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18 October 2017

The countdown to MiFID II for Discretionary Managers

Where has the year gone? While it may be unnerving to some to mention that it is about 9 weeks until Christmas, what is even more unsettling for those in the financial services sector is that MiFID II comes into effect in around 10 weeks’ time. 

As those in the financial services industry will well know, “MiFID II” is a term used to describe the new Markets in Financial Instruments Directive (Directive 2014/65/EU) and the Markets in Financial Instruments Regulation (EU) No 600/2014, together with secondary legislation and guidance. MiFID II amends and adds to the original Markets in Financial Instruments Directive which aimed to harmonise financial services law across the European Union. MiFID II comes into effect on 3 January 2018. 

As we countdown to MiFID II, discretionary managers will be in the process of, or considering, the amendment of their terms of business to ensure that these are in compliance with MiFID II in time for implementation. 

Some points to be aware of for those considering an update are as follows:

  • Local public authorities (if you have these as clients) are now to be treated as retail clients (although they can elect to be treated as professional)
  • Significant additional client disclosures are required to be made, for example disclosures are to be made:
    • as to guidance on and warnings of the risks associated with particular investment strategies and
    • whether a particular investment is intended for retail or professional clients

Terms of business can be the best place to include these.

  • Investment managers are obliged to provide clients with greater information on costs and charges, such as an aggregated disclosure regarding all costs and charges not caused by the occurrence of an underlying market risk. Investment managers may consider making reference to such costs disclosures in the terms or in any fee schedule annexed.
  • Investment managers are generally banned from receiving payments and other benefits from third parties, except for certain minor non-monetary benefits (which must be disclosed to the client):
    • Investment research however is not considered to be a minor non-monetary benefit, which means that an investment manager must either pay for any research the firm receives from brokers directly from its own resources, or establish a research payment account controlled by the manager and funded by a specific research charge to the client (which will need to be documented in the terms of business). 
    • In addition, terms of business can be a sensible location for disclosures of minor non-monetary benefits received by the firm to be made.
  • Certain changes will be required to firms’ order execution policies, for example:
    • Firms are now required to take “all sufficient steps” to achieve best execution, rather than “all reasonable steps” pursuant to MiFID I. 
    • Order execution policies will now need to reflect the new organised trading facility (for example express consent must be obtained for executing orders outside a trading venue (which now means a regulated market, multilateral trading facility or organised trading facility)). 
  • Firms must notify new and existing clients that telephone or other electronic communications that result or may result in transactions will be recorded. Firms must hold such records for five years. 
  • The standard periodic reporting frequency for discretionary management clients has been amended from half yearly to quarterly. 
  • Investment managers must notify clients if their portfolio drops 10% from the last reporting period (as well as reporting a drop of 10% in any “contingent liability transaction” or “leveraged financial instrument”). 

While updating for MiFID II, discretionary managers may also take the opportunity to ensure that their terms are compliant for the purposes of the new General Data Protection Regulation which takes effect from 25 May 2018.

Often terms of business will allow for changes which reflect regulatory requirements to take effect as soon as these are notified to the client (or as soon as the relevant law takes effect). However, it may well be that your terms provide for a 30 day (or longer) notice period, which means that changes to the terms should be notified to clients shortly. Bearing in mind the time it takes to make the relevant amendments (and allow for typesetting and printing) we recommend that discretionary managers proceed with their MiFID II terms of business reviews as a matter of urgency.

This article was written by Jessica Arrol. For more information please contact Jessica on +44 (0)20 7427 6709, or at