PS17/14: Markets in Financial Instruments Directive II Implementation Policy Statement II

Policy Statement
PS17/14
July 2017
Markets in Financial Instruments
Directive II Implementation –
Policy Statement II

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PS17/14 Financial Conduct Authority
Markets in Financial Instruments Directive II Implementation – Policy Statement II Consultation Papers: 15/43, 16/19, 16/29, 16/43, 17/8 and 17/19 which are available on our website at www.fca.org.uk/publications Please send any comments or queries to:
MiFID Coordination
Markets Policy
Financial Conduct Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Telephone:
020 7066 9758
Email:
mifidii@fca.org.uk
This relates to Contents
1 Overview 3
2 Additional requirements 8
Consultation paper 15/43 response 16
3 Perimeter Guidance Manual (PERG) 17
Consultation paper 16/19 response 22
4 Client Assets Sourcebook (CASS) 23
5 Complaints handling 34
Consultation paper 16/29 response 37
6 Inducements, including adviser charging 38 7 Inducements relating to research 48 8 Client categorisation 64 9 Disclosure requirements 75 10 Independence 81 11 Suitability 85 12 Appropriateness 87 13 Dealing and managing 89 14 Underwriting and placing 102 15 Investment research 103 16 Client agreements 106 17 Product governance 107 18 Knowledge & competence 113 19 Taping 120 Consultation paper 16/43 response 140 20 Specialist regimes (COBS 18) 141 21 Small and medium-sized enterprise (SME) growth markets 147 22 Supervision manual (SUP) 148 23 Structured deposits 150 24 General provisions (GEN) 151 Consultation paper 17/08 response 153 25 Decision Procedure and Penalties Manual (DEPP) 154 26 Consequentials 156
Annex 1
Abbreviations used in this document 158
Appendix 1
Handbook text 162 returns you to the contents list takes you to helpful abbreviations How to navigate this document onscreen

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 1 Overview Introduction
1.1 This Policy Statement (PS) on the implementation of MiFID II sets out final rules
on conduct of business, client assets and final rules and guidance on certain other matters. It follows PS17/51 , published in March this year, which covered mainly markets and organisational requirements.
1.2 The rules in this PS are final. We have also finalised the near-final rules we published in
PS17/5 taking account of some technical changes arising from the finalisation of the Treasury’s implementing legislation and the rules in this PS. All our rules implementing MiFID II are included in Appendix 1. In CP15/43 and CP16/19 we published Handbook guides on, respectively, the implementation of the markets provisions in MiFID II and the organisational requirements in MiFID II. We will publish final versions of these guides in due course, taking account of comments in response to the consultations.
1.3 Alongside this PS, we are publishing a short sixth Consultation Paper (CP17/19) dealing
with a small number of residual issues.
Context
1.4 As we have previously noted in publications on MiFID II, we think that its
implementation will be important in helping us to achieve our operational objectives which relate to consumer protection and market integrity. Most of what is in the MiFID II conduct provisions is familiar in the context of the existing UK regulatory framework. But, as well as the specific adjustments firms will need to make, their implementation presents an opportunity for firms to consider their existing approach to compliance and their efforts to put the interests of clients at the heart of what they do. In this regard, having an effective governance structure and the right culture are crucial to implementing MiFID II successfully.
1.5 In relation to the conduct provisions, we have previously highlighted the connection
between the provisions in MiFID II and those in the Insurance Distribution Directive (IDD). Following this PS, we will consult on our implementation of the detailed conduct rules in the IDD.
1.6 We recognise that in implementing MiFID II there are some areas where we have gone
beyond what the legislation requires us to do. This reflects a conscious choice on our part to ensure that we have the right regulatory regime for the UK. The following
chapter highlights those areas and our rationale.
1.7 In implementing MiFID II requirements we have taken account, in particular where
we have gone beyond what the legislation requires us to do, of our obligation to have 1 https://www.fca.org.uk/publication/policy/ps17-05.pdf

