Legal development

All change for the UK MiFID Org Reg: FCA consultation paper (CP24/24)

08 January 2025

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    The FCA published a consultation paper (CP24/24) on proposals to transfer the firm-facing requirements of the MiFID Organisational Regulation (MiFID Org Reg) into the FCA Handbook when the Treasury commences the repeal of the MiFID Org Reg. CP24/24 follows HMT's policy paper on its next steps for the UK MiFID framework, issued as part of the announcements made around the Mansion House speech (see our briefing here).

    Key takeways

    • In addition to transferring aspects of the MIFID Org Reg, this is an exercise for the FCA to clean up aspects of the Handbook relating to UK MiFID that are duplicative and confusing.
    • The FCA is to initially maintain the distinction between rules that apply to MIFID-scope investment business and other non-MIFID business (subject to future review).
    • The FCA is minded to undertake a more detailed/complex review of other areas. These include information and disclosure requirements, as well as client categorisation. Here, the FCA is concerned (among other things) about poor practices involving opting up clients to get around consumer protections. If certain proposals are carried through, these will require uplift to existing processes/changes to operations.
    • The transfer of the MiFiD Org Reg will be informed by ongoing FCA work, such as the Advice Guidance Boundary review (see our briefing here), the Call for Input on Consumer Duty (see our briefing here) and the new disclosure regime that will replace UK PRIIPs (see briefing here).

    Background

    The UK version of the MiFID Org Reg applies directly to UK MiFID investment firms, containing conduct rules and systems and controls rules. These include areas such as categorisation, disclosure, suitability, reporting to clients, best execution, inducements, research, conflicts of interest and business continuity.

    During the implementation of the MIFID regime in 2018, parts of the MiFID Org Reg were replicated into the FCA Handbook for certain sourcebooks. The FCA also extended certain MiFID requirements to firms carrying out non-MiFID business, as well as extending them to "optional exemption firms" (Article 3 firms). Some limited provisions were also extended to other non-MiFID firms.

    The MiFID Org Reg assimilated law is being revoked by the Government under its Smarter Regulatory Framework (SRF) programme, whereby firm-facing rules contained in assimilated law are transferred into relevant rulebooks of regulators (see briefing here). HMT laid out the next stage of the SRF in respect of the UK MiFID framework in a policy paper released on the same day as the Mansion House Speech delivered by Rachel Reeves. This confirmed further changes to the UK MiFID framework, including the MiFID Org Reg.

    Restating the MIFID Org Reg

    The FCA's general approach is to restate the relevant provision into the FCA Handbook, with amendments to reflect Handbook drafting style. Changes will be made to Handbook Glossary terms where this is considered necessary to incorporate provisions of the MiFID Org Reg in the Handbook.

    General Organisational Requirements

    Articles 21-25, 27, 30-35, 72, and 76 will be incorporated into the relevant chapters in the SYSC. Many of the organisational requirements are already found in SYSC Chapters, 4 to 10, 10A and 19F.

    The FCA favours restating Articles 33-35 of the MiFID Org Reg within existing SYSC rules, with limited drafting amendments, as opposed to restating Articles 33-35 into new rules that duplicate existing rules. It has made amendments to the existing SYSC 10 rules to apply them to common platform and Article 3 firms. Chapter 4 to the consultation discusses further changes to simplify the rules. The FCA has also made some minor clarificatory changes (e.g. amending Table A, column A in SYSC 1 Annex 1 to clarify that SYSC10.1.8R (conflicts) applies to common platform firms in relation to all business, as opposed to only insurance distribution activities; and amending Table B to reflect the application of SYSC 10.1.6AAR, SYSC 10.1.9AR and SYSC 10.1.11AA to Article 3 firms).

    The FCA has, however, kept certain technical differences between the current SYSC 10 rules originating from different EU regimes and those from the MiFID Org Reg provisions.

    Conduct of Business Requirements

    Articles 29, 36-61, 63-71, 73-75, Annex I, Annex II, and Annex IV will be incorporated into the Conduct of Business sourcebook (COBS). Changes that the FCA has made to COBS include: amending COBS 6.1ZA.5R(5) to refer to "appointed representative" alongside ‘tied agent’ because Article 3 firms do not appoint "tied agents"; deleting COBS 16A.3.5 UK (copying out Article 61 of the MiFID Org Reg), as COBS 1 Annex 1 deals with the application of COBS to eligible counterparty business (ECPs); and replacing the record-keeping requirements, currently contained in Annex I of the MiFID Org Reg, with individual rules within sections of COBS.

