Investment Management Update

In this issue: FCA publishes near final rules on MiFID II; Financial Advice – amended definition; and Private fund limited partnerships.

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05.04.2017 - FCA publishes near final rules on MiFID II

The Financial Conduct Authority (FCA) has published a Policy Statement including near final rules on the implementation of the Markets in Financial Instruments Directive (MiFID) II. These include changes to the trading of financial instruments, including issues affecting trading venues, transparency of trading and algorithmic and high frequency trading.

The near final rules cover:

  • the new category of firms – Data Reporting Services Providers;
  • position limits and reporting for commodity derivatives; and
  • systems and controls requirements for firms providing MiFID investment services.

The Policy Statement also summarises the approach the FCA will take to the recording of telephone conversations by retail financial adviser firms. The FCA will allow certain retail financial advisers to either tape all relevant phone conversations or take a written note of those conversations.

The FCA plans to finalise the MiFID II rules in June in a policy statement covering remaining issues, such as conduct of business, perimeter guidance, and client asset protections.

The FCA has also published a fifth MiFID II Consultation Paper, which sets out new conduct rules for dealing with Occupational Pension Scheme firms, and the extension of the FCA powers within the Enforcement Guide and the Decision Procedure and Penalties Manual.

The Consultation Paper also sets out new guidance on the use of third parties where firms are required to send financial instrument reference data or commodity derivative position reports to the FCA.

Firms affected by the changes to the activities and instruments covered by MiFID II should now apply for authorisation or for variations of permission, or risk being unable to operate in the UK market after 3 January 2018, when MiFID II takes effect.

29.03.2017 - Financial Advice – amended definition

Following a process of consultation by the Financial Conduct Authority (FCA) and the Treasury which began in August 2015 with the Financial Advice Market Review (FAMR), an Order has been made to amend the regulated activity of advising on investments in Article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).

With effect from 3 January 2018, most authorised firms will only give regulated advice when it issues a personal recommendation, as defined in MIFID II.  The intention is to give regulated firms more clarity on the perimeter of regulated advice and enable them to provide greater help and guidance to customers, in a non-advised context.

FAMR highlighted that when regulated firms issue information to non-advised customers, they tend to stop well short of the boundary of advice set out in the current Article 53 of the RAO, given uncertainties in the definition and the regulatory risks of straying “over the line”. By applying the MIFID definition of a personal recommendation instead the intention is to improve the quality of information provided to non-advised clients, particularly those who, following the FCA’s Retail Distribution Review, do not have access to advisory services.

The Order was accompanied by an Explanatory Memorandum and an Impact Assessment.

The definition of regulated advice in the RAO will, however, remain the same for all firms or persons which are not “appropriately authorised”. This will include all firms which are not authorised and regulated at all, and authorised firms which only have permissions to advise on investments or agree to do so, and do not conduct any other regulated activities.

In order to give full effect to the change, FCA is also expected to issue amendments to its Handbook and guides. These are not expected until later in 2017 but will take effect at the same time as the changes to the RAO. Until this further material is issued it is too early to assess the full impact of the amendment.

06.04.201 - Private fund limited partnerships

Legislation creating a new type of UK limited partnership – the private fund limited partnership (or PFLP) – has come into force today, 6 April 2017.  Private fund managers will now have the option of setting up new funds as PFLPs; they will also be able to “convert” their existing limited partnership funds to PFLPs if they so wish.

The PFLP regime differs from that for other limited partnerships in a number of ways including removing the need for limited partners to contribute capital; introducing a “White List” of activities which limited partners can undertake; exempting limited partners from certain duties; and simplifying certain filing requirements.