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Markets in Financial Instruments Directive II ...

Financial Conduct AuthorityConsultation PaperSeptember 2016 Markets in Financial Instruments Directive II implementation consultation Paper IIICP16/29** Financial Conduct Authority1 September 2016CP16/29 Markets in Financial Instruments Directive II implementation consultation Paper IIIC ontentsAbbreviations used in this document I Conduct of Business , including adviser and and managing7010 Underwriting and placing 9111 Investment research 9412 Other conduct issues 97 Part II Other matters 10113 Product governance 10214 Knowledge & competence requirements 10715 Recording of telephone conversations and electronic communications (taping) 11116 Supervision manual (SUP), authorisation and approved persons 11717 Perimeter guidance (PERG) 12318 Consequential changes to the Handbook 126 Annexes 1291 List of questions 1292 Cost benefit analysis 1373 Compatibility statement 194 Appendixes 1961 1962 Draft Handbook text New Form A to be included in SUP 10A Annex 4D We are asking for comments on this consultation Paper by 4 January 2017, except for the Chapter [16], Supervision manual (SUP), authorisation and approved persons, for which we require comments by 31 October can send them to us using the form on our website at: in writing to:MiFID CoordinationMarkets Policy and International Divisi

Financial Conduct Authority September 2016 1. CP16/29. Markets in Financial Instruments Directive II Implementation – Consultation Paper III. Contents

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1 Financial Conduct AuthorityConsultation PaperSeptember 2016 Markets in Financial Instruments Directive II implementation consultation Paper IIICP16/29** Financial Conduct Authority1 September 2016CP16/29 Markets in Financial Instruments Directive II implementation consultation Paper IIIC ontentsAbbreviations used in this document I Conduct of Business , including adviser and and managing7010 Underwriting and placing 9111 Investment research 9412 Other conduct issues 97 Part II Other matters 10113 Product governance 10214 Knowledge & competence requirements 10715 Recording of telephone conversations and electronic communications (taping) 11116 Supervision manual (SUP), authorisation and approved persons 11717 Perimeter guidance (PERG) 12318 Consequential changes to the Handbook 126 Annexes 1291 List of questions 1292 Cost benefit analysis 1373 Compatibility statement 194 Appendixes 1961 1962 Draft Handbook text New Form A to be included in SUP 10A Annex 4D We are asking for comments on this consultation Paper by 4 January 2017, except for the Chapter [16], Supervision manual (SUP), authorisation and approved persons, for which we require comments by 31 October can send them to us using the form on our website at: in writing to:MiFID CoordinationMarkets Policy and International DivisionFinancial Conduct Authority25 The North ColonnadeCanary WharfLondon E14 5 HSTelephone: 020 7066 9758 Email: have developed the policy in this consultation paper in the context of the existing UK and EU regulatory framework.

2 We will keep the proposals under review to assess whether any amendments will be required due to changes in the UK regulatory framework, including as a result of any negotiations following the UK s vote to leave the EU. We make all responses to formal consultation available for public inspection unless the respondent requests otherwise. We will not regard a standard confidentiality statement in an email message as a request for make all responses to formal consultation available for public inspection unless the respondent requests otherwise. We will not regard a standard confidentiality statement in an email message as a request for this, we may be asked to disclose a confidential response under the Freedom of Information Act 2000. We may consult you if we receive such a request. Any decision we make not to disclose the response is reviewable by the Information Commissioner and the Information Rights our publications are available to download from If you would like to receive this paper in an alternative format, please call 020 7066 0790 or email or write to Editorial and Digital Department, Financial Conduct Authority, 25 The North Colonnade, Canary Wharf.

3 London E14 5HS Financial Conduct Authority3 September 2016 Markets in Financial Instruments Directive II implementation consultation Paper IIICP16/29 Abbreviations used in this documentAbbreviations used in this documentAIFMA lternative Investment Fund ManagerBoEBank of EnglandCACompetent AuthorityCASS Client Assets sourcebookCBA Cost benefit analysisCESRC ommittee of European Securities RegulatorsCISC ollective investment scheme COBS Conduct of Business sourcebookCOLLC ollective Investment Schemes sourcebook Commission European CommissionCPConsultation PaperCPMC ollective Portfolio Management CSAC ommission Sharing AgreementCTP Consolidated Tape ProviderDPDiscussion PaperEEA European Economic AreaECPE ligible CounterpartyEMIRE uropean market Infrastructure RegulationEMPE nergy market ParticipantESAsEuropean Supervisory AuthoritiesESMA European Securities and Markets AuthorityEU European UnionETFE xchange Traded FundFAMRF inancial Advice market ReviewFCA Financial Conduct AuthorityFEMRFair and Effective Markets Review FGFinalised GuidanceFSAF inancial Services Authority (predecessor to the FCA)FSMA Financial Services and Markets Act 2000 FXForeign ExchangeGENG eneral Provisions FCA HandbookIDDI nsurance Distribution DirectiveIFAI ndependent Financial AdviserIPMI ndividual Portfolio Management ITS Implementing Technical StandardKIDPRIIPs Key Information DocumentKIIDUCITS Key Investor Information DocumentMAR market Conduct SourcebookMiFID Markets in Financial Instruments Directive MiFID IIMarkets in Financial Instruments Directive II (includes MiFIR, where the context indicates)

