The Financial Conduct Authority launched its third consultation on the implementation of the revised Markets in Financial Instruments Directive in the UK. The consultation paper is split into two parts. The first part is on conduct of business requirements and covers topics such as inducements, research, client categorization, disclosure requirements, independence, dealing and managing, suitability, appropriateness and investment research. The second part covers a range of issues such as product governance, supervision and authorization, knowledge and competence requirements and perimeter guidance. 

The FCA's conduct of business proposals follow on from its Discussion Paper published last year which covered two general issues: whether the MiFID II conduct rules should apply to insurance-based investments and pensions and whether the MiFID II rules applicable to the activities of advising on or selling structured products should be incorporated into the FCA's Conduct of Business sourcebook. On the first issue, the FCA has decided to wait until EU implementing measures under the Insurance Distribution Directive are finalized before it sets out its proposals. The FCA is intending to consult on implementing the IDD in 2017. On the second issue, the FCA has decided to proceed with incorporating such MiFID II rules into the Conduct of Business sourcebook. The FCA is proposing to apply individual conduct rules to those activities, which is in line with the provisions in MiFID II. 

The FCA explains its approach to applying analogous requirements to firms that are exempt from MiFID II under the optional exemptions available at a Member States' discretion. These are firms which provide investment advice and/or receive and transmit client orders for a limited range of financial instruments, which do not hold client assets or money and do not do business outside of the UK. MiFID II requires Member States that have chosen not to apply MiFID II to these firms to implement requirements that are similar to those in MiFID II on authorization and supervision, conduct of business requirements and organizational requirements. The FCA is intending to apply the same conduct rules to these firms as to MiFID investment firms to the extent they are required. The FCA also confirms that the same conduct rules that will apply to MiFID investment firms will also apply to branches of non-EEA firms.

One of the key points emerging from the consultation is the FCA's approach to funding of Research Payment Accounts. MiFID II allows research not to be treated as an inducement if it is received in return for either a direct payment by the investment firm from its own resources or a payment from a separate RPA controlled by the investment firm that meets a number of conditions relating to the operation of that account. The FCA's view is that a PRA can be funded by collecting research charges alongside transaction costs provided that the charge accrues to an RPA. This may have consequences for a firm's Commission Sharing Agreement accounts structure as firms will need to ensure that, for example, research charges deducted through a broker alongside transaction costs are fed to an RPA immediately after the transaction and that any RPA arrangements allow an investment firm to deduct research charges and manage the funds so that it matches the related budget. 

The FCA intends to continue with its practice of copying out EU legislation into its Handbook and is proposing to copy out various provisions of the secondary legislation on the conduct provisions into its Handbook. 

Responses to the FCA's proposals are due by January 4, 2017, except for the proposals relating to supervision, authorization and approved persons, for which the responses are due by October 31, 2016. The FCA is proposing a revised Form A and feedback on that form will need to be given earlier so that the FCA has time to put the forms in place for when applications for authorization under MiFID II can be made, which is expected to be in early 2017. The FCA is intending to publish its final rules and a Policy Statement in the first half of 2017. A further consultation on the remaining changes needed to implement MiFID II is expected later in 2016. 

View the consultation paper.