FCA Publishes Third MiFID II Consultation Paper

The FCA published its third consultation paper on 29 September 2016, on the implementation of the Markets in Financial Instruments Directive (MiFID II).

The consultation paper is in two parts. Part 1 deals with conduct of business issues and Part II covers a range of issues not covered in the two earlier consultations, including product governance and additional perimeter guidance.

Its key proposals include:

• New inducements rules, including the ban on research as an inducement where received by portfolio managers and independent advisers. The FCA will replace the current rules on the use of dealing commission in COBS 11.6 with a new section in COBS 2. Significantly, the proposed rules would apply to firms carrying out collective portfolio management, including UCITS management companies and AIFMs, which are currently outside the scope of MiFID II but which are currently subject to the COBS rules on dealing commission. The new rules on research payment accounts (brought in under the MiFID II implementing directives as an alternative to commission sharing arrangements which are banned under MiFID II) will continue the FCA’s ban on corporate access payments found in the current dealing commission rules.
• Implementing requirements of full disclosure of costs and charges, including information about the firm and the products it sells, and the provision of periodic reports to clients.
• New rules for product governance for firms carrying on MiFID business and guidance for non-MiFID firms manufacturing or distributing MiFID financial instruments.
• Extending the requirement of telephone taping to a wider range of firms than is required by MiFID II. The requirement to record calls is proposed to be extended to discretionary investment managers, corporate finance business, UCITS management companies and AIFMs and financial advice firms that are exempt from MiFID. The aim is to provide benefits to both firms and their clients in resolving disputes in a quick and cost effective manner. The FCA is open to receiving and exploring suggestions on alternative proposals for smaller financial advisers.
• New perimeter guidance is proposed on the scope of MiFID II. Guidance is to be provided on the application of the new rules to foreign exchange derivatives and commodity derivatives, among others. Guidance will also be provided on exemptions from MiFID II for professional firms and firms trading in commodity derivatives.

The consultation is open until 4 January 2017, except for comments on Chapter 16 - Supervision manual, authorisation and approved persons - which should reach the FCA by 31 October 2016.

A fourth MiFID II consultation paper is expected towards the end of this year.

Read the third consultation paper in full.

HM Treasury Consults on Amendments to the Definition of Investment Advice

HM Treasury published a consultation paper on 20 September 2016 on amending the definition of investment advice in the Financial Services and Markets Act 2000 (Regulated Activities) Order (SI 2001/544) (RAO).

One of the recommendations made in the final report of last year’s Financial Advice Market Review (FAMR), published in March this year, was that the government should consult on amending the definition of regulated investment advice in the RAO, to bring it in line with the definition set out in the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).

The amendment would mean that only advice that makes a personal recommendation is regulated. Amending the definition is intended to remove uncertainty and to help firms better understand the regulatory requirements.

The consultation will end on 15 November 2016.

The FCA also intends to produce new guidance to support firms offering services that help consumers to make their own investment decisions without a personal recommendation. This will include a series of case studies highlighting the main considerations firms need to take into account when developing such services and dealing with specific areas of uncertainty identified during the FAMR. The guidance will set out the FCA's view on what providers of guidance services need to do to treat customers fairly. It is intended to complement the change to the definition of advice.

Read the consultation paper in full.

FCA Publishes Occasional Paper on Dark Pool Reference Prices

The FCA published occasional paper 21 on 15 September 2016, on asymmetries in dark pool reference prices.

A dark pool is a trading venue with no pre-trade transparency, where all orders are hidden. In "lit" venues, market participants can observe the orders submitted by other participants.

The paper sets out the results of a study analysing two important aspects of reference prices in dark pools. The first aspect is the prevalence of trades at stale reference prices, their costs and their impact on different market participants. The second aspect is the choice of reference price. In particular, the extent to which participants are implementing best execution practices when a dark pool references a worse price than the lit market, and whether this is influenced by conflicts of interest within dark pools and participation sophistication.

Overall, the study found asymmetric outcomes across participants when the reference price is "stale", and when it is inferior to other available prices. This may result from participants' differing abilities to observe and manage latency, and differing abilities to engage in effective smart order routing in a fragmented market. These costs are more substantially borne by types of participant that are less capable of managing them. However, it is likely that these outcomes are the result of individual participant decisions on the basis of their own analysis of costs and benefits of investment in reduction in latency. Also, while the effects are highly statistically significant across participant types, the economic impacts are small.

As a consequence, the study concludes that dark pools may still offer a valuable service to market participants. In most cases they provide price improvement, and in all cases they allow investors not to show their hand to the market. However, evidence was found that suggests dark pools sometimes experience significant delays in accessing data from other venues, and it is only the most sophisticated participants that systematically benefit from these delays.

The paper has been prepared by FCA economists and academics.

Read the paper in full.