Markets in Financial Instruments Directive (MiFID)

The European Parliament and the European Securities Committee have now formally adopted the "EC Level 2" implementing measures for MiFID. All national authorities will need to have made the necessary changes to law and rules by the transposition date – 31st January 2007.

On the 1st November 2007 Level 1 requirements and Level 2 measures come into force and the ISD (Investment Services Directive) is repealed.

 These are firms which do not suffer a direct impact, but suffer indirect impact because of changes in the Conduct of Business rules.

There are likely to be 5 key areas that need to be addressed early in a firm's programme of accommodating MiFID.

1. Management involvement
As always, the first imperative is to engage with senior management and establish a structure that has representation across the firm, to break down any 'silo' mentality. The CEO and key managers must be involved at outset.

2. Strategic Planning
The second imperative is to produce a strategic plan. Early strategic analysis should identify where the biggest organisational challenges exist so that resource and lines of command can be put in place accordingly. Implementing the procedures and systems needed for MiFID compliance will involve different challenges for different types of firm.

3. Design Authority
The third imperative is the creation of the Design Authority for the project. This should be convened at the earliest opportunity and as always, be driven from the top of the organisation. It should involve a steering group made up of representatives from senior management, front office technical support, legal and compliance, operations, risk management and internal audit. Firms will want to use external advisers as a quality assurance mechanism to make sure that project progress remains on track and focussed on the intended goal.

4. Target Setting
The fourth imperative is that great attention must be paid to achieving the consolidated project plan and inter-dependencies which are right for the project. This does not simply mean meeting the November 2007 implementation deadlines. It means setting targets for each department and operation right from the beginning.

5. External Issues
The fifth imperative is early and ongoing engagement with external stakeholders; most importantly, with the FSA. Firms need to be familiar with the approach which the FSA is taking to compliance of MiFID. This can of course be most efficiently achieved through the use of external consultants.

The requirements of MiFID are likely to cover:

• Outsourcing of "Critical & Important" functions and investment services

• Record keeping (particularly in relation to transactions undertaken for clients)

• Management of conflicting interest to prevent the interest of clients being adversely affected

• Safeguarding of any client money held by the firm

• Internal systems and controls

PARTICULARLY:

• Business continuity

• Staff

• Risk assessment, management and mitigation

• Internal audit

• Administration and accounting procedures

• IT systems and processing

The main changes to COB rules are likely to entail:

Client classification:

Three classes of client: Retail, Professional and Eligible Counterparty. (Retail and Professional will broadly equate to Private and Intermediate, although the Retail category will be more all-encompassing than was Private. There will be the facility to switch between these two categories, depending upon the business being undertaken. Eligible Counterparty broadly equates to Market Counterparty.

Information to customers must:

• Balance benefits and risks

• Be likely to be understood by the average member of a client group

• Not diminish important items e.g. risk warnings. (This is of course "more of the same"). However, more evidence is likely to have to be presented to ensure that these issues are achieved

Suitability

A firm must obtain certain information to ensure that:

• Specific recommendations meet objectives

• Client can financially bear the risk

• Client has necessary knowledge to understand the risk (The "necessary knowledge" is causing some concern and we still do not know precisely what will be required)

MiFID needs to be planned for at the earliest opportunity. The FSA has always been intolerant of firms which do not react to new legislation promptly and competently. With the weight of the EU behind it, it is likely to be even less patient with firms which do not keep up to speed with the changes.

Haven Risk Management can provide a complete programme of bespoke support, from basic guidance to hands-on involvement, to ensure that firms achieve timely MiFID compliance.

Please contact us for further information.