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MiFID II In Focus

Unlocking Organisational Requirements under MiFID II




Mikhaelle Schiappacasse, Senior Associate (MS)
Matthew Duxbury, Associate (MD)
Dick Frase, Partner (DF)

MS Good morning everyone and welcome to this new session on MiFID In Focus, Unlocking Organisational Requirements. I’m joined by my colleague, Matt Duxbury. I’m Mikhaelle Schiappacasse, and we’re both associates here in the financial services group in London.

We will be joined later by our colleague Dick Frase who will be speaking about product development, and provide some additional updates since the last seminar that covered that topic.

So, without further ado, I’ll hand it over to Matt to start us off.

MD Thank you, Mikhaelle. Good morning, everyone. My name’s Matt Duxbury and I’m an associate in the financial services group here at Dechert. In today’s seminar we are focusing on internal organisation and governance, but what exactly does this mean, what are the new rules under MiFID II, and what will the impact be on your business?

Broadly, we are focusing on the policies and procedures, functions and structure related to the organisation and management of investment firms. The rules apply to MiFID investment firms, though as we will explain, in certain instances the FCA has extended the rules to non-MiFID firms in certain cases.

So, what does internal organisation and governance under MiFID cover? Well, the rules can largely be categorised as falling within those areas as shown onscreen. Now, under MiFID II not all of this is new. Risk management, internal audit and the restrictions on the scope of personal transactions remain completely unchanged from the current rules under MiFID I.

However, most areas have seen some changes. As I will explain shortly, the key change to complaints handling is that the rules now apply to both professional and retail clients. The rules are also more prescriptive.

There’s a new complaints management function, and information on complaints must now be reported to the competent authority, although for SCA firms this is already the case in respect of retail clients. There are new reporting requirements for compliance as well, and there is a greater overlap with the complaints handling function.

We will look at the conflicts of interest rules too, and as we will explain, there are three key changes under MiFID II. There is now an even greater focus on the management and prevention of conflicts, rather than their disclosure. The requirements that apply when making a disclosure are now more prescriptive, and there are also additional oversight responsibilities for the management body.

As Mikhaelle will explain, outsourcing broadly remains the same. There are new content requirements for outsourcing agreements, and firms must be able to immediately terminate their outsourcing arrangements where this is in the best interests of their clients.

Recordkeeping, though, is subject to some more significant changes. As Mikhaelle will cover later, the MiFID II includes new rules on telephone and electronic communications. Although a lot of you here will already be having to comply with the SCA’s existing telephone taping requirements, the MiFID II rules are more extensive. There are also some minor changes to the rules on the responsibility of senior management and data security.

Then there’s two areas which are completely new to MiFID II, product governance and remuneration. Of the two, product governance has probably received the most attention. As Dick will explain later, these are completely new rules which require product approval processes to be implemented by firms which manufacture financial instruments, so that’s those who design, create and implement products. And those manufacturers must identify a target market for each financial instrument it manufactures and take steps to ensure that each financial instrument is distributed to its target market.

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Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.