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MiFID - Conduct of Business (COB) Reform - Non-Retail FirmsMove to principles-based regulation: implementing MiFID for non-retail firmsDecember 2006The FSA has published a Consultation Paper (CP) giving proposals for a radical overhaul of the Conduct of Business (COB) rules. The move is aimed at simplifying the detailed regulations and moving to a more "principles-based" type of regulation and also implementing the EU's Markets in Financial Instruments Directive (MiFID) for FSA regulated firms and markets. The proposals involve the removal of around half the content of the old rulebook with the end result being a new Conduct of Business rule book - NEWCOB - which will be substantially shorter. (The term 'NEWCOB' is used throughout the CP to distinguish the proposed new sourcebook from the existing one, COB. However, the FSA has noted when the proposals are made into Handbook text, it will use the reference code 'COBS.' COBS has therefore been used in the draft text at Annex 6.) The paper also puts forward proposals to implement other MiFID related changes to other parts of the Handbook, much of which also needs to be transposed by 31st January 2007. This includes complaints handling, record-keeping, outsourcing of retail portfolio management, training and competence, and non-scope transaction reporting. FIRMS SHOULD NOT ASSUME THAT BECAUSE THEY ARE OUTSIDE THE SCOPE OF MIFID, THEY ARE UNAFFECTED BY THESE PROPOSALS.
The CP, entitled "Conduct of Business Regulation" (CP 06/19) includes proposed amendments to other (non-COB) parts of the FSA Handbook, notably complaints handling, which are necessary for MiFID implementation. These papers represent the final parts of FSA consultation for implementation of MiFID. NEWCOB will apply to all regulated firms and business coming under the FSA Conduct of Business regime, not just those firms and types of business which are covered by MiFID. The paper puts forward proposals on extending some MiFID standards to non-MiFID firms and business in the retail product and advice markets. As previously indicated, the FSA has not yet fully considered this issue for institutional firms, and a separate review of COB standards for some firms (including managers and depositaries or trustees of collective investment schemes) is to be carried out in the second quarter of 2007. The proposed changes to complaints handling are designed to apply to all firms when dealing with complaints from retail clients, and to all participants in the Financial Ombudsman Service Voluntary Jurisdiction and the new Consumer Credit Jurisdiction. There are also significant changes to the provisions covering eligible counterparties and eligible complainants which will impact on many institutional firms. The FSA has decided that the COB proposals in this paper should apply to the UK branches of non-EEA firms; this is because, although the Directive does not apply directly to third country branches, Member States must not treat such branches more favourably than branches of investment firms from other EEA Member States. The CP also covers the implementation of the Unfair Commercial Practices Directive (UCPD) for financial services. UCPD is a general consumer protection directive which will prohibit unfair business-to-consumer commercial practices, not just in financial services. It must be transposed into UK law by 12th June 2007 and will apply from 12th December 2007. No Handbook changes are to be made to take account of the Directive, but it has been taken into account in the drafting of NEWCOB, and will be included in the post implementation review of MiFID in around four years' time.
The FSA has drawn attention to the following key areas in the paper: 2.1 Principles-Based Regulation The change from detailed rules and regulations towards high-level rules that focus on outcomes rather than processes, with the minimum necessary prescription, is known as principles-based regulation. The FSA intends to focus more on management's responsibility for delivering the right outcomes for consumers and giving management more flexibility in delivering the required standard of consumer protection. The experience from the move towards principles-based regulation in the Treating Customers Fairly (TCF) project has lead the FSA to admit that many firms are concerned that, with higher-level rules, there will be uncertainty about the minimum standards required. The FSA has said that it recognises that firms should be able to predict, at the time, whether an action would be in breach. It is proposing to continue its practice, started under the TCF initiative, of providing statements of good and poor practice, worked examples and case studies illustrating ways in which firms have successfully met the requirements. A separate Discussion Paper ("FSA confirmation of Industry Guidance - DP 06/5") has also been published covering greater use of industry codes and guidelines. 2.2 Non-MiFID and Mixed Scope Firms and Business MiFID is much narrower than the existing provision in COB, but there are significant areas of overlap. The FSA wants to ensure consistency across the market, and some provisions in MiFID are therefore to be included in NEWCOB, and will thus apply to all firms. A firm may undertake "mixed scope" business with a client where the services provided or the transaction in question involve both MiFID and non MiFID business, for example, where a transaction in a financial instrument involves investment advice, but also advice on a life product. In this case, the advice on the life product will not fall within the scope of MiFID, but the advice regarding the financial instrument will.
