Supplementary memorandum submitted by
Fidelity International
SUMMARY
1. Fidelity International believes that
the European Union's legislative process (as seen most recently
in the case of MiFID) has been transparent and consultative. However,
the MiFID process has taken longer than it should have and the
time between the finalisation of rules and their implementation
has been squeezed significantly.
2. The decision to use a Directive rather than
a Regulation will exacerbate this problem and open up greater
scope for further delay and inconsistency between Member States.
Many firms will face significant challenges to develop new IT
and systems. Current uncertainty makes planning very difficult.
If the European Parliament fails to pass the Level 2 work before
its summer recess an orderly transfer to the new regime will be
all but impossible.
3. UK firms are increasingly aware of the impact
of MiFID and levels of preparedness are increasing.
DETAIL
4. As a pan-European fund manager, Fidelity International
supports the efforts aimed at achieving a Single Market in financial
services. It has engaged with the development of MiFID and particularly
the evolution of the Level 2 measures.
5. Fidelity International currently makes use
of the Investment Services Directive (ISD) passport to conduct
branch and cross-border activity throughout the EU. It intends
to make similar use of the MiFID passport.
6. For a pan-European organisation one of the
major benefits of MiFID will be the principle of Home State regulation
for cross-border business. The internet is a particularly good
example of the ability to apply one set of rules across all European
business enabling firms to streamline operational processes and
build economies of scale.
7. Our comments on MiFID and the MiFID process
are made from this perspective.
THE LEGISLATIVE
PROCESS
8. The CESR methodology has been transparent.
The "Calls for Evidence", consultation and feedback
have lead to constructive engagement with the industry and we
believe a better result than might otherwise have been the case.
9. The UK Treasury and FSA have also consulted
extensively with the industry throughout the process, far more
so that their European counterparts.
10. However, we have three concerns with the
Level 2 process of MiFID.
10.1 It has taken much longer than envisaged.
Transposition and implementation dates have had to be extended.
For many firms, especially on the sell side, MiFID will have enormous
IT and systems implications. For them the delays mean that the
implementation is unlikely to be orderly or timely. This does
not augur well for future Lamfalussy Directives.
10.2 Level 2 is too detailed for the purpose
for which it was designed. For example, in the case of periodic
statements and contract notes, instead of a simple obligation
to set out the material facts, the required content is laid out
in detail. The process of agreeing this detail has delayed the
process and resulted in lengthy discussions of fine drafting options.
This may be a stimulating intellectual exercise for the bureaucrats
but it ignores the variety of business models and practices which
MiFID is seeking to cover.
10.3 Despite the generally consultative nature
of the Commission's approach, there have been occasions when they
have introduced new material into the working drafts (and indeed
into its final draft text of 6 February 2006) which has not been
the subject of prior consultation, and at a stage in the process
when the consultation is relatively informal, unstructured and
subject to significant time pressure. For example, Article 45
of the February 6 draft Directive attempts to place the obligation
of best execution in the context of portfolio management. We had
consistently argued that the Level 2 measures relating to trading
ignored the fund manager context and dealt solely with a retail
brokerage scenario. Article 45 seeks to address that, but does
so in a way that confuses separate obligations of best execution
(MiFID article 21) and acting in the best interests of clients
(MiFID Article 19). Combined with MiFID itself this also has the
effect of placing greater obligations on the managers of regulated
funds than unregulated funds—a strange outcome that we would
have hoped to avoid if we had been given the opportunity to consult
more fully.
THE CURRENT
STATUS AS
A BASIS
FOR PLANNING
11. At the close of 2005 the Commission was indicating
that the bulk of the Level 2 measures were likely to be contained
in a Regulation. Only those aspects involving significant differences
in local legal structures would be in an implementing Directive
requiring local legislation and/or rule-making. The February draft
Directive and Regulation however found the bulk of the conduct
of business rules being included in a Directive. Moreover, Article
4 of the implementing Directive sets out a process by which Member
States would be permitted to "gold-plate" elements of
MiFID subject to conditions which we believe are too vague. Crucially
Member States will only be required to notify the Commission of
any such measures. There is no requirement in the Directive for
the Commission to consent, still less any mechanism for it to
object.
12. This volte face has meant that, for
many firms, MiFID has become a problem of process rather than
substance. There are still issues with aspects of the Level 2
(see below) but we will now have to wait until the fourth quarter
of 2006 for the main FSA consultation on MiFID. With a Regulation
we could reasonably have expected the final text by the summer.
The opportunity to prevent bad rules being made before end of
January 2007 would now appear to be remote given that only one
of month consultation will be possible.
13. Our understanding is that most European regulators
state that they will adopt an "intelligent copy-out"
approach to implementing the Directive. We would, however, not
underestimate the amount of intricate carpentry required to fit
the requirements of the Directive seamlessly into the FSA's and
other regulators' rule books. Such complexity often leads to unintended
consequences, the effect of which tends to be greater when insufficient
time is allowed for the process to be undertaken.
