1 November 2007 promises to be a big day for the financial services industry. We will finally see the practical implementation of the European Markets in Financial Instruments Directive (MiFID) and we will also see the FSA take another step on the road to a more principles-based regime by replacing the existing conduct of business rulebook with a shorter version which, it is hoped, will be easier to understand and comply with (NEWCOB).
MiFID will create new divides, because neither all firms nor all business regulated by the FSA will be caught by its provisions. The flow charts appended to the FSA’s draft guidance on the scope of MiFID have proved helpful to us in navigating this new landscape, but it is worth noting that life assurance pensions and other packaged products are not caught.
NEWCOB will not do much more than implement the Directive in the UK for MiFID firms conducting MiFID business, because Brussels’ intention is to create a ‘super-harmonious’ regime in which very few additional requirements are imposed by individual Member States, though the FSA plans to notify the Commission of its intention to impose some, notably the requirement for a written explanation of the reasons for giving a certain piece of advice. The FSA also plans to extend the new MiFID requirements and terminology in circumstances where they would not otherwise apply (which it tells us are few and far between), so as to create consistency. In general terms the FSA’s approach to this exercise seems a sensible one. NEWCOB is not all about MiFID though: it will be the first major move towards a less overbearing regime and will be considerably shorter – though naturally still weighty! – than the outgoing rulebook.
We cannot make a significant attempt at tackling the new provisions in this short piece, but the main changes lie in financial promotions, client classification, disclosure and the determination of suitability/appropriateness and we have picked out a couple of examples below.
The MiFID client classification terminology is to be extended into the non-MiFID realm, so we will soon be referring to each and every client as either a “retail client”, “professional client” or “eligible counterparty”. These classifications mirror those currently in use and in general terms clients will be grandfathered across without any need for an assessment to be carried out. There are some other substantive changes, notably that it will be more difficult to lift experienced investors who would otherwise be classified as retail clients into the into the less regulated professional client bracket than it is to treat a private customer as an intermediate customer (using current terminology).
In so far as suitability is concerned, the move to principles is illustrated by the fact that an explanation of the suitability of advice will still be required but its form will no longer be prescribed, and by the removal of the specific rule requiring the most suitable product from the range to be recommended on the basis that it is unnecessary because clients are already protected by other rules. Of particular interest is the new requirement for a judgment as to the appropriateness of a product for a client even where no advice is given, depending on whether the product is “complex” or not.
There is some way to go yet but NEWCOB offers a tantalising glimpse of what the FSA has in mind for principles-based regulation.