On 20 October 2011 the European Commission tabled proposals to revise the Markets in Financial Instruments Directive (MiFID). These consist of a Directive and a Regulation.
In general terms, the proposals aim to:
- Establish more robust and efficient market structures
- Take account of technological innovations
- Increase transparency
- Reinforce supervisory powers and introduce a stricter framework for commodity derivatives markets and
- Provide stronger investor protection
Impact on UCITS: Two-Tier Definition
From a UCITS perspective, the key issue of concern is the proposed classification of “structured UCITS” as complex instruments in the context of execution-only selling. The proposal has been criticised by a number of commentators on the basis that it will result in a “UCITS split”.
Under the execution-only regime – which applies only to non-complex financial instruments – there is no requirement on investment firms to apply the “appropriateness test” (i.e. to assess whether the investor client has sufficient knowledge to understand the financial instrument being sold). To date, all UCITS have been classified as non-complex instruments and have not, therefore, fallen within the scope of this requirement.
The MiFID II proposal to classify “structured UCITS” as complex instruments would require investment firms to apply the appropriateness test where selling “structured UCITS” to retail investors but not where other UCITS are concerned.
Prohibition on Third Party Payments
Also worth noting is that in order to prevent potential conflict of interest, independent advisors and portfolio managers will be prohibited from making or receiving third-party payments or other monetary gains. Again, there has been criticism of this proposal with suggestions that it creates a loophole by failing to cover non-independent advisors. In this regard, much will depend on the definition of “independent advisor”.
Next steps
The proposals will pass to the European Parliament and the Council for negotiation and adoption. The Directive, Regulation and technical implementing rules will apply from the same date, however, the timeframe around implementation of the proposals is not yet clear.
Contributed by Patricia Taylor.