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Markets in Financial Instruments Directive II Implementation – Policy Statement II regard to the Government’s economic policy in advancing our operational objectives. We have considered the benefits to consumers and to the integrity of the UK market of our proposals set against the costs for firms and therefore overall the extent to which the UK remains attractive as a location for internationally active financial institutions. Summary of feedback and our response
1.8 In this PS, we summarise feedback received to issues from across CP15/432
, CP16/193
,
CP16/294
, CP16/435
, and CP17/86
, but most notably the client asset rules from CP16/19 and the conduct rules from CP16/29. We group our responses into sections which relate to each of the CPs, and the issues raised, including areas where we have made changes to our proposals as a result. Much of what is covered is detailed and technical. There are a small number of areas where we make discretionary policy decisions.
1.9 There are a small number of the conduct areas, covered by CP16/29, where we
received the majority of our feedback.7
In response, we have made significant policy changes to some proposals, but for others we maintain the approach we proposed. Points of particular note include:

Inducements in relation to research. We will apply these provisions to collective
portfolio managers and not only to the investment firms that are subject to MiFID II. Other than this discretionary extension of scope, we are not going beyond the MiFID II regime. In response to consultation feedback we are amending our guidance on how quickly research charge deductions should be passed into a research payment account (RPA), allowing greater flexibility, and are clarifying that we do not intend to require investment managers to have a single RPA per research budget.
Client categorisation. We are revising our proposals for criteria for local authorities
opting up to professional client status. The revised criteria have a lower threshold for the size of portfolio that a local authority has to have, and makes it easier for local authorities investing on behalf of a LGPS pension fund to opt-up to professional client status if they wish to.
Best execution. We will not, contrary to the proposals we consulted on, apply
the changes in the best execution rules in MiFID II to Alternative Investment Fund Managers (AIFMs).
Appropriateness. We maintain our view that collective investment undertakings
other than Undertakings for Investments in Transferable Securities (UCITS), including non-non-UCITS retail schemes (NURS) and investment trusts, are neither automatically non-complex nor automatically complex.
Taping. We will not apply a requirement for recording phone conversations and
electronic communication (‘taping’) to all investment services and activities carried 2 www.fca.org.uk/publication/consultation/cp15-43.pdf – which received 26 responses 3 www.fca.org.uk/publication/consultation/cp16-19.pdf – which received 27 responses 4 www.fca.org.uk/publication/consultation/cp16-29.pdf – which received 211 responses 5 www.fca.org.uk/publication/consultation/cp16-43.pdf – which received 14 responses 6 www.fca.org.uk/publication/consultation/cp17-08.pdf – which received 2 responses to date 7 CP16/29 attracted the most responses, 211, when compared to all the other MiFID II CPs which numbered a further 69 in their entirety.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II out in relation to corporate finance business. We will, as proposed, remove the current partial exemption in our taping rules for discretionary investment managers, albeit making some modifications to the way the rule applies. We have also decided that where Article 3 firms decide to take a note rather than record a telephone conversation we expect the note to include key details of any orders taken and the key substance of the main points of the conversation. Who does this policy statement affect?
1.10 This PS affects a wide range of firms we authorise and recognise, particularly:

interdealer brokers
stockbrokers
financial advisers
corporate finance firms and venture capital firms
trading venues including regulated markets (RMs), recognised investment
exchanges (RIEs),multilateral trading facilities (MTFs), and prospective organised trading facilities (OTFs)
prospective data reporting service providers (DRSPs)
banks
investment managers, including individual and collective portfolio managers
tied agents and appointed representatives
trustee firms
firms trading commodity derivatives including energy and oil market participants
firms conducting corporate finance business or stock-lending activities
occupational pension scheme (OPS) firms
firms conducting Lloyd’s market activities
depositaries
investment companies with variable capital (ICVCs)
service companies
authorised professional firms (APFs)

