A UK MiFID II “Quicker Fix”: UK Quick Fix SI amends UK MiFID II regime from 26 July 2021
The Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021 were laid before Parliament on 30 June 2021 (the “UK Quick Fix SI”), along with an explanatory memorandum. The amendments relate to the UK version of the MiFID II quick fix, and most will apply from 26 July 2021. The changes are summarised below, alongside an initial view on divergences from the EU MiFID II Quick Fix.
Reacting to changes made by the EU MiFID II Quick Fix to the EU MiFID II regime, the FCA consulted (in CP21/9) on certain changes to the UK rules on inducements relating to research and on best execution reporting.
However, the FCA indicated that legislation would be needed to bring change relating to other areas covered by the EU MiFID II Quick Fix. This is now addressed by the UK Quick Fix SI, which makes several changes to the on-shored Commission Delegated Regulation (EU) 2017/565 (the on-shored UK MiFID II Delegated Regulation, or “UK MiFID II DR”), which complement the changes proposed by the FCA in CP 21/9.
Summary of changes
The substantive changes in the UK Quick Fix SI apply from 26 July 2021, though certain provisions come into effect on 1 December 2021 (noted below).
- Costs and charges disclosures
- Exemption for professional clients/ECPs, except where portfolio management and investment advice are provided: Detailed costs and charges disclosures to professional clients and eligible counterparties are removed, except where providing portfolio management or investment advice (aligning with the EU MiFID II Quick Fix).
- Distance communication: The obligation to provide costs and charges information before concluding a transaction is also modified for distance communications. Firms must give clients the option of receiving costs and charges information over the telephone before execution. However, where the client consents and has been given the option of delaying the transaction to receive costs and charges information if desired, the firm can then provide costs and charges information after the conclusion of the transaction (in general alignment with the EU MiFID II Quick Fix approach).
- Phasing out paper: All information that must be provided under the UK MiFID II DR in a “durable medium” must be provided to professional clients and eligible counterparties in an electronic format. Existing requirements broadly remain for retail clients (i.e. paper remains the default), save that it is specified that information must be provided free of charge for retail clients who have requested to receive information on paper. The government indicates that it intends to consult separately on extending the electronic format requirement to retail clients as well (and does so in the Wholesale Markets Review that was published on 1 July).
- Websites: Only retail clients will be required to specifically consent to the receipt of information by website (where that is permitted).
- Trade confirms: The requirement to provide detailed trade confirms is restricted to retail clients only (though the obligation to provide professional clients with “essential information” concerning the execution of their orders remains). The government plans to consult on removing this obligation for retail clients in due course.
- Reporting obligations for portfolio managers and switching analysis
- Portfolio manager 10% loss reporting: This obligation is removed for professional clients but remains for retail clients. The government, however, consults in the Wholesale Markets Review on whether this should be removed for retail clients as well.
- Periodic reporting and contract notes: While the obligation to provide professional clients with a periodic statement in a durable medium remains, the detailed requirements for periodic reporting to clients are switched off for professional clients and applied only to retail clients, as is the obligation to provide contract notes on a transaction-by-transaction basis to clients making that election. Again, the government indicates that it intends to consult on removing this obligation for retail clients.
- Switching: Portfolio managers will no longer be obliged to conduct an analysis of the costs and benefits of switching investments for professional clients.
- Information for eligible counterparties: In addition to the disapplication of the costs and charges and trade confirmation requirements, several other obligations to provide information to eligible counterparties are disapplied, namely: (i) general information requirements (Art. 46 UK MiFID II DR); (ii) information about the firm and its services (Art. 47 UK MiFID II DR); (iii) risk warnings about financial instruments (Art. 48 UK MiFID II DR); (iv) information regarding client assets and money arrangements (Art. 49 UK MiFID II DR); and (v) costs and charges information relating to the distribution of units in collective investment undertakings and PRIIPS (Art. 51 UK MiFID II DR).
- Best execution reporting:
- RTS 27 and 28 reporting: Amendments are made to legislation to remove RTS 27 and 28 reporting obligations for certain trading venues. Firms will no longer be required to produce RTS 28 reports in relation to the services of reception and transmission of order or portfolio management (scheduled to come into effect on 1 December 2021, so later than other changes but prior to the next RTS 28 reporting cycle). These changes are intended to complement the measures proposed by the FCA in CP 21/9, with a view to removing all obligations for both RTS 27 and RTS 28 reporting.
- Links to RTS 27 reports: Firms providing services to retail clients will no longer be required to provide links to the RTS 27 reports published by the execution venues they access in their execution policy summary (as this would now be redundant given the removal of RTS 27 reporting obligations).
- References to ‘IP completion day’: Several ‘IP Completion Day’ references in the UK MiFID II DR and other legislation are updated to refer to 1 December 2021 instead (taking effect from 1 December 2021). Though not stated, presumably this indicates that the FCA’s rule changes proposed in CP 21/9 are anticipated to take effect on that day, since these changes are made in the context of legislative cross-references to the FCA’s rules.
Initial comparison with EU MiFID II Quick Fix
Though sharing the same general direction of travel, there are several points of divergence of the UK MiFID II Quick Fix from the EU version.
- A UK “quicker fix”: Most of the changes in the UK Quick Fix SI become effective on 26 July 2021. The EU MIFID II Quick Fix, however, generally becomes effective from 28 February 2022 (due to the need for Member State implementation).
- Paper for retail: It appears that the UK position is that paper remains the default medium for communication with retail clients (pending the outcome of the Wholesale Markets Review), whereas the EU MiFID II Quick Fix makes electronic formats the default for retail clients as well. In contrast to the EU MiFID II Quick Fix, there are also no provisions dealing with how firms should approach existing clients.
- Switching: The EU MiFID II Quick Fix permits professional clients to opt in to switching protections, whereas the UK Quick Fix SI simply removes these protections for professional clients altogether.
- Best execution reporting: Together with the proposals in CP 21/9 (which presumably will be implemented as consulted on), the UK Quick Fix SI deletes RTS 27 and 28 reporting entirely. The EU MiFID II Quick Fix only suspends RTS 27 reporting for two years, and neither suspends nor deletes RTS 28.
- Commodities: The EU MiFID II Quick Fix implements several changes to the EU commodities position limits regime and the ancillary activities exemption, which the UK Quick Fix SI does not cover (though broad changes to the UK commodity derivatives regime are consulted on in the Wholesale Markets Review).
- Reporting to professional clients/ECPs: There are differences of approach regarding reporting obligations to professional clients/ECPs. For example, the EU MiFID II Quick Fix disapplies periodic client money/assets reporting (subject to an ability for professional clients to opt in), while the UK Quick Fix SI makes no changes in this area. Equally, while deleting the detailed trade confirmation requirements, the UK Quick Fix SI amendments leave UK firms still obliged to provide professional clients with “essential information” on executions (which is not the case under the EU MiFID II Quick Fix). Firms will need to carefully consider differences in this area to identify points of divergence, which could impact systems builds.
- Product governance: Neither the UK Quick Fix SI nor the FCA’s CP make amendments in the product governance space, in contrast with the EU MIFID II Quick Fix’s exemption for bonds with no embedded derivatives other than “make-whole” clauses and for products that are only marketed/distributed to ECPs.
Our client note on FCA CP21/9 on changes to the UK rules on inducements relating to research and on best execution reporting is here.
We are publishing a client note on HM Treasury’s consultation on the UK Wholesale Markets Review and will provide a link to this once it is available.