Select Committee on Treasury Written Evidence

Supplementary memorandum submitted by Fidelity International


  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.


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.


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.


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.


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.


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.


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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