Changes to the DISP sourcebook under MiFID: The impact on firms

February 2007

Background

The FSA has recently published its proposals regarding the amendment of the Disputes (DISP) sourcebook. The amendments aim to ensure compliance with the Markets in Financial Instruments Directive (MiFID). This bulletin aims to summarise the changes and the steps firms need to take to ensure they remain compliant with the sourcebook.

Summary of the changes

The majority of the changes continue the move towards principles-based regulation and the new rules are less prescriptive than the old rules. This allows firms more flexibility in the management of their own complaints process and should reduce the amount of administration time taken when reporting minor rule breaches. For example:

• The new rules remove the requirement to acknowledge a complaint in writing within 5 days in favour of a less restrictive “promptly”.
• The requirement to send a “holding” response within 4 weeks is removed in favour of a broader requirement to keep complainants reasonably informed of the progress of their complaint.

A number of changes place additional requirements on firms. These are summarised below. Some of these changes make specific amendments to the complaints handling process. Others make more general changes to, for example, conduct of business requirements.

Changes that may have a material impact

The changes made under the new rules that may require practical action from firms are as follows:

• Firms are now required to make specific reference to the availability of the Financial Ombudsman Service (FOS) from the outset when conducting business with clients and when investigating a complaint.
• The FSA now specifies that within 8 weeks it expects almost all complaints to have been resolved by the respondent or addressed through a final response.

The above changes are subject to a 4 month consultation period and the new rules would be made in May 2007. Further to this, in relation to MiFID instruments only, the following changes were implemented as of January 2007:

• The minimum record keeping requirement is now 5 years as opposed to the previous minimum of 3.
• MiFID requires handling of complaints from all clients classed as “retail clients” under the new classification system. Previously, only complaints from “eligible complainants” had to be looked at.
• MiFID does not waive record keeping requirements for complaints that do not involve an allegation of financial loss or material distress or inconvenience, or complaints which are resolved by close of play the next business day, or complaints which do not relate to an activity which comes under the jurisdiction of FOS.

Action Points

The majority of the changes do not require firms to take any action to remain compliant. However, there are a number of rules which may require changes to be made to firms procedures. The required action points at the present time are summarised as follows:

1. Firms transacting MiFID business should amend their procedures to ensure that records are kept for a minimum period of 5 years rather than the 3 years that was previously required. We advise that firms should keep such records for a minimum of 6 years due to HMRC requirements.
2. Procedures should be amended to allow for the handling of complaints from all newly classified “retail customers”, not only the formerly classified “eligible complainants”.
3. Procedures must be amended to incorporate the requirement that record keeping is required for all complaints. This applies newly to those that do not involve an allegation of financial loss, material distress or inconvenience, complaints which are resolved by close of play the next business day and complaints which do not relate to an activity which comes under the jurisdiction of FOS.

These requirements will not apply to a MiFID firm where it transacts non-MiFID business. In addition, subject to the four month consultation period confirming the FSA’s original proposals, the following will become requirements as of May 2007:

1. Firms should ensure that the customer is made aware of the availability of the Financial Ombudsman Service from the start of the sales process. The impact of this should be relatively minimal, as all customers dealing with private clients should refer to this in their Terms of Business in any case. However, as best practice, we would recommend that each letter sent to the customer during the complaints process should make reference to FOS.
2. Complaints procedures should emphasise the need to resolve a complaint within 8 weeks as standard, except for where this is not practical for reasons beyond the firm’s control.

Additional Information

A full summary of the FSA’s proposed changes to the DISP sourcebook can be found in section 31 of CP06/19. This is available to download at http://www.fsa.gov.uk/pubs/cp/cp06_19.pdf. For further information about how the requirements apply to your firm, please contact your usual consultant.

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