In this, the first of a series of updates about MiFID II, we look into its background, outline key themes, highlight the impact of the regulation on service providers and investors, as well as on our corporate clients, their employees and shareholders.
Background to MiFID II
The Markets in Financial Instruments Directive (MiFID) first came into force in November 2007 and sought to provide a common standard for investment services across the European Union (EU) to ensure that approval of a firm in one country would enable ‘passporting’ of its services to another EU country, without requiring re-approval. It also introduced aligned protections for all investors within the EU.
Since 2007 and the subsequent financial crisis, there have been many changes to the trading environment and advances in technology. In response to this, and to close gaps in transparency to investors and regulators, the European Commission has revised MiFID. The new proposals take the form of a revised Directive and a new Regulation referred to as MiFID II, which will apply to all firms operating within the EU from 3 January 2018.
This legislation has several core objectives, including: increased investor protection; further alignment of investment services regulation across the EU; increased competition across financial markets; and the introduction of enhanced supervisory powers. In seeking to achieve these objectives MiFID II contains a broad range of complex provisions, of which the key themes are summarised below.
MiFID II places strong emphasis on improving investor protections. This includes the introduction of robust controls to avoid conflicts of interest, encouraging greater transparency both pre and post-execution of trades and extending the regime of ensuring the suitability of investments.
Conduct of business
MiFID II introduces additional and enhanced powers of supervision, coordinated with the European Securities and Markets Authority (ESMA). Interventions will be permitted on both a pre-execution basis (in relation to product development) and post-execution basis (in relation to trades) with wider general powers to oversee governance processes and to intervene when deemed necessary.
Organisational requirements of the service provider
MiFID II increases the importance of compliance, audit and risk management functions of service providers, particularly as they relate to market participants and the production and marketing of new financial instruments, reporting and conflicts of interest. MiFID II also seeks to strengthen governance to ensure the integrity of financial markets.
How does it impact on service providers?
MiFID II will impact on all nominee, custody and dealing services. This means that the services currently provided by our regulated business, Equiniti Financial Services Limited, to our corporate clients, their employees and investors will need to be adapted to enhance reporting requirements, implement changes to product governance and controls and to provide additional information to investors. Equiniti’s MiFID II project team are working on system and platform changes, reviewing the existing policy documents and customer agreements we are required to have when providing nominee services and putting in place the structural and cultural changes that are needed. Five key workstreams are:
How will MiFID II affect employees and shareholders?
Employees and shareholders using nominee services such as a Corporate Sponsored Nominee (CSN) or Global Nominee will see changes to their statements (information provided and frequency) and to the terms and conditions of the service provision (significant or material changes to the service may have to be provided to the participant).
They will also see changes when buying and selling shares (including those undertaken at share plan maturities and vestings). Additional transparency requirements mean that Equiniti will need to collect extra information from employees and shareholders for dealing transactions occurring on or after 3 January 2018. In practice, additional data may be required earlier than January 2018 where advance sales instructions are being collected (e.g. in the weeks leading up to Sharesave maturities and executive award vestings in January 2018).
What additional information will be needed?
For individuals, information such as date of birth, nationality (and dual nationality) will be needed, along with specific national identification information (e.g. tax number, passport number, personal identity code).
What happens next?
The scope of MiFID II makes this a key compliance priority for the industry and our own project and development workstream will continue through to implementation. More detailed information regarding the impact of MiFID II will be provided in the form of updates throughout 2017 and we will be discussing the individual impact with those clients who will be directly affected.
For further information on this subject, please speak with your Equiniti relationship manager.