3.1 Client Categorisation Although there are a number of deferred matters that will be consulted on later (probably in the second quarter of 2007) the FSA is proposing in this paper to replace the existing client classification framework set out in COB with the MiFID client categorisation provisions, using the MiFID categories and terminology (though with some modification for retail non MiFID business around the retail/professional client boundary). The coverage of the later CP will include proposals covering Self Invested Personal Pension Plans (SIPPs). This CP sets out some areas of practical difficulty and issues that have been raised by respondents to the August Client Categorisation paper, and gives the FSA's views on how these might be overcome. These issues surround the grandfathering provisions, designed to minimise the transition to the MiFID categorisation, and other matters concerning the change over to the MiFID categories and terminology. 3.2 Communications to Clients and Financial Promotions There will be a general requirement under NEWCOB, as there is under COB, for all information provided by firms to consumers to be fair, clear and not misleading. This is supplemented by high-level rules that explain what is meant by the principle. These high-level rules are to apply to both MiFID and non MiFID firms. MiFID contains further provisions that apply to all communications from firms to clients. These are often detailed and similar to provisions that currently only apply to financial promotions. The FSA says that it is not proposing to extend these rules to non MiFID non-marketing communications. 3.3 Disclosure of Information about the firm, its services and remuneration The Initial Disclosure Document (IDD) and Menu for retail firms were introduced following depolarisation in 2005. The FSA has long planned a post implementation review of this area, to check that the regime is working as the FSA wants, and this review is due to be carried out in the next few months. Institutional firms should note, where relevant, that the FSA is proposing to retain the IDD and the Menu in NEWCOB while the post implementation review of depolarisation is carried out. Any new rules brought in following the review covering this area will not come into force until at least the middle of 2008. 3.4 Client Agreements The existing rules distinguish between Client Agreements and Terms of Business documents, with the Term of Business being a statement of the terms and conditions on which a firm will conduct business, to be provided to both private and intermediate customers in good time before investment business occurs. A client agreement is a "two-way" agreement, which the client must consent to in writing. It sets out the basis on which the firm will conduct business with private customers, where particular services are provided. MiFID requires investment firms that provide services other than investment advice to enter into and provide to the client a basic, written agreement with their retail clients, setting out the essential rights and obligations of the firm and the client. It also includes requirements to retain records of documents that set out the terms on which the firm will provide services to its clients. The FSA is proposing to apply the MiFID requirements on client agreements to MiFID and non MiFID business and remove the current detailed rules specifying the content of these documents. This will involve removing the current distinction between one-way and two-way agreements, including the requirement for a signature for certain types of business. The timing requirement in MiFID is roughly the same as under COB, involving information being provided "in good time" before the client is bound by any agreement or before services are provided. It is also proposing to remove the requirement for Terms of Business documents for professional clients. The proposals mean that firms will need to continue to disclose most of the information currently required in Client Agreements and Terms of Business documents to meet MiFID requirements. However, they will have greater flexibility when deciding how this should be done. In particular, firms would no longer be obliged to provide written, two-way agreements with their clients, although they may choose to do so for commercial reasons. 3.5 Identifying Client Needs and Advising The FSA is proposing to use the MiFID requirements for the NEWCOB suitability standard for all advice and discretionary portfolio management business currently covered by COB. The single NEWCOB standard will therefore cover non-MiFID products such as life policies, pensions, and other packaged products, and apply to both MiFID firms and non-MiFID firms covered by NEWCOB; there will be additional guidance covering some retail non-MiFID areas such as pensions. The NEWCOB information gathering and suitability requirements will cover professional clients as well as retail clients. There is no proposal to extend the application to professional clients beyond what MiFID (and the IMD) necessitates. This issue will, however, be subject to further consultation in 2007. MiFID may have a greater impact on firms dealing with professional clients as the Directive applies the suitability requirements to these clients for the first time. The professional client category will include clients who may be exempt from other Conduct of Business requirements under the MiFID eligible counterparty regime, since investment advice and discretionary portfolio management do not fall within this. Firms may need to modify existing processes and introduce new ones to comply with this new requirement. The approach means that the requirements will be the same for MiFID business (for example units in UCITS) as it will be for non-MiFID business (for example, Unit Linked life policies), and will give a level playing field and consistent regulatory standards. 