14. It should be borne in mind that even apparently
small changes in regulations can require very significant systems
up-dates. The lack of clarity at this stage in the process makes
it very difficult for firms to plan and budget for the systems
work that may or may not be needed in 2007.
VARIETY AS
THE SPICE
OF LIFE
15. The move of virtually all the conduct of
business requirements to a Directive, together with the flexibility
afforded Member States by Article 4, means that the eventual character
of MiFID implementation is likely to differ significantly from
one State to another. We would point out two areas where we think
there will be differing views. The list is, of course, not exhaustive,
but it illustrates the two main ways in which diversity can arise.
15.1 The question of outsourcing has been a vexed
one, and the section on this has seen more substantive change
(and change back) than perhaps any other part of the Level 2 work.
Several Member States remain unhappy with the Commission's compromise.
Broadly, this states that if fund management on behalf of retail
investors is outsourced outside the EU the firm being used as
a delegate must meet certain criteria or the firm outsourcing
the activity must notify its regulator and that regulator not
object. The criteria include the delegate firm being prudentially
supervised (as US-based fund managers are not subject to financial
adequacy rules no US asset manager will meet the criteria) and
the delegate's regulator having a means of exchanging information
with the outsourcing firm's regulator (though we note most IOSCO
members do not have memoranda of understanding with most other
IOSCO members). It is likely therefore that many firms will need
to use the notification route. However, there are no conditions
set out for the regulators to consider so each will adopt their
own. There is a danger that those Member States who did not approve
of this provision will object on principle to any third country
outsourcing while we expect the FSA to act responsibly and justifiably.
This is an example where the Level 2 Directive structurally creates
the potential for variety.
15.2 Another vexed area has been the obligation
on firms to "know the client". In the UK this has traditionally
been required if the firm is giving advice or offering bespoke
portfolio management. However, MiFID places that obligation on
any firm processing an order so that it can assess the suitability
(or otherwise) of the order. HMT understood that much business
in the UK, especially in the mutual fund world, is conducted on
an "execution-only" basis—where the client is
not advised but places the order on the basis of information such
as a fund's prospectus. As a result the obligation was removed
for non-complex instruments (such as a regulated fund) and provided
the transaction was at the client's initiative. The FSA has indicated
that it will not apply the suitability obligation where a client
is responding to a firm's marketing material. The reality is that
funds are sold not bought and clients, even when acting on their
own initiative, are often responding to material put out by the
firm. In other parts of Europe we believe that the own-initiative
requirement will be interpreted more strictly and that in some
States the concept of execution-only may effectively become extinct.
CONFLICTS WITH
UK RULES
16. Our general impression is that firms already
compliant with the FSA principles and rules will not have any
great problem with the majority of MiFID's requirements as they
stand today. Those areas which are potentially awkward are still
the subject of discussion and negotiation with the EU institutions
involved and may yet be resolved.
17. Our primary concern is that MiFID has the
potential to balkanise the current point-of-sale disclosure regime
for retail savings. The FSA has, quite rightly in our view, attempted
to ensure that retail investors looking for savings vehicles receive
broadly similar information, regardless of the underlying character
of the product, but with due consideration of the characteristics
of each such product, whether they be deposit account, fund, equity
or insurance-based. We may not agree with the totality of what
is in place today, but conceptually the FSA approach is absolutely
right and we trust it will remain intact after MiFID.
PREPAREDNESS
18. There is a growing awareness of the impact
of MiFID among UK firms. It is most marked amongst larger firms
with a European dimension to their operations. The FSA and the
Treasury have both done an excellent job of keeping the industry
appraised of their plans and of the broader picture developing
in Brussels. The Planning for MiFID document issued by the FSA
has been useful, but its effect has been undermined by the delay
in agreeing the Level 2 text and the extent to which a Directive
will be the implementing measure. In many ways the UK is well
placed as the discussions and documentation is in English. It
remains to be seen how some of the distinctions between "suitability"
and "appropriateness" for example will be interpreted
in other languages.
19. We are now in a "phoney war" that
will last until the finalisation of the Level 2 text. As an industry,
we can plan but we cannot commit people and money until we have
that finality. Even then, if we believe that the FSA intends to
use the Article 4 flexibility to gold-plate there is little we
can do until the fourth quarter.
20. Further delays are possible, and if the EU
Parliament fails to pass Level 2 before its summer recess, then
timely implementation will become almost impossible. Should the
EU-level timetable be met, and provided the FSA keeps its consultation
to the point and does not excessively gold-plate the Directive,
then most buy-side firms should meet the timetable.
21. However, the IT issues on the sell side and
market side (including those related to definitions of liquid
share, pre- and post-trade transparency and the market system
protocols for systematic internalisers) are far more sensitive
to delay and change. They are also reliant upon reciprocal technologies
and systems being in place at competent authorities the prognosis
for which is at best unclear.
March 2006
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