MiFID II—Quick Fix Directive FAQs

July 6, 2021

The following FAQs clarify some of the key aspects around the MiFID II ‘Quick Fix’ Directive, which will impact EU firms.

 

 

What is the MiFID II ‘Quick Fix’ Directive?

In July 2020, the European Commission (EC) issued a legislative proposal to amend specific requirements of MiFID II in response to the Covid-19 pandemic and related disruptions.

Following this legislative proposal, the MiFID II ‘Quick Fix’ Directive was published in the Official Journal on 26 February 2021.

What is the objective of the MiFID II ‘Quick Fix’ Directive?

The objective of the MiFID II ‘Quick Fix’ Directive was to introduce ‘quick fixes’ to mitigate the effects of Covid-19. Their aim is to streamline regulatory requirements whilst allowing for more flexibility for wholesale clients.

What are the key changes as part of the MiFID II ‘Quick Fix’?

The measures consist of targeted changes to MiFID II rules relating to product governance, payment for research, client information requirements, energy derivatives markets and best execution requirements.

What are the key areas of MiFID II ‘Quick Fix’ that are likely to impact Pershing’s clients?

Pershing has identified the following areas of that are likely to impact our clients:

1. Phase-out of Paper-based Communication as a Default
The phase-out of paper-based communication methods should allow firms to move to electronic communications. Covid-19 has informed firms’ views on switching to e-delivery and is also seen as more secure and ‘green’. However, retail clients will still be able to request paper.

How easy will it be for all firms to switch to e-communication?

Wealth managers, brokers and advisers will still need to maintain a process for paper-based communications as retail clients can opt in, requiring firms to operate two processes.

In addition, we still await the UK approach. There are some outstanding questions, such as:

  • Where system changes are required, will firms be able to test and implement ahead of the February 2022 deadline?
  • What will be the impact on operational risk/resilience and data protection risk?
  • What will be the financial impact to firms, i.e. this process should save on postage, but will there be additional spend on maintaining dual systems?
  • Will the UK implement to a different timetable (unknown but possible) and implement differently (which is unlikely)?

2. Costs and Charges Disclosures
Professional clients and eligible counterparties are exempted from the costs and charges disclosure requirements, both ex-ante and ex-post, except for investment advice or portfolio management services.

Many of these clients never wanted this information in the first place. Firms can now turn off this reporting but it won’t be just a case of flicking off a switch. Firms need to look back to see the impact to other services provided and any required system changes.

3. Ex-post Reporting Requirements (10% drop reporting)
Mandatory service reports will no longer required to be produced for eligible counterparties and professional clients (but professional clients can opt in). This includes the 10% drop reports.

MiFID II requires investment firms to send ex-post statements to clients concerning the services they have received. The introduction of the 10% drop reporting linked to the value of the portfolio was controversial. Three years’ worth of market data has reflected what was already known in the industry, for professional clients and counterparties at best they serve no purpose and at worst are simply confusing. The volatile markets in early Covid-19 period brought this into sharp relief with firms required to issue almost daily reports that were out of date by the time they were received. ESMA now acknowledges this and proposes as no longer mandatory for eligible counterparties and to allow professional clients to choose if they want to opt in. This is a positive move but comes at a substantial cost for firms who do not service retail clients and had to implement a process to gather, store, collate data and provide reports within 24 hours in a specific format that is now looking to be redundant.

4. Exemption from Product Governance Requirement
Investment firms will be exempt from product governance requirements for simple corporate bonds with “make-whole clauses”.

5. Suspension of Best Execution Reports
The amendments provide a temporary suspension of the obligation for execution venues and systematic internalisers to submit quarterly best-execution reports under RTS 27. The suspension will apply until 27 February 2023. Best execution reporting for EU investment firms under RTS 28 still applies.

6. Research Unbundling
The research unbundling rules implemented for MiFID II were problematic and despite the European Securities and Markets Authority (ESMA) saying the research rules were working as expected, they are now being partially “undone” to pre-MiFID II requirements to enable joint payment of execution services and research on small and midcap issuers. Research on fixed income instruments is also permitted.

7. Requirement to Produce Cost/Benefit Analysis
Relaxing the requirement to produce cost-benefit analysis when switching in relation to services provided to professional clients (but professional clients can opt in).

What is FCA’s response to the ‘Quick Fix’?

Following the EC’s MiFID Quick Fix changes, the FCA has published their first consultation (CP21/9) with proposed changes to what will be UK MIFID rules.

Two main proposals are included:

  • Best Execution—Abolish the RTS 28 reporting obligation for investment firms’ top five execution venues, in addition to the removal of RTS 27 reporting obligation for venues. This is wider than the ESMA’s proposal to solely remove RTS 27.
  • Research—Change the inducement rules relating to research to broaden the list of what are considered minor non-monetary benefits to include research on Small and Medium Enterprises (SMEs) with a market cap below £200M and fixed-income instruments. The FCA’s carve out is wider than ESMA’s proposal (set at SMEs with a market cap of less than €1B) and looks to be in recognition that small cap listed companies can struggle to get analyst coverage.

When will the ‘Quick Fix’ Directive be implemented in the EU?

The Directive came into force on 27 February 2021. EU Member States will have to publish and adopt implementing measures by 28 November 2021 and are expected to apply the measures from 28 February 2022.

When will the ‘Quick Fix’ Directive be implemented in the UK?

While the ‘Quick Fix’ Directive does not apply to UK firms, the HM Treasury and FCA will consult on changes it will make to the UK’s MiFID regime separately. In addition to the FCA’s first consultation (CP21/9), the HM Treasury also recently issued their Wholesale Markets Review consultation, which signals that the UK is minded to take a similar approach to certain areas included in the EC’s ‘Quick Fix’, such as investor reporting, however, it is now likely that the UK’s switch to e-delivery will come into force at a later date than the EU’s amends in February 2022, resulting in rule divergence.

The UK implementation date is not yet known, but the UK Government will seek to implement any necessary amendments quickly and the FCA is expected to take forward any proposals that fall under its rules by the second half of 2021.

.