neil woodford

14 Jun 2018

Everything you need to know about MiFID ii

On 3 January this year, wide-ranging reforms to the European financial services industry came into effect. The second Markets in Financial Instruments Directive (MiFID ii) rules are complex but there are some key issues that affect financial advisers.

Keep reading for an introduction to MiFID ii and everything you need to know.

What is MiFID ii?

MiFID ii is an extended version of the original Markets in Financial Instruments Directive. It aims to provide greater protection for investors, reduce the risk of market abuse and make markets more efficient. The new legislation will also inject more transparency into all asset classes including equities, fixed income, exchange traded funds and foreign exchange.

The new rules cover almost all aspects of trading within the European Union (EU). It is a significant piece of legislation, having taken seven years to write and boasting more than 1.4 million paragraphs of rules.

How these changes will affect financial advisers

There are many changes under the MiFID ii rules that will affect financial advisers.

For example, if you have a client with assets managed under a discretionary mandate, they must be notified within 24 hours every time their portfolio falls by 10 per cent or more (and by 20 per cent, 30 per cent and so on) against the value in the most recent periodic valuation statement.

In addition, under the new rules, firms are obliged to explain to clients the “appropriate details of all costs and charges, within good time”. Enhanced disclosure of costs and charges under MiFID ii means that all costs must be disclosed, including manufacturers’ costs, platform fees, DFM fees and adviser charges.

The essential things you need to know about MiFID ii

The key parts of the new MiFID ii legislation that you need to be taking into account are:

  • Make sure that you have a procedure for informing your clients if their portfolio value falls by 10 per cent or more. Discretionary fund managers may already have processes in place so you should liaise with DFMs or platforms to establish how the notification process will work.
  • Ensure that client identification, including Legal Entity Identifiers (LEIs), are in place.
  • Make sure that client agreement and disclosure documents are compliant with the new cost and charges disclosure rules. This might mean that you need to change your pre-sales costs and charges disclosure process.
  • Do you understand the target market information for the products you’re likely to recommend to your clients? You should also factor this information into your record-keeping and recommendations. You may need to establish whether fund managers can provide user-friendly target market information.
  • Are your ‘acceptable hospitality’ rules compliant? For example, the regulator says that hospitality is acceptable if it is “of a reasonable de minimis value, such as food and drink during a business meeting or a conference, seminar or other training events … [such as] … participation in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service.”

What you should be doing to comply with MiFID ii

As well as considering the above, there are three main tasks that you should be undertaking in order to remain compliant with the new MiFID ii regulations.

  1. Make sure your digital record keeping is robust

To comply with Articles 6 and 69 of the new regulations, you are required to keep records of all electronic communications (including those via social media, email and text messages from any device) ensuring that you keep adequate records of disclosures of potential conflicts of interest.

These records should be recorded in a linear manner to avoid having to piece together communications from different devices if audited.

  1. Make sure your employee procedures and training are updated

Articles 16 and 45 of the MiFID ii regulations require that firms provide their staff with adequate training. Your staff should be able to understand the new rules and maintain an audit trail of the controls and processes that comply with the regulation.

  1. Establish a solid content approval process

Your firm’s digital marketing is required to be fair, clear and not misleading. Experts recommend that your firm has technology in place that makes sure advisers are sharing online content that has been first checked by your compliance and supervision departments before it is shared with clients.

Article 25 of MiFID ii also insists that forms and advisers ensure the “suitability” of their client’s needs in order to make the appropriate product or service recommendations. You can do this by having proper compliance technology and efficient workflows in place.

If you would like to find out more or you have any questions, feel free to get in touch with us.

By Lyba Nasir