    Market Conduct Rules

    Articles 77-80 and Annex III will be incorporated into the Market Conduct sourcebook (MAR). Article 80, which deals with suspending/removing a financial instrument that would likely cause damage to investors' interests etc, has been has been copied into MAR 5.6A for MTFs and MAR 5A.9 for OTFs. Article 81 of the MiFID Org Reg and Section A of Annex III relating to the reporting infringements to FCA rules have been replicated in new provisions in MAR 5.6.1 for MTFs, and MAR 5A.8.1 for OTFs. Article 82 and Section B of Annex III of the MiFID Org Reg on market abuse obligations for trading venues has been replicated in MAR 5A.6.1 for MTFs and in MAR 5A.8.1 for OTFs.

    Future amendments to EU Derived Organisational and Conduct rules

    The FCA is looking for feedback on provisions in the FCA Handbook stemming from MiFID that cause confusion/ regulatory cost with limited client benefit. Areas initially identified include: streamlining duplicative conduct and organisational rules originating from various EU directives (mostly in COBS and SYSC) and removing the distinctions in rules between types of firms where there is no substantive difference in obligations; introducing flexibility on how firms can meet existing obligations; and considering whether certain rules do not meet their intended objective. Similar questions were asked by the FCA in its call for input on the Consumer Duty.

    Areas that could be streamlined include:

    • SYSC 10 conflict of business rules (the FCA notes that current regime requires SYSC 10 to be read alongside SYSC 1 Annex 1 (which amends certain SYSC provisions) and that SYSC 10 contains a number of conflicts rules that are very similar but only applicable to a specified activity);
    • best execution rules in COBS 11.2, COBS11.2A and COBS 11.2B; and
    • COBS 11.7 and COBS 11.7A, which apply largely similar rules to personal account dealing in relation to MiFID business and non-MiFID business.

    More complex changes include:

    • Information and disclosure requirements. Several COBS chapters (e.g. COBS 2, COBS 4 and COBS 16) require disclosure of information to clients during investment journey. Amendments to the MiFID requirements would need to factor in changes relating to product disclosures that are likely to arise with the new disclosure regime replacing existing UK PRIIPs.
    • Client categorisation. The FCA considers that there is considerable overlap between the per se professional and per se ECP categories. The FCA is seeking views on whether entities acting on behalf of underlying clients should be treated as per se ECPs, noting that their removal from the per se ECP list would result in them being categorised as professional by default (as opposed to requesting to opt down). It is also seeking feedback on other ways the per se categories could be simplified e.g. replacing the different types of authorised firm listed separately with "authorised person"; and harmonising the differences in certain thresholds within the wholesale categories which differ for MiFID and non-MiFID business.
    • Elective categorisation. COBS 3.5 sets out requirements for opting up a retail client to elective professional status. Areas views sought are sought on include: whether the process allows sufficient flexibility for clients to change category when appropriate; clarity of current rules and guidance in preventing firms inappropriately opting clients up to avoid consumer protections (e.g. leverage limits on CFDs); and whether the use of elective professional categorisation in relation to financial promotion rules is still appropriate. Changes to the existing regime proposed include: updating and/or adding alternative quantitative test criteria (e.g. adding product specific criteria or alternative indicators of a client’s expertise); aligning the rules for MiFID business with the current standard for non-MiFID business; and enhancing the process for ensuring consumers understand what opting up entails. The FCA is also looking at the interaction of client categorisation with financial promotion rules and seeking views on instances where firms accept requests from "clients" to elect to be opted up to professional status so as to exempt them from certain financial promotion rules (e.g. the fair, clear and not misleading rule under COBS 3). The FCA also wants to know to what extent firms treat corporate finance contacts as elective professional clients for the purpose of complying with the financial promotion rules.

    Article 3 firms

    FSMA 2023 revoked assimilated law imposing restrictions on the activities of Article 3 firms. The FCA and HMT are considering the impact of these changes on Article 3 (this could include looking at activities Article 3 firms may undertake and associated legislative and Handbook amendments). The FCA confirms that any changes would need to be sequenced with the introduction of replacement rules to avoid unintended impact to the authorisation status of relevant firms. The FCA is not proposing any changes to MiFID derived rules applicable to Article 3 firms at this stage.

    Next steps

    The deadline for comments is 28 February 2025 and 28 March 2025 in respect of discussion points raised in chapter 4. On the same day CP24/24 was published, the PRA issued a statement confirming that it will publish a separate consultation paper on restating firm-facing provisions in the MiFID Org Reg into PRA rules. HMT is to publish a draft statutory instrument outlining how the Government will deal with the non-firm facing elements of the assimilated MiFID Org Regulation. Following these publications, the FCA will publish feedback on responses and issue a policy statement.

    The MIFID regime is undergoing significant reform, both in the EU and in the UK. We have been profiling these changes and considering their impact on investment firms in a number of briefings, some of which are below:

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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