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From 1 November 2007, some significant changes to the FSA's Handbook requirements come into force. These arise from the implementation of the EU Markets in Financial Instruments Directive (MiFID) in conjunction with the introduction of a new, more principles-based, Conduct of Business Sourcebook (COBS) for investment business.

These changes will be reflected in our future supervision of regulated firms and, as necessary, in our strategic supervisory and thematic work. Given the volume of change, and consistent with our risk-based approach, in assessing firms' compliance with the new requirements we need to set clear priorities. Publicising these priorities also amplifies our Business Plan commitment that in Q1 2008 'we will begin a risk-based review of whether firms affected by MiFID have implemented the requirements appropriately'. We believe that it is important for firms to know what our priority areas of attention will be while they are progressing their implementation projects and beyond.

• In identifying our priorities, we have considered:
• the scale of the change and extent of the expected consequences (whether one-off or continuing);
• the potential detriment in terms of consumer outcomes arising from any non-compliance with the change;
• the potential risks for firms arising from the change (including any arising from changes to systems and processes; risks to business continuity in the broadest sense, risks to accepted market practices or behaviours); and
• potential risks for us (including to our ability to supervise the change and to our statutory objectives).

Within a set of common objectives, there will inevitably be different sector emphases and approaches to addressing our supervisory priorities. The risk profiles of individual firms will also vary.

The resulting list is at Annex 1.

Our approach

As far as possible, our approach will be to integrate our oversight of changes with 'business as usual' supervisory activity (in relation to individual firms and groups, sectors, and thematic work such as that under the Treating Customers Fairly heading). Few of the priority areas for supervisory attention involve new areas of regulatory intervention, but rather changes in existing requirements. As noted, specific risk priorities and weightings will vary between supervisory sectors and types of firm. To indicate this at a high level, we have grouped some priorities by referring to predominant impact on (a) retail and (b) wholesale sectors. However, such distinctions can only be indicative.

There are also more general 'overarching' issues that supervisors will consider, relating to firms' governance and internal management procedures to cope with the move to a more principles-based approach (and also taking account of the particular MiFID-driven changes in SYSC relating to firms' compliance, risk management and internal audit functions). Internal governance changes are not listed amongst the priority issues, because the scale of the particular SYSC changes is not major for most firms, and matters of internal governance will remain a key focus of our ongoing 'business as usual' supervisory activity. In addition, we will be looking at how the new equity transparency regime beds down at a market-wide level, and at how firms are meeting their transaction reporting obligations. The implementation of MiFID involves some significant changes in transaction reporting requirements and brings a number of firms, notably passported EEA branches, within the scope of our regime for the first time. We set out for firms our approach to dealing with practical implementation issues in the Transaction Reporting User Pack published in July and in the August edition of our newsletter MarketWatch, and will continue to work with the industry as the changes are implemented.

In respect of our supervision of inwardly passporting firms (including UK branches of firms based in other EEA states), we recognise that we will need to have regard to any delays in a home state's implementation of MiFID requirements. Our supervisory approach in such circumstances will be risk based, taking into account the position of particular firms and the markets in which they operate.

Timing

Integrating the priority issues into our supervisory work will involve a number of stages. Our particular focus of attention, and what we might expect to see from firms, will develop over the short, medium and longer term. As an indication, this development may involve:

Pre-implementation

Readiness for change (pre-November 2007): our supervisors are already in contact with firms about firm's preparations to implement the MiFID and COBS changes. For relationship-managed firms this involves continuing dialogue/meetings on firms' planning and progress. For other firms, we are spreading the messages through roadshows, newsletters, e-learning and other communications. Our Supervisors are already implementing particular strategies to reflect the needs of firms they oversee.

Post-implementation

• Q1 2008: consistent with our Business Plan commitment, we envisage that beginning in Q1 this will involve:
• confirmation with relationship-managed firms on delivery of implementation plans and discussion of any issues arising;
• 'business as usual' follow-up on any issues of concern arising;
• sampling across a range of firms to obtain examples of documentation firms are giving customers (particularly retail clients) where firms are given greater flexibility under COBS on form and content;

• this is likely to focus on 'new' documentation such as that used to disclose IDD and Menu information; the form of risk warnings being used for riskier products; suitability reports; and possibly best execution policies.

• Q2 2008 and onwards: this will involve:
• continuation and development of the Q1 approach, though starting to shift to more formal review of implementation of the relevant priority changes;
• embedding oversight of the relevant changes into continuing supervisory processes (including ARROW) as necessary;
• our aim to begin pulling together trends in the responses of firms and sectors to the COBS/SYSC changes; and
• input from supervisors feeding into the COBS Post Implementation Review work announced in PS07/6 and other issue-specific reviews that will be taking place in 2008-2009. The nature of this review work will develop over time to consider broader sector/ market impacts, changes in market behaviours and changes in client/consumer behaviours.

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