3.6 Non-Advised Services The MiFID "appropriateness" requirement applies to a range of MiFID investment services which do not involve advice or discretionary portfolio management ("non-advised services"). This includes some "execution-only" business, direct offer sales, reception and transmission of orders without advice, and some non-discretionary portfolio management not involving any advice. This is a new area for UK regulation. It means that an investment firm must seek information from a client or potential client to enable the firm to determine whether the client has the necessary knowledge and experience to understand the risks involved in the transaction or service that is envisaged. If the firm considers that the client does not, it must warn them. If the client declines to provide information, or provides insufficient information, the firm must warn the client that on this basis it is unable to make a determination. The way in which this "appropriateness test" applies partly depends on whether the products involved are "complex" or "non-complex": Non-complex products include shares admitted to trading on a regulated market or equivalent non-EEA market, money market instruments, bonds/other forms of securitised debt (excluding those that embed a derivative), UCITS and "other non-complex" MiFID instruments. The Level 2 Implementing Directive gives criteria for "other non-complex" instruments that are not specifically mentioned in the Level 1 Directive; an instrument must be liquid, transparent in price, not involve a contingent liability, and there must be adequately comprehensible information publicly available. Complex products or instruments include MiFID derivatives, warrants, some structured products, and other financial contracts for differences - including financial spread-betting contracts. The test always applies to a non-advised service involving a complex product; and in the case of a non-complex product, the test only applies where the service is at the initiative of the firm, rather than the initiative of the client. MiFID allows firms to assume that a professional client has the necessary experience and knowledge to understand the risks in relation to the particular investment services or transactions, or types of transaction or product, for which s/he is classified as professional. Other existing clients may be 'grandfathered' as far as relevant dealing experience is concerned. 3.7 Dealing and Managing The proposals cover the MiFID requirements on best execution; client order handling, limit order display; and personal transactions and the non MiFID proposals covering the use of dealing commission and miscellaneous dealing requirements. 3.7.1 Best Execution MiFID also covers process, disclosure and client consent on best execution. The requirements for investment firms that execute client orders are similar but not the same as the requirements for investment firms that place client orders with other entities for execution when they manage client portfolios (portfolio managers) or that transmit orders to other entities for execution when they receive and transmit client orders (ORTs). Specifically, MiFID requires any portfolio manager, ORT or investment firm that executes client orders, to: There is also a requirement that investment firms executing client orders should: There is also a standard covering the entities that a portfolio manager or ORT includes in its execution policy; in that each entity in the policy must have execution arrangements allowing the portfolio manager or ORT to comply with the best execution requirements when it places or transmits orders to that entity for execution. The current COB rules require a firm to take reasonable care to obtain the best price but do not require a firm to take account of other factors. COB rules also provide a "safe harbour" for securities traded on the London Stock Exchange Trading System (SETS). For example, an investment firm can satisfy existing best execution requirements if it executes through SETS. The MiFID requirements mean that FSA is not permitted to retain the existing safe harbour on SETS as it does not allow a Member State to say that execution on any particular venue will satisfy MiFID requirements. The FSA is proposing to delete all the existing COB requirements and replace them in NEWCOB with "intelligent copy out" of the MiFID text. There are no proposals to apply these requirements to any business other than MiFID business. The MiFID procedural and disclosure requirements are more extensive and prescriptive than the comparable provisions in COB and SYSC. 3.7.2 Client Order Handling The existing COB client order handling rules cover customer order priority, timely execution, aggregation and allocation and record keeping of client orders. There are three specific areas where MiFID differs from COB: The FSA is proposing to delete all the existing COB requirements and replace them in NEWCOB with "intelligent copy out" of the MiFID texts. 3.7.3 Limit Order Display The proposal is to "intelligently copy out" the MiFID texts into NEWCOB. However, MiFID does permit competent authorities to waive the publication obligations on limit orders that are large in scale compared with normal market size and the FSA is proposing to exercise this discretion. 3.7.4 Personal Transactions MiFID introduces personal transaction requirements which are similar to the current personal account dealing rules, and the FSA is proposing to copy out MiFID personal transactions requirements into NEWCOB for both MiFID and non MiFID business. Requirements currently in COB but not reflected in MiFID will not be retained. 