PRA open consultation on implementation of MiFID II—part 2

14 Dec 2016 | 5 min read

The Prudential Regulation Authority (PRA) has published its second consultation on the Markets in Financial Instruments Directive II (MiFID II), which includes new management body and organisational requirements and proposals for granting authorisations in respect of a new investment activity, the operation of an organised trading facility (OTF), as well as emission allowances and structured deposits. Sara Evans, professional support lawyer, and Matthew Baker, partner, both at Berwin Leighton Paisner LLP, examine the proposals.

Original news

PRA launches second consultation on MiFID II implementation

The PRA has published its second consultation paper (CP43/16) on the implementation of MiFID II 2014/65/EU. The consultation paper proposes changes to the PRA Rulebook and supervisory statements relating to new management body and organisational requirements. There are also proposed changes to granting authorisations in respect of operating an OTF, emission allowances and structured deposits. The deadline for comments is 27 February 2017.

What is the background to this consultation?

On 25 November 2016, the PRA published its second consultation on the implementation of MiFID II. Comments are invited by 27 February 2017.

The PRA is responsible for implementing those parts of the MiFID II package that impose prudential requirements on dual-regulated firms. The PRA is the appropriate regulator for dual-regulated firms and is therefore the regulator to which any necessary applications for variation of permission (VoP) must be made by those firms.

The PRA’s first consultation in March 2016 (CP 9/16) set out the PRA’s proposals to implement the MiFID II provisions relating to the passporting regime, and systems and controls for firms that engage in algorithmic trading and provide direct electronic access to trading venues. That consultation closed on 27 May 2016 and the PRA issued its policy statement (PS 29/16) in October 2016.

This further PRA consultation covers matters the PRA was not able to consult on in March 2016 due to delays in the development of Level 2 material. Proposed changes are set out in four draft PRA instruments:

  • PRA Rulebook: CRR Firms: Internal Governance Instrument 2017
  • PRA Rulebook: CRR Firms: Notifications Instrument 2017
  • PRA Rulebook: CRR Firms: Glossary Instrument 2017
  • PRA Rulebook: CRR Firms: General Provisions Instrument 2017

How does the PRA propose to implement the relevant provisions of MiFID II?

As with the PRA’s first consultation, the PRA proposes to apply the MiFID II requirements across the whole of firms’ businesses (that is, MiFID II requirements will also apply to non-MiFID businesses). The proposals in the consultation will affect banks, building societies, PRA-designated investment firms and their qualifying parent undertakings (that is, financial holding companies and mixed financial holding companies). The proposals also affect credit institutions, PRA-designated investment firms and financial institutions that are subsidiaries of these firms.

In the cost/benefit analysis published as part of the consultation, the PRA states that it does not envisage that the implementation costs to firms will be material.

How does the PRA’s approach impact on the following topics?

New regulated activity (operating an OTF) and new financial instrument (emission allowances)

MiFID II introduces a new type of regulated venue—an OTF. The operation of an OTF will be a regulated activity. MiFID II also brings emission allowances into the regulatory regime.

Amendments to the Financial Services and Markets Act (Regulated Activities) Order 2001, SI 2001/544 (the RAO) will transpose this new activity and instrument into UK law. Firms conducting the activities that fall within the new OTF activity, and firms conducting regulated activities in relation to emission allowances will need to apply to the PRA for a VoP. The timing of such applications is not yet clear, as HM Treasury approval has been sought, but not yet obtained, for the PRA to have the power to process VoP applications in advance of the MiFID II transposition date of 3 January 2018.

Management body

MiFID II, Article 9 aims to enhance and harmonise corporate governance across firms, setting out the specific responsibilities of the management body of firms. PRA implementation will involve changes within the General Organisational Requirements and the Skills, Knowledge and Expertise parts of the PRA Rulebook. MiFID II, Article 9 imports the requirements of the Capital Requirements Directive 2016/36/EU (CRD IV) into MiFID II, and as such, the management body provisions are unlikely to add to firms’ regulatory implementation burden.

Structured deposits

MiFID II introduces new provisions relating to structured deposits, which are currently not a regulated investment product. HM Treasury consulted in 2015 on amendments to the RAO to extend the following regulated activities to cover structured deposits:

  • dealing in investments as agent (Art 21)
  • arranging deals in investments (Art 25)
  • managing investments (Art 37)
  • advising on investments (Art 53)

HM Treasury’s March 2015 consultation set out a transitional approach that will allow permission to be deemed to have been obtained where firms are already authorised to conduct the above activities in relation to other instruments and wish to do so in relation to structured deposits. The PRA proposes that firms wishing to follow the transitional approach set out in HM Treasury’s consultation will need to notify the PRA using a VoP form.

Organisational requirements

MiFID II, Article 16 and Articles 21–25 and 72 of the Delegated Regulation adopted by the European Commission in April 2016 with respect to MiFID II introduce new requirements in relation to the operation of the compliance function, outsourcing, and record keeping, including a list of minimum records. The PRA proposes to implement these organisational requirements through changes to the Compliance and Internal Audit, General Organisational Requirements, Outsourcing, Record Keeping and Risk Control parts of the PRA Rulebook. The proposals include introducing rules to extend the substance of the requirements of the Delegated Regulation on organisational requirements and operating conditions to the non-MiFID business of firms in line with the PRA’s ‘whole business’ approach.

Do any of these rules go beyond what is required by MiFID II?

No—the ‘gold-plating’ of EU rules stopped some time ago.

What are the next steps?

As usual there will be a policy statement when the PRA has considered responses, and new rules will come into force on the MiFID II application date—3 January 2018.

Interviewed by Duncan Wood.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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