MiFID II – Conflicts of interest
14 December 2017
The implementation of MiFID II forces firms to review the majority of their policies and processes. Although firms will already have clear COI policies in place, there will be at least one key change to consider under MiFID II’s enhanced requirements.
Conflicts of Interests: Article 23 and 16 (3)
The Level 1 (high level) European Securities and Markets Authority (ESMA) text on COI states:
Member states shall require investment firms to take all appropriate steps to identify and to prevent or manage conflicts of interest between themselves, including their managers, employees and tied agents, or any person directly or indirectly linked to them by control and their clients or between one client and another that arise in the course of providing any investment and ancillary services, or combinations thereof, including those caused by the receipt of inducements from third parties or by the investment firms own remuneration and other incentive structures.
The Level 2 (more detailed) text focuses on treating clients fairly and protecting them from any harm regarding COI. Some of the points noted involve identifying conflicts such as:
· A firm/person making financial gain or avoiding a loss at the expense of the client.
· A firm/person who has an interest in the outcome of a service provided that is distinct from the client’s own interest or outcome.
· A firm/person who has a financial or other incentive to favour the interest of another client.
· A firm/person where an exchange of information may harm the interests of one or more clients.
· Ensuring the fair treatment of clients and the quality of services provided by ensuring appropriate remuneration, including the balance between fixed remuneration and variable remuneration based on quantitative commercial criteria or appropriate qualitative criteria.
In addition, it is expected that COI policies will require meaningful annual reviews. Such reviews should include the involvement of senior management.
Following the implementation of MIFID II on 3 January 2018, it will not be enough to simply identify COI and document them. MiFID II’s requirements assume that conflicts identified will be resolved, either by being managed or avoided, and that firms will only disclose those conflicts that cannot be successfully resolved.
The Level 2 ESMA text highlighting this change states:
Investment firms shall ensure that disclosure to clients, pursuant to Article 23 (2) of Directive 2014/65/EU, is a measure of last resort that shall be used only where the effective organisational and administrative arrangements established by the investment firm to prevent or manage its conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of the clients will be prevented.
It is also specific on what should be included in disclosures surrounding COI:
The disclosure shall include specific descriptions of the conflicts of interest that arise in the provision of investment and/or ancillary services, taking into account the nature of the client to whom the disclosure is being made. The description shall explain the general nature and sources of conflicts of interest, as well as the risks to the client that arise as a result of the conflicts of interests and the steps undertaken to mitigate these risks, in sufficient detail to enable that client to take an informed decision with respect to the investment or ancillary service in context of which the conflicts of interest arise.
What does this mean?
Firms must ensure that they:
· Undertake a comprehensive analysis of their existing COI policy, including processes for identifying COI in all aspects of their business and the measures in place to mitigate or avoid them.
· Ensure their COI policy includes provisions on remuneration, inducements and incentives.
· Pull together a template for disclosure of COI that could not be prevented, which includes the specific requirements noted in the ESMA statement’s Level 2 text.
· Ensure that COI policies are regularly reviewed and revised by senior management.
· Ensure regular management information about COI is shared with senior management and the firm’s Board, where applicable.
· Train and inform staff on their obligations to identify, mitigate and manage COI.
It is very likely that firms will have to amend their documentation. Brooks Macdonald plans to amend all documentation impacted by MiFID II, (including our Terms and Conditions on COI) and release revised documents later in the year. This will allow us to avoid writing to clients on multiple occasions.
This article was first published by Brooks Macdonald here
For more information please email [email protected]
While the information in this article has been prepared carefully, Brooks Macdonald gives no warranty as to the accuracy or completeness of the information. The information in this article does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.
ATEB Consulting’s Steve Bailey examines why and how Paraplanners should consider a workplace pension in a pension transfer recommendation. Firms involved with...
Fund data and technology company FE fundinfo has acquired cashflow planning provider CashCalc, adding the cashflow planning capability to its suite...
The majority of paraplanners (58%) find suitability report writing software a useful tool but only if used in tandem...