With the impending transition to the Markets in Financial Instruments Directive, there are still many who remain convinced it has nothing to do with them - erroneously. A small degree of research, however, and benefits will begin to emerge from what many consider to be a bouquet of horror
No doubt everyone is growing a little weary of the MiFID/TRiFID gags that have been doing the rounds ever since the Markets in Financial Instruments Directive first loomed on the horizon. But then MiFID really is no laughing matter - especially for those who think it has nothing to do with them.
One thing that is genuinely alarming is the number of people simply not ready to deal with the sweeping regulatory changes that will become reality at the start of November when the new rules are implemented.
It did not help, of course, that MiFID arrived at a time when the industry was already trying to assimilate the Capital Requirements Directive (CRD), the FSA's new More-Principle-Based Regulation and the 3rd European Union Money Laundering Directive, which many have overlooked and whose December 15 implementation date has been widely forgotten. Nonetheless, the progress in some areas could best be described as patchy.
Now, though, no one can afford to ignore the implications - the devil is in the detail, and many firms that think MiFID does not apply to them could find themselves caught out. It is in the coming weeks that they will truly realise why.
If they have not had them already, investors will soon be receiving letters from all kinds of fund houses and financial services providers informing them of some of MiFID's ramifications. These are regulatory letters; on the face of it, they may seem life-sappingly boring, but they show how MiFID will affect everyone.
MiFID is part of the European Commission's Financial Services Action Plan (FSAP). The FSAP is aimed at bringing more uniformity to the regulation of financial services across the EU, with the laudable objective of creating an integrated market for financial services and hence a 'level playing-field' for all EU member states - that is the theory.
MiFID primarily affects the markets for financial instruments such as shares, bonds, warrants and other securities. It replaces the present Investment Services Directive (ISD) and firms need to comply with more extensive requirements. The key changes include a widening of the range of 'core' investment services and activities that firms can passport. A good example is investment advice that is outside the scope of the ISD, but within the scope of MiFID.
It should be noted that 'passporting' of services into Europe and vice-versa is open only to firms that are incorporated in one of the EU member states. Prior to 1 November, firms from non-EU jurisdictions were able to provide investment advice in other EU countries using their FSA authorisation. Since 1 November, this is no longer possible, and such firms will need to incorporate as legal entities within the EU in order to take advantage of the passporting arrangements. The alternative is a nightmare: having to seek separate authorisation in each jurisdiction in which the firm wishes to trade.
While those details are likely to make most investors' eyes glaze over, there is some information they might actually want to hear: how they are likely to emerge from the MiFID maelstrom as the biggest winners of all, enjoying some improvement in services and, more importantly, extra protection.
Arguably, the single greatest benefit to investors is the introduction of the appropriateness definition. As of 1 November, thanks to MiFID, fund houses have to define carefully the kinds of investors for whom their products are, indeed, appropriate. If it can be proved they were mis-sold a product, this rule will afford consumers more recourse to compensation from either an adviser or a product provider in the event of poor performance.
For example, say a product provider has clearly identified the appropriate target market for a product, and an adviser has then either ignored or misunderstood this and sold this product to a client for whom it is clearly unsuitable. Such a mistake could render the adviser liable to disciplinary actions by the FSA, and the client may also seek compensation from the Financial Services Compensation Scheme and/or private legal action for losses and damages.
The other scenario is that the product provider may have been at fault in identifying the target audience and, as a result, the product was sold to an unsuitable audience. This scenario can arise at the launch stage or at some point during the lifetime of the product. The product's key features, such as investment strategy, might change and firms need to update their assessment of whether the existing target audience is still appropriate.
What is more, many service and product providers will now also have to offer plain advice in introductory packs, outlining, among other things, how investors can complain and what redress is available to them. All of this is the kind of news an investor likes to hear - or even, at a push, read.
The appropriateness definition brings another potential benefit: it should make it easier for the FSA to identify and stamp out risky schemes that conceivably should never have been marketed in the first place. Also, resources permitting, it should allow the FSA to act much earlier to spot and monitor products to nip any mis-selling in the bud.
Investors will also be keen to learn that they should (at least in theory) enjoy quicker, cheaper share-dealing under MiFID. That is because stock exchanges and stock-trading venues across Europe will now have to be able to prove 'best execution' on deals - not just in terms of price, but in terms of speed, efficiency of execution and settlement.
There is plenty about MiFID to keep customers happy, then, but the appropriateness requirement brings complications for the advisory community, and shows that this is regulation that affects nearly everyone - even those who thought they were exempt by virtue of MiFID's Article 3. While the exemptions are useful, they can be complicated for some firms. Firms therefore need to be careful to ensure their activities fall clearly within the exemptions and professional legal advice should be sought wherever there is doubt.
Things are unlikely to change overnight on 1 November. Initially, the FSA is likely to be fairly light in its enforcement approach to allow industry time to catch up. However, firms would be unwise to expect the honeymoon to last too long, especially so soon after a marriage made in hell. It will likely be six months or so before the FSA starts getting hot under the collar with those who are failing to comply with the new requirements.
Clearly there can be no excuse for non-compliance. An IFA cannot afford merely to shrug off the introduction of MiFID. Some serious preparation needs to be done if the IFA is not to sit on a time bomb.
Everyone, particularly compliance officers, should do some research. There is a wealth of material out there - including the Compliance Register's own series of simple workbooks - that can help smooth the transition to MiFID. In addition, there is the Compliance Strategy Forum on 21 November in London to help firms understand and prepare for the main regulatory changes. Make no mistake, there is a sizeable amount to take on board; but if approached in the right frame of mind, embracing the challenges it presents and recognising the benefits it brings, the day of the MiFIDs need not be a horror show.