David Lawton, director of markets policy and international at the Financial Conduct Authority, warned that senior management and firms should already be preparing for the challenging January 2017 deadline for Markets in Financial Instruments Directive II, sweeping new regulations covering financial markets in Europe.

Lawton made a speech at the MiFID II Wholesale Firms Conference, hosted by the UK regulator, on 19 October to discuss the 1,500-page draft technical standards issued by the European Securities and Markets Authority last month. Delegated acts, the implementing measures, are expected to be published in November or December.

He emphasised that MiFID II is a major priority for the FCA as the regulator believes the legislation will improve market integrity, enhance competition and provide necessary protection for consumers and market users.

“To say that MiFID II will change the way European markets operate in future is without doubt hugely underplaying the likely impact of this legislation. From new transparency regimes for equity and, for the first time, non-equity trading, regulation of new entities like OTFs and authorisation of firms utilising high-frequency trading, strengthened conduct of business requirements and disclosures, to caps on dark trading of equities and positions limits for commodity derivatives,” Lawton added.

If the draft technical standards are approved by the European Commission, Parliament and Council, MiFID II will come into force on 3 January 2017, the date written into the legislation. If changes are not made, the technical standards could be finalised in the first quarter of next year.

“This is universally recognised as challenging.  For everyone. Regulators included,” added Lawton. “Let’s be clear, even now that Esma has delivered the draft technical standards, it will be for the Commission and co-legislators to make decisions about the European timetable, not for national competent authorities.”

By 3 July next year, all 28 EU member states should have turned the MiFID II directives into national law or rules, for example, through legislation from the UK Parliament or FCA rules for the Handbook. Lawton said both the FCA and HM Treasury are heavily dependent on seeing the near-final EU rules so  the FCA expects to publish a first consultation paper this December.

“But we have to remain realistic, giving sufficient time and consideration to our own proposals, before consulting. On that basis, we have decided to split our consultation efforts, with one CP in December and at least one more in early 2016,” Lawton added.

Lawton warned firms that they should at least already be in the early stages of planning for how the new rules, as far as they are known, could change their businesses. For example, liquid bonds will require pre-trade transparency. Esma opted for an Instrument-by-Instrument approach (or IBIA) with an element of a Class of Financial Instrument approach (or COFIA) for new issues above a certain issue size threshold for five and a half months. IBIA will then apply to bonds that have met certain liquidity thresholds in the previous calendar quarter.

“Around 4% of bonds traded today will be captured by the full scope of the new requirements, or around 2,000 different bonds – a large number of which are sovereign bonds,” Lawton said.

David Geale, director of policy at the FCA, spoke at the conference about MiFID II’s impact on the retail sector.

For example, investment firms will have to act in the best interest of their clients and the detailed requirements will cover product design, best execution and strengthened protection of investors’ assets.

Geale said the Retail Distribution Review in the UK has already placed curbs on inducements and requirements on firms that give independent advice so UK firms should already be prepared for many of the MiFID II reforms. However a review by the FCA this year found weaknesses in the way some firms approach product design and governance for structured products. The regulator is also currently carrying out a review of due diligence to ensure firms recommend products that are suitable for their clients.

“As firms prepare for MiFID implementation over the next year, we will continue to examine the application of our existing conduct requirements, reinforcing key messages through our policy and supervisory work,” Geale added. “But we will also challenge firms about whether they have in train the changes needed to ensure their future compliance.”

He continued that MiFID II will, for the first time, bring in a European regime covering how asset managers purchase and consume third-party research. The FCA has created controversy by suggesting that commission sharing arrangements cannot continue to be used under MiFID II.

“At this point, we are still waiting to see the final implementing legislation that will determine the exact shape and operational details of the new regime,” Geale said.

MiFID II will also require firms to disclose all costs and charges associated with a client’s investment.

“By embracing these changes wholeheartedly, the industry has an opportunity to tackle accusations that have been made in the media that some costs are being hidden from investors,” added Geale. “We will be looking for the new cost information to be simple and clear – to show all costs in a way that people can understand, so that they can make effective decisions about their investments.”

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