3.7.5 Use of Dealing Commissions The current requirements were introduced in January 2006. The rules restrict the use, by an investment manager, of client dealing commissions to the purchase of execution services and research and require them to make adequate disclosure to customers of the firm's policy and of the type of goods and services received. 3.8 Investment Research The proposed rules and guidance will apply to firms within MiFID scope which produce, or arrange for the production of, research that is intended or likely to be subsequently disseminated to clients of the firm or to the public. Rules and guidance for firms outside MiFID scope (including UK branches of non-EEA firms) will be reviewed separately and will be the subject of a later consultation (expected 2007). Existing rules prevent firms from dealing ahead of the publication or distribution of research except in certain circumstances. They also require firms publishing or distributing impartial research to effectively manage conflicts of interest. There are also requirements on disclosures for research recommendations, which result from the implementation of the Market Abuse Directive (MAD). MiFID has similar provisions to COB, but introduces different terminology. The MiFID definition of research is similar to the COB definition of impartial research. It requires research material that does not meet the conditions for impartial research to be clearly identified and treated as a marketing communication. This type of research material is currently termed partial in COB. The FSA proposes intelligent copy out of the MiFID provisions into NEWCOB. It will also introduce guidance to clarify that where a financial analyst or other relevant person has knowledge of the intention to produce or disseminate independent research, the dealing ahead prohibition contained in MiFID may apply. NEWCOB will retain the substance of COB guidance regarding the means and timing of the publication of independent research and the persons for whom independent research is primarily intended. The guidance expresses ways in which the general conflicts rules apply, particularly in relation to dealing ahead. There will also be new guidance on conflicts of interest which may also arise when a firm deals in financial instruments that are the subject of non-independent research which is published, or intended to be published, to clients - firms should have measures in place to address any such conflicts. The existing MAD disclosure provisions in COB will be carried over for research recommendations. 3.9 Product Information - KFDs, Projections and Keyfacts The COB product disclosure requirements typically apply to packaged products but MiFID applies to a wider range of designated investments. The MiFID requirements on product disclosure for scope business require: It also allows: 3.9.1 Key Features Documents In addition, COB has provisions covering the Consolidated Life Directive (CLD) and Distance Marketing Directive (DMD), and includes requirements on information to be given when a customer varies their contract and information that must be provided after the point of sale. MiFID contains high-level disclosure provisions for MiFID business which are very different to the current prescriptive approach in COB. The FSA has been considering and developing a Quick Guide (QG) replacement for the KFD and has previously consulted on this. It has now also carried out consumer research, and has found that although there was a clear consumer preference for shorter, more focused material (such as would be provided by the QG); the evidence did not support the introduction of QGs as good KFDs achieved the same outcome in consumer protection terms. The FSA has therefore decided to retain the KFD and SP regime, to ensure consumer protection and ensure a level playing field between MiFID and non MiFID business. This will be the subject of an Article 4 disclosure to the EU Commission (as above). Many of the detailed requirements on the specific content of the KFD (namely, the rules and guidance on risk warnings and special situations such as long-term care insurance, endowments and broker funds) will be replaced with high-level rules for firms to ensure that the KFD: Firms will continue to be required to include information, where relevant, about complaints, compensation and cancellation. The FSA is concerned to improve the quality of the KFD and is proposing the following improvements, which will also encourage greater stand-out and readership. These measures will include: 3.9.2 Projections The FSA has decided that it will not require projections to be issued for MiFID business and where they are provided, they will no longer be subject to prescribed detailed assumptions (including growth rates). Instead, where MiFID intermediaries and product providers choose to include projections, they will have to comply with the relevant MiFID provisions. In addition, and to minimise competitive distortions, the FSA is proposing that this standard should also apply to non MiFID entities doing MiFID business. This is an area that will be monitored closely post-implementation. For CTFs there is a proposal to retain a re-drafted form of the "balanced comparison rule" which would require firms to disclose which of the three types of CTF is being sold. For consumer protection reasons and because of the unique nature of this product (which is actively marketed to many who will not have previously engaged in financial services) the FSA considers that the prescription of such information is warranted. The requirement for firms to provide a clear and prominent indication of the general availability of a stakeholder pension scheme will be retained. There are no proposals covering charges information for packaged products or the wider non MiFID projections regime, which applies principally to life policies. The FSA is continuing to review options in this area in the light of the impact of MiFID. Proposals will be forthcoming in due course. In the meantime, firms must continue to comply with the existing requirements. 