Child Trust Funds and MiFID

Our view is that CTF accounts themselves are not MiFID financial instruments. So the provision of services in relation to such interests (such as in relation to initial and further contributions) is not caught by MiFID.

Investment services involved in how the product operates might, in principle, be caught where those services involve products and activities within the scope of MiFID. For example where the operator transfers all or part of the value of an existing CTF holding into a fresh MiFID financial instrument (such as a security or collective investment scheme unit) this may be within MiFID scope. However, we believe the professional activity exemption in MiFID (see MIFID Article 2(1)(c)) is available to CTF operators and effectively means that even these activities lie outside MiFID scope. In practice, therefore, retail activities in respect of CTFs lie outside MiFID scope.

The key question in applying this exemption is whether investment services are incidental to the other activities involved in operating a CTF when viewed on a global basis. We believe this is likely to be the case as most CTFs do not involve active trading, such as day trading, by the client and therefore involve little or no investment service within the scope of MiFID.

We considered whether a focus on deal-based charges as the main source of remuneration (instead of charges related to the administration of the CTF itself) might indicate that trading is not incidental. We would expect firms designing an account in this way to follow the principle of treating their customers fairly. For example, firms may want to explain to potential clients the possible impact of frequent switching if this incurs costs and erodes capital. We question whether a firm should design a CTF account where active trading is expected to be more than an incidental activity if this is likely to have a detrimental effect on capital value.

It is necessary to balance investment services against all the activities that are not investment services that have taken place or will take place in the firm's CTF accounts over their full term. We do not expect firms to investigate each CTF on a trade-by-trade basis. The exemption will apply even if particular accounts experience higher levels of dealing activity.

MiFID firms providing MiFID services to the CTF operator in relation to financial instruments within the CTF may be within the scope of MiFID.

CTFs have very particular product features. We do not think this line of reasoning will necessarily apply more widely to other product types. For example, an interest in an ISA that is invested in a share, bond or collective investment scheme is a financial instrument for the purposes of MiFID.