduces a European standard on investment advice.

Firms will now be expected to consider a sufficient range of providers’ products prior to recommendation. In addition to independent retail investment advisers, this will impact firms who also advise upon shares, bonds, derivatives and structured deposits.

This could mean firms are potentially subject to two standards on independence.

These types of instruments raise questions about how a firm can consider a sufficient range of providers’ products because, for direct securities, we are dealing with issuers rather than providers. Secondly, when selecting a particular instrument, should a ‘sufficient range’ be based upon research of a particular sector, asset class or geography?

Product Governance

MiFiD II will place due-diligence requirements on firms. They will need to demonstrate an understanding of the product and the intended target market before distribution.

This creates potential problems for firms because they typically structure portfolios for clients rather than ‘sell’ products. It is entirely conceivable that a product with ‘higher’ risk characteristics designed for niche investors is legitimately incorporated into a portfolio that is suitable for mass-market investors.

Investment committees will play an important role with respect to satisfying these requirements.

Suitability Requirements

MiFiD II requires firms to take into account the client’s risk tolerance and ability to bear losses. Firms will also be required to issue suitability letters before the transaction is completed or the client is committed to the transaction. Portfolio managers will also be required to include an updated statement of suitability in its periodic reports.

The requirements do not change existing suitability obligations although changes to documentation and processes may be required.

Structured Deposits

MiFiD II now brings structured deposits within scope and will become subject to suitability requirements. Although demonstrating suitability for structured deposits is unlikely to be a challenge, they may become Retail Investment Products and changes to research processes for independent firms would be needed.

Next steps

You must bear in mind that these are not formal proposals as yet. We can expect a Policy Statement in June 2016 with implementation by January 2017.

These are challenging time-lines. Firms should not wait for a policy statement because it creates the risk of sub-optimal implementation. Instead, firms should be thinking about the impacts now and working out how they would implement for a ‘worse-case’ set of requirements.


OptimaRS can support your business with the understanding, defining, planning and implementing MiFiD II requirements. Contact us for initial discussions now.

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