Emailed issued by Jersey Finance on 7 July 2006
Markets in Financial Instruments Directive
To APCIMS, JBA & JATCO
Dear all
Please find attached the MIFID survey, a joint initiative between the JFSC and Jersey Finance.
The purpose of this survey is to assess how big the impact of MIFID will be on Jersey firms and to highlight some of the key challenges and opportunities it represents.
A high level summary of the results will be provided to all respondents.
We would be grateful if you could circulate the survey to your Members and ask them to reply to us by no later than Monday 21st August 2006 [now extended to 22 September 2006].
Many thanks & kind regards,
Peggy
Peggy Gielen
Technical Manager
(T) +44 (0)1534 836000
(F) +44 (0)1534 836001
(E)
(W)
QUESTIONNAIRE – MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE
Dear Member,
This survey is a joint initiative between the JFSC and Jersey Finance and will help us to assess the potential impact of MIFID regulation on the operation of Jersey firms. The information you supply will be treated as confidential.
The results of this survey will be used to produce a high level summary highlighting key MIFID opportunities and challenges for Jersey firms. The summary will be supplied to respondents to this questionnaire.
With the implementation of the EU Markets in Financial Instruments Directive (MIFID) in November 2007, the financial marketplace in Europe is set to change dramatically. MIFID is part of a package of measures to help develop a single-market in financial services across the EU.
The changes introduced by MIFID will affect a wide variety of firms including Investment Banks, Portfolio Managers, Stockbrokers, many Futures and Options firms, Corporate Finance firms and some Commodities firms.
For the purposes of MIFID ‘third countries’ are non-EEA Members.
Please follow this link for all documents relevant to the Markets in Financial Instruments Directive.
We would be most grateful if you could answer the questions below to your best knowledge and return the survey to Peggy Gielen at Jersey Finance.
- GENERAL QUESTIONS
- Do you think MIFID will make it easier/more difficult for your firm to access European markets?
- Do you believe MIFID will have an impact on the products or services you offer? If yes, please explain how.
- Do you believe MIFID will impact on the clients you service? If yes, please explain how.
- Do you believe MIFID will impact on your ability to compete with other firms? If yes, please explain how.
- Have you identified any other issues that will impact on your firm or your Industry?
- Have you identified any benefits MIFID could bring to your firm or Industry?
- Do you expect MIFID standards will be imposed on Jersey-based firms by EU Groups?
- COMPLAINT HANDLING
Background
MIFID requirement
Article 10 of the Level 2 draft Directive states that “Member States shall require investment firms to maintain effective and transparent procedures for the reasonable and prompt handling of complaints received from retail clients or potential retail clients, and to keep a record of each complaint and the measures taken for its resolution.”
Jersey regulation
In broad terms, section 3.7 of the Jersey Investment Business Codes of Practice (the Codes) has similar provisions. However, the Codes set out certain timescales in which complaints have to be responded to. It is possible that once Member States implement Article 10 of the Level 2 Directive they may apply timescales which are different to those in the Jersey Codes
Questions
- Do you believe EU-based groups should be able to seek derogation from the Codes with regards to timescales in which complaints have to be responded to so that - if necessary - an appropriate group-wide timescale can be applied?
- RECORD KEEPING
Background
MIFID requirement
Article 51 of the draft Level 2 Directive will require investment firms to keep records for at least 5 years; although where the record relates to client agreements the record must be kept for at least the duration of the client relationship. Members States can choose to impose longer requirements if they wish when transposing the Directive into national law.
Jersey regulation
Section 3.9 of our Codes requires a registered person to keep all records (of business transacted, the firm’s structure, apportionment of responsibilities, compliance procedures, etc) for at least 10 years. This is more stringent than proposed under MiFID (and indeed more stringent than current FSA rules for some types of records).
Questions
- Do you believe EU-based groups should be able to seek derogation from the Codes with regards to record keeping requirements so that group-wide record keeping timescales can be applied?
- CAPITAL REQUIREMENTS
Background
MIFID requirement
EU-based investment firms and their subsidiaries will have to meet the capital requirements set out by the Capital Requirements Directive (CRD).
Jersey regulation
The Codes set out (in section 5) minimum share capital requirements for investment businesses.
Questions
- Are you clear what will be expected from your firm as part of an EU-based investment firm under the CRD?
- OUTSOURCING
Background
MIFID requirement
Article 15 of the draft Level 2 Directive regulates the use by an investment firm of a service provider in a third country (ie, non-EEA).
Where an EU investment firm wishes to outsource retail portfolio management provided to clients to a service provider in a third country two conditions must be met:
a)The service provider must be authorised or registered in its home country to provide that service and must be subject to prudential supervision; and
b)There must be an appropriate cooperation agreement between the competent authority of the investment firm and the supervisory authority of the service provider.
Jersey situation
The first condition will not cause Jersey a problem. In relation to the second, the draft Directive does not specify what constitutes “an appropriate cooperation agreement”. However, it will require competent authorities in Member States to publish a list of the supervisory authorities with which they have cooperation agreements that they deem appropriate.
Questions
- Are any MIFID-defined investment services or activities outsourced to your firm in Jersey? If yes, please indicate what type of services and/or activities and in which countries your clients are based.
- Which EU countries should the JFSC have ‘an appropriate agreement’ with to ensure that retail portfolio management from that EU country can be outsourced to Jersey?
- Does your firm provide an outsourced MIFID ‘critical or important operational function or investment service or activity’ (see Art 14 draft Level 2 Directive)? If yes, have you considered what action will be required of your firm to meet MIFID standards on outsourcing?