3.9.3 Keyfacts There will be a 12 month transition period for non MiFID related changes, aimed at reducing the costs of this. 3.9.4 Product Disclosure The following changes are proposed to be made to the current COB requirements: For post sale variation of policies, the FSA is to replace the current requirements with one high-level requirement for firms to provide, on variation, details of the changes and any other information sufficient to enable a customer to understand the consequences of the variation. The FSA will also stop prescribing where information on commission or commission equivalent must be disclosed, simply that it must be provided in line with the MiFID standard for the timing of the provision of information. 3.10 Customer Understanding of Risk The current COB rules, guidance and evidential provisions cover consumers understanding of risk and for certain types of products the information required to be given is very detailed. The MiFID provisions have the same objectives, but are at a higher level and across a wider scope than COB. The current regime includes a high-level requirement that a firm must not make a personal recommendation of a transaction, act as a discretionary investment manager, arrange or execute a deal in a warrant or derivative, or engage in stock lending activities with, to or for a private customer unless it has taken reasonable steps to ensure the private customer understands the nature of the risks involved in the transaction. MiFID provides a new standard requiring investment firms to provide clients or potential clients with a general description of the nature and risks of financial instruments, in sufficient detail to enable the client to take investment decisions on an informed basis. The FSA plans to copy out the MiFID requirements into NEWCOB and remove the existing COB requirements (including the detailed product-specific risk warnings). Within MiFID scope, the standard applies to all firms conducting any investment service or activity in respect of retail or professional clients. This differs from current COB in that the existing standard applies only to retail clients. For firms and activity outside of MiFID scope, the proposed changes will apply in a limited manner. It will be extended to non MiFID business involving retail clients only, and then only in respect of certain types of activity, that is: investment advice; discretionary portfolio management; receiving and transmitting orders in warrants and derivatives; and stock lending. This applies to all firms. The FSA does not propose to extend the standard to other activities outside the scope of MiFID, or non MiFID business with professional clients. Applying this to the areas to which COB currently applies, simplifies the rules significantly, achieving more principles-based regulation. Firms will be expected to assume greater responsibility for identifying relevant risks and explaining them to retail clients. This will apply to all MiFID business and to some extent non MiFID business, as set out above. As the scope of the MiFID requirement is wider than that in COB, firms will also have to do this for professional clients in respect of MiFID business. 3.11 Cancellation The current position under COB is intended to give customers rights to cancel in certain circumstances, and to ensure that firms properly disclose these rights to consumers. The current provisions can at best be described as fragmented, and result from a variety of historical circumstances. They cover both non-life and life (including most pensions) products. They take account of pre-sale rights to withdraw, post-sale rights to cancel, cancellation periods, voluntary provisions, variations, the effects and obligations on cancellation, the reminder notice and shortfall. There are no changes to the underlying directive requirements for life and pensions products. MiFID does not prescribe cancellation rights as a tool for consumer protection, so no notification under Article 4 is required. The FSA has based proposals for the disclosure of cancellation rights on DMD and CLD requirements for up-front (pre-sale) provision to consumers of clear information on cancellation rights and procedures. The FSA is proposing to extend the current 14 day cancellation rights to all non-life products (for advised sales only). But the FSA is inviting views on whether to remove completely the specific non-distance cancellation rules for all advised non-packaged products. For life and pensions products, the proposals are: The FSA is also: 3.12 Reporting Information to Clients The existing COB confirmation of transactions provisions apply to a firm when it executes a sale or a purchase of a designated investment with or for a customer. The provisions are designed to ensure that customers are promptly advised of the essential details of a transaction. Firms are required to despatch these details within a specific time limit but allowed to depart from the standard default despatch date if the customer has agreed. COB periodic statement requirements apply to a firm when it acts as an investment manager, or administers any other account or portfolio which includes designated investments. These provisions also apply to firms operating customer accounts containing uncovered open positions in contingent liability investments. The provisions require firms to pay due regard to the information needs of its customers and to supply them with a regular statement, on a timely basis, providing information on the investment