Chris Pitt, Head of Market Analysis UK, details the upcoming implementation of the EU’s second Markets in Financial Instruments Directive (MiFID II).

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MiFID II update
August 2017

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IRESS is a supplier of software products and solutions for the financial services market. Whilst
we seek to understand relevant changes to the regulations that will affect our clients
businesses we do not purport to offer definitive advice or guidance as regards the meaning or
interpretation of any new regulations. The interpretation of many MiFID II rules is still being
clarified and there are many areas where a common understanding does not yet exist across
the market. As such, any views and / or statements made within this presentation should not
be relied upon and your own particular position should be checked with your Compliance
Officer and / or Compliance Service provider.
Important notice

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• What is MIFID II?
• Why is it being introduced?
• When will it come into effect?
• Who does it apply to?
• What are the core provisions?
• What IRESS is doing?
• What actions could you take now?
Agenda

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What is MiFiD II
MiFID is the framework of EU legislation for:
• Investment intermediaries that provide services to clients
around shares, units in collective investment schemes and
derivatives (collectively known as ‘financial instruments’)
and
• The organised trading of financial instruments
MiFID I was applied in the UK in 2007, but is now being revised
to improve the functioning of financial markets in light of the
financial crisis and to strengthen investor protection.
If your business involves the distribution and trading of financial
instruments, it is highly likely to be impacted

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Why is it being introduced?
The legislation has several core objectives, including:-
• Increased investor protection
• Alignment of regulation across the EU in certain areas
• Increased competition across the financial markets
• Introduction of reinforced supervisory powers
This session will focus on potential implications for financial
advisers involved with selling and advising on ‘financial instruments’

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• If you were a MIFID I firm then MIFID II applies
• If you are an ‘article 3’ MIFID exempt firm then beware as some the
regulations will apply and the FCA also has to apply “analogous standards” in
a number of other areas
Who does it apply to?

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When will it come into effect?
3rd January 2018
The FCA has acknowledged that parts of the
regulations are still being resolved but expects
firms to take ‘reasonable steps to comply by the
January deadline’.

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Independence
• Definition of independence
reviewed and slightly narrowed
• “Comprehensive review” to be
replaced by “Sufficiently diverse”
• And, for example, you could
become an “Independent Pensions
Adviser”
• Individual advisers can’t offer both
independent and non-independent
advice on MIFID products
What are the core provisions?
Permissions
• Advising on / and arranging
structured deposits will need
regulatory permission
• Notify the FCA to extend ‘Part
4A’ permissions
Disclosure of costs & charges
• Must provide an aggregated view of
all fees & charges relating to the
investment solution, i.e. including
advice fees, any DFM fees and
investment solution charges
• Must provide both:
o Ex-ante - pre-sale (probably based
on a reasonable set of
assumptions)
o Ex-post - post-sale based on
actual costs & charges (annually)

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Suitability
(advised clients)
• To be assessed when
recommending to buy, sell or hold
MIFID products
• Issue suitability letter BEFORE a
transaction is concluded (a
concession exists for sale carried
at a distance, e.g. telesales)
What are the core provisions?
Appropriateness
(non-advised clients buying
‘complex’ products)
• Checks to be made around
client understanding and
experience of the investment
product sought
• Evaluation to be made
whether the investment
product is “appropriate”
• Must then decide whether to
complete the sale or not
10% drop in clients’
portfolio value
• Requires clients to be informed by
their portfolio manager if the value of
their portfolio has dropped by 10% or
more within the reporting period
• Portfolio values to be monitored on a
daily basis (not more frequently)
• Basis of calculation still to be clarified
/ defined

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Periodic reporting to clients
• Portfolio managers send a report to
clients at least quarterly (rather than
every six months)
• Online systems need to evidence that
clients have access to periodic
statements
Call recording
• MIFID firms will have to tape all telephone conversations (including
those made on mobile devices) that relate to client transactions or
which are intended to lead to a client transaction
• MIFID exempt firms (article 3) have the option to manually record
notes of such calls.
• And the requirement is broader than just telephone calls with the
client:-
• Records must be kept of ALL communications relating to the
placement of trades, e.g. emails, text messages, Skype calls and
face-to-face conversations.
• Internal telephone calls and conversations must also be recorded
/ noted
What are the core provisions?

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What are the core provisions?
Product Governance
• Product manufacturers will have greater responsibility for
ensuring that their products are distributed to the intended
target market
• To support this adviser firms must provide information on
sales to manufacturers for each type of financial instrument
it distributes to clients, e.g.
o Types of clients buying the product
o Sales outside of the target market
o Summary of complaints received
o Responses to client questionnaires
o Details of firm-level processes and procedures for
reviewing products that will be distributed to clients
Knowledge & Competence
• T&C for those providing information to clients as
part of a transaction or MIFID related service.
Conflicts of interest
• Free research from Asset Managers will be
banned
• Additional onus on avoiding conflicts of interest
and disclosing those that can’t be managed

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What IRESS is doing?
MiFID II Provision XPLAN AO
Independence n/a n/a
Permissions n/a n/a
Disclosure of costs & charges  
Suitability (advised clients)  
Appropriateness (non-advised clients)  
10% drop in client portfolio value  
Periodic reporting to clients  
Call recording & manual record keeping manual record manual record
Conflicts of interest n/a n/a
Product governance  
Knowledge & competence n/a n/a
The release(s) within which support for each provision will be delivered has still to be
finalised, i.e. timings are affected by the uncertainty surround some of the regulations

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IRESS Product roadmaps:
• XPLAN - 2.23 (July) and 2.24 (Sept)
• Adviser Office – 12.1 (end October)
As other requirements are clarified, further releases / interim updates may be issued
What IRESS is doing?

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Ensure which provisions your
firm will need to comply with:
• Read the FCA documentation
(CP14/43, CP16/19, CP16/29,
PS17/5, PS17/14)
• Speak to your Compliance Officer /
Network Service supplier
• Read the Compliance bulletins and
trade press
• Talk to your colleagues / advisers
in other firms
What action could you take now?
Review your
client propositions:
• Should you continue
distributing and advising upon
MD products?
• Can you take advantage of the
change in definition of
independence?
Review your
policies relating to:
• Call recording
• Potential inducements and conflicts of
interest, e.g. around research materials
• Appropriateness, i.e. prospects that fail
the appropriateness test
Apply to the FCA for
structured deposits
permissions

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What action could you take now?
Review your operating processes around:
• Identifying cases where your clients portfolios have dropped in
value by > 10%
• When suitability letters are produced
• Producing suitability letters where clients are being advised to hold
or sell their investment solutions
• How aggregated investment solution costs & charges can be
established and then disclosed to both prospects and clients
• Evaluating new products before you start recommending them to
your clients
• Training staff that only provide information to clients
Understand how technology can help:
• Speak to your IRESS Account Manager
• Make a note to watch our next webinar

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Thank you
M: 07920 135708
Chris.Pitt@iress.com
Chris Pitt