- DEPOSITING CLIENT FINANCIAL INSTRUMENTS
Background
MIFID requirement
Article 17 of the draft Level 2 Directive will require Member States to prohibit their investment firms from depositing financial instruments held on behalf of clients with a third party in a third county that does not regulate the holding and safekeeping of financial instruments for another person unless one of the following conditions is met:
a)The nature of the financial instruments or of the investment services connected with those instruments requires them to be deposited with a third party in that third country;
b)Where the financial instruments are held on behalf of a professional client, that client requests the firm in writing to deposit them with a third party in that third country.
Jersey situation
Given that the provision of safe custody facilities from or within Jersey is not explicitly regulated (save for custodians/depositories of collective investment fund assets) it is possible that a Jersey firm wishing to provide such a facility may fall foul of this Article in the draft Directive.
Questions
14.Does your firm provide custodian services to EU based investment firms? If yes, please indicate in which countries your clients are based and please indicate how important this business is to your firm (in % of turnover).
15.Are you aware that post MIFID implementation your firm may no longer be able to provide custodian services to EU based firms?
- DEPOSITING CLIENT FUNDS
MIFID regulation
Article 18 of the draft Level 2 Directive restricts the institutions with which an EU investment firm may place client funds.
The list consists of central banks, EU-authorised credit institutions, banks authorised in a third country, or a “Qualifying Money Market Fund”.
A qualifying money market fund is defined as one which meets certain conditions in relation to maintenance of capital value, the type of underlying investment, and liquidity. In addition it must be either:
a)An EU UCITS fund; or
b)A fund which is “subject to supervision and, if applicable, authorised by an authority under the national law of the Member State”.
Jersey situation
Until we know how the EEA countries intend to transpose the requirement as set out in point b above into national law, there must be some doubt as to whether or not a Jersey Money Market Fund would be considered a “Qualifying Money Market Fund”.
Questions
- Does your firm operate a Jersey Money Market Fund which has been granted authorisation to be sold in an EEA country?
16a.If yes, would an exclusion from the list of ‘Qualifying Money Market Fund’ be an issue for your firm?
- BUSINESS OPPORTUNITIES/THREATS
MIFID regulation
It would seem possible that the reclassification rules under MIFID will make it more difficult for a high net worth individual (HNWI) to be treated as a professional (at their request) and thus benefit from a lighter-touch regime.
If a HNWI has to remain classified as retail this will involve them in having to provide to the investment firm, and receive from the investment firm, detailed information. They may regard this as a nuisance. An additional nuisance to a HNWI will be that under MIFID a retail client can only be provided with a truly execution-only service in respect of a non-complex financial instrument. Where the financial instrument is not non-complex the investment firm has to do an appropriateness test. This will involve the investment firm in seeking information from the client to determine whether or not the client has the necessary experience and knowledge in order to understand the risks involved in the transaction in the financial instrument envisaged.
Jersey situation
It might be that local investment businesses see this situation as a business opportunity to try and attract EU HNWI business to Jersey.
Questions
- Do you believe MIFID represents a HNWI business opportunity to investment firms located in Jersey?
- If your firm is selling products to EEA residents via an EEA intermediary, have you considered what additional information you might need to give to the intermediary as a result of MIFID?
- If your firm’s clients are offered products via an EEA broker, your EEA broker will ask you to classify your customers under MIFID. Is there a danger the EEA broker will exit the business if the re-classification falls outside of its strategy?
Your Name:
Your Organisation:
Investment Business Class:
Your Email Address:
Your Telephone No:
SUMMARY OF QUESTIONS
1Do you think MIFID will make it easier/more difficult for your firm or Industry to access the European markets?
2Do you believe MIFID will have an impact on the products or services you offer? If yes, please explain how.
3Do you believe MIFID will impact on the clients you service? If yes, please explain how.
4Do you believe MIFID will impact on your ability to compete with other firms? If yes, please explain how.
5Have you identified any other issues that will impact on your firm or your Industry?
6Have you identified any benefits MIFID could bring to your firm or Industry?
7Do you expect MIFID will be imposed on Jersey-based firms by EU Groups?
8Do you believe EU-based groups should be able to seek derogation from the Codes with regards to timescales in which complaints have to be responded to so that - if necessary - an appropriate group-wide timescale can be applied?
9Do you believe EU-based groups should be able to seek derogation from the Codes with regards to record keeping requirements so that group-wide record keeping timescales can be applied?
10Are you clear what will be expected from your firm as part of an EU-based investment firm under the CRD?
11Are any MIFID-defined investment services or activities outsourced to your firm in Jersey? If yes, please indicate what type of services and/or activities and in which countries your clients are based.
12Which EU countries should the JFSC have ‘an appropriate agreement’ with to ensure that retail portfolio management from that EU country can be outsourced to Jersey?
13Does your firm provide an outsourced MIFID ‘critical or important operational function or investment service of activity’ (see Art 14 draft Level 2 Directive)? If yes, have you considered what action will be required to meet MIFID standards on outsourcing?
14Does your firm provide custodian services to EU based investment firms? If yes, please indicate in which countries your clients are based and please indicate how important this business is to your firm (in % of turnover).
15Are you aware that post MIFID implementation your firm may no longer be able to provide custodian services to EU based firms?
16Does your firm operate a Jersey Money Market Fund which has been granted authorisation to be sold in an EEA country?
16a.If yes, would an exclusion from the list of ‘Qualifying Money Market Fund’ be an issue for your firm?
17Do you believe MIFID represents a HNWI business opportunity to investment firms located in Jersey?
18If your firm is selling products to EEA residents via an EEA intermediary, have you considered what additional information you might need to give to the intermediary as a result of MIFID?
19If your firm’s clients are offered products via an EEA broker, your EEA broker will ask you to classify your customers under MIFID. Is there a danger the EEA broker will exit the business if the re-classification falls outside of its strategy?