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ECP and PC exemptions 

01 December 2011

Impact Red traffic light High/medium impact, extra compliance obligations

Other areas to consider

Best Interests of Clients; Suitability; Appropriateness

Current MiFID rules

MiFID expressly dis-applies a number of conduct of business obligations where a firm carries out eligible counterparty business with an eligible counterparty, including the obligation to provide best execution and in respect of certain of the order handling rules.

Eligible counterparty business is limited to where firms execute orders on behalf of clients, deal on own account and/or receive and transmit orders, and any MiFID ancillary service directly related to these services or activities, with or for an eligible counterparty.

However, some rules do not apply to eligible counterparty business even though they are not expressly disapplied, as they only apply to professional clients or retail clients or alternatively only to business that is not eligible counterparty business (e.g. investment advice). With respect to the latter, to the extent that a firm carries out this type of business, it will do so with its clients on the basis that they are professional clients or retail clients, and the relevant conduct of business rules will apply as normal.

MiFID does not expressly disapply any rules in relation to any business carried on with or for a professional client. However some rules do not apply to professional clients because, even though they are not expressly disapplied in MiFID, they only apply to retail clients.

MiFID Level 1 Directive Art: 24(1)

FSA rules

COBS 2.1.1

Proposed changes
Draft Directive
Recitals (56) and (67)
Article 30(1), Part II of Annex II

To address concerns arising out of alleged mis-selling practices that non-retail clients are not always able to understand the risks they are subject to, the draft Directive:

  • Clarifies that MiFID’s principles to act honestly, fairly and professionally and the obligation to be fair, clear and not misleading also apply in the relationship with eligible counterparties.
  • Restricts the presumption that professional clients have a necessary level of experience and knowledge to less complex financial instruments (broadly categories listed in the draft Directive that do not embed a derivative or a structure that may be difficult for a client to understand), as to grant to professional clients a more rigorous assessment of suitability or appropriateness.
  • Prevents municipalities and local public authorities from being treated as eligible counterparties and they may only be treated as professional clients following the “opt up procedure”. Member states may, however, adopt their own criteria for the assessment of the knowledge and experience of municipalities and local public authorities, which can be alternative or in addition to the usual criteria specified in Annex II.I.
  • Extends information and reporting requirements concerning more complex financial instruments to ECPs.
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