Background information
MiFID – the Markets in Financial Instruments Directive – came into effect on 1 November 2007, replacing the Investment Services Directive (ISD). Amendments to UK legislation and rules to transpose to its provisions were made by the deadline of 31 January and came into effect on 1 November 2007. MiFID extends the coverage of the ISD and introduces new and more extensive requirements that firms will have to adapt to, in particular for their conduct of business and internal organisation.
The aim of the ISD was to set out basic high-level provisions governing the organisational and conduct of business requirements that should apply to firms. It also aimed to harmonise certain conditions governing the operation of regulated markets.
MiFID has the same basic purpose. But it makes significant changes to the regulatory framework to reflect developments in financial services and markets since the ISD was implemented.
Wider scope
It widens the range of ‘core’ investment services and activities that firms can passport. In addition to the services covered by the ISD, MiFID:
- Upgrades advice that involves a personal recommendation to a core investment service that can be passported on a stand-alone basis;
- Introduces operating a multilateral trading facility (MTF) as a new core investment service covered by the passport; and
- Extends the scope of the passport to cover commodity derivatives, credit derivatives and financial contracts for differences for the first time.
Greater degree of harmonisation
- MiFID sets out more detailed requirements governing the organisation and conduct of business of investment firms, and how regulated markets and MTFs operate.
- It also includes new pre- and post-trade transparency requirements for equity markets; the creation of a new regime for ‘systematic internalisers’ of retail order flow in liquid equities; and more extensive transaction reporting requirements.
Facilitate cross-border business
- MiFID improves the ‘passport’ for investment firms by drawing a clearer line between the respective responisibilities of home and host states and generally clarifying some of the jurisdictional uncertainties that arose under the ISD.
Capital Requirements
- Most firms that fall within the scope of MiFID also have to comply with the new Capital Requirements Directive (CRD) which sets requirements for the regulatory capital a firm must hold. Those firms newly covered by MiFID will be subject to directive-based capital requirements for the first time.
MiFID is a major part of the European Union’s Financial Services Action Plan (FSAP), which is designed to help integrate Europe's financial markets. MiFID comprises two levels of European legislation. ‘Level 1’, the Directive itself, was adopted in April 2004. In several places, however, it makes provision for its requirements to be supplemented by ‘technical implementing measures’, so-called ‘Level 2’ legislation.
The Commission's Level 2 measures were developed on the basis of advice provided by the Committee of European Securities Regulators (CESR) and were the subject of negotiation at European level in the European Securities Committee (ESC). They were formally adopted by the Commission and published in the Official Journal of the European Union on 2 September 2006 (see European Timetable).
Impact on firms
In general MiFID covers most, if not all, firms that were subject to the ISD, plus some that were not. This will include:
- investment banks;
- portfolio managers;
- stockbrokers and broker dealers;
- corporate finance firms;
- many futures and options firms; and
- some commodities firms.
In some areas, the position for firms is less clear-cut. For instance, retail banks and building societies will be subject to MiFID for some parts of their business – for example, selling securities, or investment products which contain securities, to customers - but not others.
So, we have considered carefully whether that certain MiFID requirements should apply to some firms and business outside the scope of MiFID. We will consider each individual issue carefully, and consider the costs and benefits involved and consulting appropriately.
Also, we have used implementation of MiFID as a catalyst for reviewing and simplifying our Handbook. We have removed rules that are no longer effective or proportionate, in line with our move towards more principles-based regulation. We have introduced a new Conduct of Business Sourcebook (COBS), which is shorter, simpler and easier for firms to use. These changes w affect all firms subject to Conduct of Business regulation, many of whom will not fall within the scope of MiFID.