portfolio. Existing CASS provisions apply to reporting obligations of firms when they safeguard and administer investments. MiFID requires firms to report on all investment services provided to clients, with detailed rules on reporting where the firm is: The FSA is proposing some changes, some of which are significant. These are: However, overall there is a proposal to delete most of the COB provisions not replicated in MiFID. The changes are relevant to a wide range of institutions, from investment banks to brokers/dealers and investment managers. The MiFID Level 1 Directive contains the general reporting requirement that the client must receive from the investment firm adequate reports on the service provided. While this applies both to retail and professional clients, most of the detailed requirements of the Level 2 Implementing Directive - and subsequently of the NEWCOB text - apply to retail clients only. Retail clients will no longer have the flexibility to opt-out of receiving post-trade confirmations or periodic statements. The flexibility to alter the contents or promptness of despatch of the reports or statements is no longer available. Further significant changes also include: 4.1 Training and Competence - TC The whole of the Training and Competence sourcebook (TC) will be reviewed during 2007, with any resulting changes timed to come into force in November 2007 (i.e. at the same time as NEWCOB). However, the FSA has already announced that it intends to disapply the detailed Training and Competence (T&C) requirements for wholesale activities (i.e. those carried on by firms for non-private customers). This change is deferred until the implementation of MiFID in November 2007. The current review of T&C is therefore focusing on the retail requirements. Changes from this part of the review will also be brought into force at the same time as MiFID. 4.2 Organisation Rules - SYSC The FSA issued a Consultation Paper in May 2006 covering the organisational changes required under MiFID to the Systems and Controls Handbook (SYSC) and proposing the introduction of a Common Platform for firms affected by both MiFID and the Capital Requirements Directive (CRD). The May CP did not cover proposals for record-keeping or outsourcing of retail portfolio management services to non-EEA service providers as they were still under active discussion at a European level when the CP was published. This CP also covers the issue of conflicts of interest in investment research. 4.2.1 Record Keeping Both MiFID and the CRD contain record keeping requirements, (not explicitly stated in the CRD), in order to show compliance with the directives. The FSA is proposing to create a unified set of reasonably high-level record-keeping requirements, applying to common platform firms, i.e. firms subject to either or both of MiFID and CRD. The MiFID high-level record-keeping articles will be applied on an intelligent copy out basis to common platform firms. A firm must thus arrange for orderly records to be kept, which must be sufficient to enable the FSA or any relevant MiFID competent authority to monitor compliance with the requirements under the regulatory system, and in particular, to ascertain that the firm has complied with all obligations with respect to clients or potential clients. This will result in two different standards for common platform firms in the short term. Further considering will be given to this area, together with other standards for non MiFID business, in 2007. For the non MiFID business of common platform firms there will be no application of the MiFID requirement that records be retained for a period of at least five years. In addition to this, MiFID defines the form and manner in which records should be maintained and the FSA proposes to limit this rule to the MiFID business of a common platform firm. The FSA says it is essential to its ability to monitor firms' compliance with the regulatory regime that records should be reproducible in English and is to provide guidance to that effect. The proposed rules will not form part of the common platform until November 2007. Therefore the current record-keeping rules in SYSC Chapter 3 will apply to common platform firms until 1st November 2007. In order to apply the whole of the common platform early, including record-keeping requirements, a firm would have to apply for a waiver. 4.2.2 Outsourcing The FSA is also proposing to issue a policy statement, in the form of guidance, setting out examples of cases where the FSA would not, or would be likely not to, object to an outsourcing proposal, where one or both of the conditions are not met. Where a MiFID investment firm outsources the services as above, it must ensure that: In cases where one or both of the above conditions are not satisfied, the firm may still outsource, but it must then notify the FSA. The FSA is proposing that a one month time limit should be set for the FSA to object to the notification. The FSA is not proposing to apply the provisions to other common platform firms (e.g. firms only subject to the CRD). MiFID does not exempt existing outsourcing arrangements, so existing arrangements will have to be reviewed and if appropriate, notified. 4.3 Dispute Resolution (DISP) The changes directly linked to MiFID are subject to a one month consultation and will be made in January 2007; the remaining changes are subject to a four month consultation and will be made in May. The new Handbook text sets out the minimum standards expected of firms. The changes complement the Treating Customers Fairly (TCF) material which has already been issued. 