4 MiFIR Markets in Financial Instruments RegulationMTF Multilateral Trading FacilityNURSNon-UCITS Retail SchemeMarkets in Financial Instruments Directive II implementation consultation Paper IIICP16/29 Financial Conduct Authority5 September 2016 Markets in Financial Instruments Directive II implementation consultation Paper IIICP16/29 OMPOil market ParticipantOTCOver The CounterOTF Organised Trading FacilityParliament European Parliament PERG Perimeter GuidancePFOFP ayment For Order FlowPRA Prudential Regulation AuthorityPRODP roduct Intervention and Product Governance sourcebookPRIN Principles for Businesses sourcebookPRIIPsRegulation on Packaged Retail and Insurance-based InvestmentsRAOR egulated Activities OrderRDRR etail Distribution ReviewRIPR etail Investment ProductRM Regulated MarketRPAR esearch Payment Account RPPDR esponsibilities of Providers and Distributors for the Fair Treatment of CustomersRRRs FSMA (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001 RTS Regulatory Technical StandardSMES mall and Medium-sized EnterpriseSUPS upervision ManualSYSCS enior Management Arrangements, Systems and Controls FCA HandbookTCTraining and Competence sourcebookthe TreasuryHM Treasur yUCITSU ndertakings for collective investments in transferable securities6 Financial Conduct AuthoritySeptember 2016 Markets in Financial Instruments Directive II implementation consultation Paper IIICP16/29 Financial Conduct Authority7 September 2016 Markets in Financial Instruments Directive II implementation consultation Paper IIICP16/291.

5 Overview1. Overview Following on from consultation Paper (CP) 15/43 and CP16/19, we are now publishing a third consultation paper on the UK implementation of the Markets in Financial Instruments Directive (MiFID) II. MiFID II is a package of EU legislation which regulates both retail and wholesale investment As with our previous proposals on the implementation of MiFID II we have developed the policy in this CP in the context of the existing UK and EU regulatory framework. Following the result of the UK s referendum on its membership of the EU, firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for MiFID II and other pieces of EU Financial services legislation that are due to come into effect in the This CP is split into two parts.

6 Part I deals with conduct of business issues whilst Part II deals with other matters, covering a range of issues not covered in our previous two Strengthening investor protection is one of the key aims of MiFID II. This is in line with our operational objective of ensuring an appropriate degree of protection for consumers. The changes to the conduct rules between MiFID and MiFID II pick up on several of the themes of recent work in the UK on retail and wholesale conduct issues, including: Introducing the concept of independent investment advice and requirements for firms to ensure employees providing investment advice have the necessary knowledge and competence. These are similar to the requirements of the Retail Distribution Review (RDR). New product governance requirements which cover similar ground to our guidance on the responsibilities of providers and distributors for the fair treatment of customers and to points raised in recent thematic Strengthened inducements rules which are consistent with the recent work we have done on retail Financial advisers and New rules on inducements and the receipt of research which will strengthen transparency and controls by investment firms over costs of third party research.

7 This will deliver better outcomes for investors in line with FCA work and publications on the use of dealing commission since 2012, including our review in See for example: and 3 Including: and Conduct AuthoritySeptember 2016 Markets in Financial Instruments Directive II implementation consultation Paper IIICP16/29 Enhanced rules on best execution help to address some of the issues we identified in our 2014 thematic review of firms implementation of the existing We consider that the new framework of conduct rules in MiFID II will reinforce and strengthen the retail and wholesale conduct work we have been doing in the UK. Its implementation should help to ensure that Markets work well for The Financial Advice market Review5 (FAMR) recommended that, in implementing MiFID II, we were mindful of proposals to aid firms in delivering streamlined advice.

8 We are confident that steps both we and the Treasury are taking to transpose and implement MiFID II are consistent with the FAMR The Treasury has published a consultation paper6 to amend the wording in Article 53 of the Regulated Activities Order to reflect the definition of a personal recommendation as set out in the Markets in Financial Instruments Directive (MiFID), in line with the recommendation in FAMR. Depending on the outcome of this consultation , we may need to consider the impact of any changes on our proposals on inducements. Insurance based investments and pensions, and structured The proposals on conduct in this CP follow up on the issues we raised in Discussion Paper (DP) 15/ There were two general issues covered in that DP. Firstly, whether we would apply the MiFID II conduct rules to insurance-based investment business and pensions. Secondly, whether we would incorporate the MiFID II rules which apply to the activities of advising on or selling structured deposits into our Conduct of Business sourcebook (COBS).

9 There were mixed responses to DP15/3 on the question of applying MiFID II conduct rules to insurance-based investment business and pensions. Some respondents felt it was important to have a single set of rules applying to substitutable types of business. However, some also felt it would be premature to do so before more details were known of the implementing measures under the Insurance Distribution Directive (IDD). Others raised concerns about the specific application of certain MiFID II rules to insurance-based investment business and pensions, such as the appropriateness The IDD is due to apply in the first quarter of 2018 shortly after MiFID II applies. Its implementing measures are still to be finalised, so we have not proposed applying MiFID II conduct rules to insurance-based investment business and pensions in this CP. However, we think there remains a good case for having a significant degree of consistency of conduct rules across investment business.

10 While our ability to deliver such consistency will depend on the final shape of the final IDD implementing measures, we will return to this subject when we consult on implementing the IDD in On structured deposits respondents to DP15/3 were mainly in favour of putting MiFID II rules dealing with structured deposits into COBS. This is what the proposals in this CP do. We have not proposed including the activities of advising on, and selling, structured deposits within the scope of designated investment business. Rather, we propose applying individual conduct rules to such activities as required by Article 1(4) of MiFID II. We also believe that Article 3 firms (this term is explained in paragraph ) can advise on and sell structured deposits, and, in doing so should be subjected to the relevant analogous requirements. As such, the issues that arise out of this are dealt with in the relevant individual chapters in Part I of this Conduct Authority9 September 2016 Markets in Financial Instruments Directive II implementation consultation Paper IIICP16/29 Other non MiFID Rules in COBS cover other non-MiFID business as well as insurance-based investment business and pensions.


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