MiFID II - The knowledge zone

Please click on the below link which contains a number of popular questions we are getting in regards to MiFID II. If you have any further questions please email us at mifid@7im.co.uk.

Top MiFID II Questions

MiFID II is a complex directive which imposes significant requirements on regulated firms and on all participants in the securities markets. The two key objectives are transparency and investor protection. Some aspects of the directive such as client reporting will be clearly visible to investors but others less so. The intention is to increase the efficiency and probity of markets and enhance the ability of regulators to supervise and analyse the activity of market participants.

MiFID II will impact a range of areas in your and our business with some consequences for clients. We’ve compiled a list below which is followed by a series of articles. This list is by no means exhaustive, check back here for regular updates.

Transaction reporting - Client Identifiers

To facilitate market supervision all transactions undertaken in securities transacted on a recognised market will have to identify the account holder and the individual / firm making the decision. This requirement will apply to all such securities including Exchange Traded Funds and Investment Trusts but not to authorised Collective Investment Schemes such as those managed by 7IM.

This development is intended to enable the regulator to have a greater ability to identify instances of market abuse which, if successful, will benefit all market participants.

Read the Transaction Reporting chapter below for more detail.

Information to clients - costs & charges

MiFID II is expected to require an increased level of information on costs and charges to be provided to retail customers. Our periodic reporting includes details of the costs and charges associated with a client’s account. We will continue to look for ways to improve our clients understanding of all the costs and charges impacting their investment on an annual basis. At present some clarity is required on the nature and format of reports and we are working closely with relevant trade associations in this regard.

Reporting

Periodic portfolio reporting (including valuations) will move from the current bi-annually (in most cases) to quarterly. There is also a new requirement to communicate to clients if their portfolio’s value falls by 10% over a single reporting period. The specific requirements for this are still to be clarified but we’ll continue to update these pages. Make sure you use the form below to join the mailing list and stay up to date. Wherever possible we will be looking to facilitate electronic reporting.

Suitability & Advice

MiFID II includes additional requirements for obtaining information about each client’s risk tolerance and capacity for loss.

Appropriateness

MiFID II will mean that fewer products are treated as ‘non-complex’. The types of product that are subject to ‘appropriateness tests’ at the point of sale will also change. For example, structured deposits and shares or bonds that embed derivatives or incorporate structures that make them difficult for clients to understand will be deemed complex although it is worth noting that suitability obligations will address these issues for discretionary and advised business.

Telephone recording

This refers to both the recording of telephone conversations and retention of electronic communications relating, or which could relate, to transactions concluded and advice given in relation to client order services. Changes will relate to the reception, transmission, advice and execution of client orders. Landline phone calls at 7IM are currently recorded, we will be extending recording capabilities to 7IM mobile phones over the coming year.

Inducements

No monetary benefits and no more than ‘minor’ non-monetary benefits will be permitted under MiFID II. This means that we will still be able to support events which have clear benefits to clients but the traditional forms of hospitality are unlikely to be acceptable.

Best execution

The definition of ‘best execution’ will be amended slightly under MiFID II. Firms will have to take “all sufficient” steps to provide best execution to their clients, rather than “all reasonable” steps. Firms will be obligated to provide evidence that they have undertaken best execution to both the regulator and its clients on request and we will also be publishing data concerning where we execute transactions periodically via the website. This data will need to be customised depending on the class of financial instrument and type of service provided.

Product governance: distribution

Product providers will need to enhance governance arrangements to ensure that the products and services they sell are compatible with the needs, aims and characteristics of their target market both at launch and on an ongoing basis. Distributors, a very wide term which applies to anyone in the chain between product manufacturer and ultimate investor will have to obtain and provide enough information to ensure that the products and services they provide are not mis-sold. They will also have to identify any group of investors for whom these are not suitable. This will impact products and services that are accessed on platforms, where additional information may need to be obtained and provided.

Terms & Conditions

We will be reviewing our Terms & Conditions and updating them in line with the regulatory changes. Your Relationship Manager will be in touch when we are ready to update clients.

As explained in the summary above, the rules on transaction reporting are designed to facilitate market supervision. All transactions undertaken in securities transacted on a recognised market will have to identify the account holder and the individual / firm making the decision. This requirement will apply to all such securities including Exchange Traded Funds and Investment Trusts but not to authorised Collective Investment Schemes such as those managed by 7IM.

The intention behind this requirement is to enable the regulator to have a greater ability to identify instances of market abuse which, if successful, will benefit all market participants.

What does this mean for you and your clients?

In the case of the Personal accounts that you manage the identification of these will be covered by National Insurance numbers, which you would already hold as a basic client on boarding requirement. However in In the case of Non-Personal accounts this identification has to be in a standard from known as the Legal Entity Identifier (LEI) which is an alphanumeric code. In advance of January 2018, we must obtain an LEI for each Non-Personal from you in order to transact in listed securities. We will be contacting each of our partner firms individually with a list of accounts for which we believe we will need to obtain the LEI. Each non-personal account will only need one LEI which can be used with multiple providers.

There are a number of organisations that can issue LEIs but only one in the UK. A full list of the authorised issuers can be accessed from the Regulatory Oversight Committee.

Unavista, a division of the London Stock Exchange is the UK provider. You can find more details on their website here: http://www.lseg.com/LEI. There is a cost to obtaining and maintaining an LEI. At present Unavista charges £115 (+VAT) to allocate an LEI and £70 (+VAT) to renew the code each year.

Key points to consider:

• Each account will need an LEI
• Each LEI will need to be updated and paid for each year
• You will need to supply an LEI for each of your client accounts and the renewal date
• Unavista are the UK provider of LEIs

We have recently reviewed our Best Execution policies and this can be accessed below.

• Retail Clients Execution Policy
• Institutional Clients Execution Policy