4.3.1 Complaint Resolution The current rules emphasise that resolution can be sought through a response that is not final, and set strict time limits. The amendments reduce procedural prescription by relaxing the current requirements to: There are general relaxations proposed about how firms should make consumers aware of the existence of FOS, and a proposal to require respondents to make specific reference to the ultimate availability of FOS from the outset when dealing with customers around the point of sale and when acknowledging a complaint. All the above changes are subject to a four month consultation and would be made in May 2007. The FSA is also considering how it might align the one and two stage complaints processes and is aiming to finalise this so that any changes can be introduced in November 2007. 4.3.2 Complaint Handling and Record Keeping DISP does not currently draw an explicit distinction between handling and resolution, but it does require respondents to have procedures that cover both aspects in practice, and it also has a record-keeping requirement for firms. It also does not distinguish between investment and other firms in the way MiFID does, and its requirements for handling and resolution apply equally to (most) firms. DISP does not apply to EEA branches of a UK firm; but DISP does apply to incoming branches. MiFID changes the scope of application for the handling of complaints and the record-keeping of complaints. The provisions extend to branches of UK firms operating in another EEA state, but switch off the MiFID rules for complaints handling and record-keeping in relation to incoming EEA firms carrying on MiFID business. This is because under MiFID, complaints handling and record-keeping are "home state" matters. 4.3.2a MiFID Firms' MiFID Business Additional Guidance will cover the receipt and recording of complaints and (in conjunction with SYSC) the analysis of complaints' causes, so as to detect compliance failures. This means that the new MiFID copy out will go beyond current DISP: 4.3.2b MiFID Firms' Non-MiFID Business 4.3.2c Non-MiFID Firms and Other Respondents 4.3.2d Branches The handling and record-keeping requirements for MiFID firms in respect of MiFID complaints will have to be made in January 2007. The FSA is proposing to make the equivalent requirements for non-MiFID business and respondents at the same time. 4.3.3 Eligible complainants and client classification DISP currently requires firms to handle and resolve complaints from "eligible complainants". This links with FOS eligibility and is intended to give protection which focuses on less expert or experienced consumers. The criteria for "eligible complainants" link to the current client categorisation scheme, which is to be changed following MiFID. The changes required are a practical consequence of MiFID but not part of the implementation process, and is subject to the four month consultation - rules to be made in May 2007. The changes proposed change the criteria for "eligible complainants" to include retail clients (rather than private clients) other than those who (as now) are: 4.4 Transaction Reporting for Non-MiFID Firms The proposals cover investment managers of collective investment undertakings and pension funds. These types of firm are currently covered by the existing regime set out in the Supervision Manual (SUP) but are outside the scope of MiFID. Investment management firms are currently required to submit transaction reports when they enter into reportable transactions, though they are exempted from this obligation if: The FSA is proposing to require the managers of collective investment undertakings and pension funds to provide transaction reports when they execute reportable transactions. This requirement is to be imposed in the same way as for MiFID scope firms, (CP 06/14). This means that the managers will be required to comply with a number of super equivalent measures (gold plating) as follows: There will however be exemptions, as in the current SUP 17.4.3R, which are currently framed with reference to investment managers generally, available to the managers of collective investment undertakings and pension funds. Investment managers that fall within the scope of MiFID will not be able to rely on these specific exemptions under the proposed post-MiFID rules.
The consultation period closes for much of the material in the paper on 23rd February 2007. However, those elements which transpose MiFID requirements have a much shorter consultation period and comments on these must be submitted by 28th November 2006. The FSA says it will "not close our minds to" making further changes on how copy-out is to be delivered, or on the provision of guidance, if that seems desirable later, in the light of the broader, longer consultation. The provisions of NEWCOB will be finalised during 2007, and the rules will be made in the second quarter of 2007 (probably May 2007) and they will come into force on 1st November 2007. Any waivers, modifications and transitional provisions which now exist in respect of the current COB sourcebook, and which apply to business covered by this Consultation Paper, will cease to have effect as from 1st November 2007. Waivers, modifications and transitional provisions covering deferred matters will be considered as part of the consultation in the second quarter of 2007. A post-implementation review will be carried out to make sure that the changes have the intended impact on the FSA's expectations.
The Consultation Paper can be found at the following link: http://www.fsa.gov.uk/pubs/cp/cp06_19.pdf Additional bulletins covering the Joint Implementation Plan for MiFID, the changes to SYSC and the Common Platform provisions, together with the MiFID provisions for firms and markets can be found on the Grainger Consulting website at the following link: http://www.graingerconsult.com/topics/index.shtml WARNING COPYRIGHT
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