Our Profession

1st February 2008

OPTING IN TO MIFID – FACTS AND MYTHS

The AIFA team has been made aware of some incomplete and inaccurate information regarding MiFID that is currently being circulated to IFA firms.  In order to dispel these myths and half-truths, we are issuing this newsflash to reiterate some facts about MiFID and its implications for members.

MIFID - Article 3 Exemption

As members know, IFA firms who do not hold client money or operate cross-border are generally exempt from MiFID under Article 3 of the Directive. This is the vast majority of IFA firms. The Article 3 exemption for IFAs was the result of AIFA lobbying both the EU Commission and the Treasury, on the grounds that the amount of business conducted by IFAs relating to MiFID investments is so low that the requirements of the Directive would be disproportionate.

How do I know if I’m a MiFID firm?

IFA firms that hold client money, undertake discretionary portfolio management, stockbroking or other specified investment business are subject to full MiFID rules.  They are more correctly known as Common Platform Firms (CPFs).  They are outside the exemptions provided through Article 3 of the Directive and are therefore subject to the full MiFID regime, including the Capital Requirement Directive (CRD).  Full details of the scope of MiFID and activities covered can be found at http://fsahandbook.info/FSA/html/handbook/PERG/13

Why would I want to opt in to MiFID?

IFA firms can elect to opt in to MiFID, the most likely reason being that it makes it easier for them to give investment advice to clients who reside in the EU.  For further details of the need and implications of opting in to MiFID, please revisit the AIFA newsflash which was issued in September http://www.aifa.net/news/newsflash.php?id=124 .

How will opting in affect my firm?

An IFA firm that opts in becomes an Article 3 Capital Adequacy Directive (CAD) exempt firm.  This means that it is not subject to full CRD requirements but is subject to different capital adequacy and PI requirements than firms that do not opt in.  The prudential requirements for an ‘A3 CAD exempt’ firm are detailed in IPRU (INV) 13 or you can refer to http://www.aifa.net/news/newsflash.php?id=124 for details.

If I am a full MiFID firm or opt-in, do I still have to follow FSA rules?

Yes. If you are authorised by the FSA, you are still subject to their rules.

What if I want to run my business from another member state?

You will need to seek authorisation from the regulator of that state and operate within the rules of that regulator.  It may be possible to ‘passport’ into the UK and provide services to UK clients.  As yet, no other member state has exercised the A3 exemption so an EU based IFA firm is very likely to be subject to the rules applying to full MiFID firms, including the CRD.

What if I just want to advise on insurance-based products in another EEA state?

You may or may not need to apply for an Insurance Mediation Directive (IMD) passport depending on whether you are advising and arranging new business or servicing existing polices.  We will be issuing more information on IMD passporting shortly.

To summarise, there are four possible regulatory positions for IFA firms:

1. UK based FSA regulated IFA firms not undertaking any MiFID activities that bring them in full scope of the Directive.
2. UK based FSA regulated IFA firms that opt in because they wish to provide services (that are not subject to full MiFID) in other EU states who then become A3 CAD exempt firms.
3. UK based FSA regulated firms who undertake specified MiFID activities that bring them fully into scope (e.g. holding client money) who then become CPFs and are subject to the CRD.
4. EU based IFA firms who are authorised by another member state and who could passport services into the UK. These are likely to be subject to the full MiFID regime, as applied by the relevant EU regulator, and the CRD.

Myth 1

If you opt in to MiFID, you are not subject to FSA rules.
 
If you are a UK firm and opt in to MiFID, you are still authorised and regulated by the FSA but can give investment advice in other EU states under a MiFID passport.  You will still be subject to COBs and all relevant FSA rules but will have different capital and PI requirements to non-MiFID firms or those that are subject to the full MiFID regime.  

Myth 2

Small firms which opt in to MiFID no longer benefit from the small firm audit exemption.

Firms that opt in still benefit from the exemption provided they meet the requirements of Companies Act legislation and continue to meet the conditions of the Article 3 MiFID exemption.  Further details can be found in our November newsletter which you can view via the following link http://www.aifa.net/news/connect-news.php?id=106  

Myth 3

Any changes following the RDR will not apply to firms that are full MiFID firms (CPFs) or those that opt in.

The outcome of the RDR is unknown so any speculation as to how it will affect firms, whether they are full MiFID firms (CPFs), firms who have opted in to MiFID or non-MiFID firms, is without foundation.  The only way to avoid the full thrust of FSA regulation is to set up your business in another member state and become authorised and regulated by the regulatory authority that exists in that state. But certain UK requirements, including conduct of business rules, would still apply to business carried on in the UK that FSA has jurisdiction over.  


This factsheet has been created to help members understand the impact of MiFID. As part of our remit we endeavour to bring insightful and plain English information to the market.  This factsheet has been produced in this spirit.  Firms are advised to seek professional advice rather than rely on comments on this brief text.  

20th September 2007

MiFID

The Markets in Financial Instruments Directive takes effect on 1st November 2007. It is a European Directive that seeks to harmonise the investment market across Europe and is ambitious in its scale.

The impact of MiFID should not be under-estimated. The majority of IFA firms should have been outside of MiFID’s scope but, given the regulatory impact, the waves will beat against our shores. FSA is re-writing the Conduct of Business rulebook as a result of MiFID’s requirements – and are taking the opportunity to identify any unnecessary rules.

MiFID also has an impact on T&C and also the handbook dealing with complaints: DISP.

AIFA has been publishing information over the last year to help members prepare and we have been lobbying to ensure minimum disruption to business. More information on all of MiFID’s impacts can be found both on the AIFA website and on the FSA’s. Firms are strongly advised to check it out!