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Is this of interest to consumers?
1.11 This PS covers the MiFID II rules of most relevance to consumers,. The conduct of
business rules including inducements, adviser charging and the taping of retail financial advisers (RFAs) and the client asset rules, will be of particular interest to consumers, together with the client assets rules. Consumers have a clear interest in financial markets that operate fairly and transparently. This is the basis for the decisions we make in this PS. Equality and diversity considerations
1.12 We have considered the equality and diversity issues that may arise from the decisions
made in this PS.
1.13 Overall, we do not consider that the policy approaches in this PS adversely impact any
of the groups with protected characteristics ie age, disability, sex, marriage or civil partnership, pregnancy and maternity, race, religion and belief, sexual orientation and gender reassignment. Next steps What you need to do next
1.14 Firms need to continue with their preparations for the application of MiFID II on
3 January 2018. We expect firms to take reasonable steps to meet this deadline. Implementation of MiFID II represents a significant challenge for firms, particularly given that important issues concerning the interpretation of the legislation are still being resolved. As set out below, we will continue to support firms with their implementation.
1.15 We are considering internally our approach to supervising against the new standards
in MiFID II. But several of the supervisory priorities that we highlighted in our Business Plan for 2017/18, both on a cross-sector basis and in relation to some of the specific sectors, are relevant to the changes that MiFID II will bring.
1.16 Firms who still need to apply for authorisation or variation of permission should
prioritise as a matter of urgency their submission of complete applications. We cannot, however, guarantee that these applications will be determined by 3 January 2018. Such firms must have contingency plans in the event that by 3 January 2018 they do not have the required permissions.
1.17 Firms’ responses to CP17/19, published today are also welcomed. The deadline for
responses is 7 September 2017.
What will we do
1.18 We remain committed to helping firms with the implementation of MiFID II. Our staff
will continue to liaise with industry to assist with implementation and will offer targeted firm sessions to educate and support their implementation of MiFID II throughout this year, and ensure that their preparations go as smoothly as possible.

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1.19 In CP17/8, we made some proposals in relation to business conducted by occupational
pension scheme (OPS) firms. The feedback on these proposals is not included in this PS and will be published separately later this year. We will also publish later this year our feedback on responses to the issues we are consulting on in CP17/19.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 2 Additional requirements Introduction
2.1 In many areas, our implementation of MiFID II delivers, through changes to the
Handbook, the minimum requirements in the directive and accompanying standards. We have sought to achieve this through an ‘intelligent copy-out’ approach.8 However, in three broad categories we have gone beyond applying the minimum MiFID II standards. These are where we apply:

the minimum standards in MiFID II to a wider range of firms or business than required
by the legislation to achieve consistency of regulatory standards and to avoid arbitrage
standards above the minimum in MiFID II to those covered by the legislation to
preserve existing UK regulatory standards
standards above the minimum in MiFID II to those covered by the legislation as a
result of new policy decisions
2.2 We think that the additional requirements we are imposing will help to promote
investor protection and market integrity and avoid distorting competition between different types of firms conducting designated investment business, thereby helping to deliver the outcomes that MiFID II envisages.
2.3 There will be some additional costs for firms arising from going beyond the minimum,
but we consider that the benefits will ensure the costs do not impair the attractiveness of the UK as a location for financial services. Clients will want to use firms that are adhering to regulatory standards that support their efforts to act in their clients’ best interests, to focus on good outcomes for clients and to act with integrity. There are also some areas where we have chosen not to extend new MiFID II provisions to firms that were covered by our implementation of MiFID, for example some enhanced best execution requirements. This is because we thought that costs would exceed benefits.
2.4 Information about the additional requirements that we will have in our Handbook
which go over and above the minimum requirements in MiFID II is contained in the many MiFID II implementation policy documents. It is mainly contained within the cost benefit analysis (CBA) annexes that accompany each CP we have published.
2.5 There is one area in which we applied the standard in MiFID to non-MiFID firms
but where we will not do so when MiFID II is implemented. Portfolio managers and firms operating pension funds, that are not authorised under MiFID, must currently transaction report. We recognise that these firms would experience a significant 8 An ‘intelligent copy out’ approach means adhering closely to the wording of MiFID II when drafting the relevant provisions in the Handbook, but using alternative wording where appropriate to align with UK law and practice.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II increase in the burden of transaction reporting were we to subject them to the new rules under MiFID II. We will therefore remove the obligation to transaction report from these firms for the time being.
2.6 This remainder of this chapter explains our overall approach, and summarises this
information to provide clarity on the details of what we have done. The minimum standard
2.7 MiFID II is intended to help improve the functioning of the European Union (EU)
single market by achieving a greater consistency of regulatory standards. By design, therefore, it is intended that Member States should have very similar regulatory regimes in relation to the matters covered by MiFID II.
2.8 A significant part of MiFID II is maximum harmonising (with a significant part of
the legislation taking the form of directly applicable regulations) leaving us with no discretion as to the standard that is imposed on those subject to the provisions. We have, however, as explained further below, extended some of these standards to firms or business to which they are not directly applicable.
2.9 There are, however, explicit clauses in Article 16 of MiFID II (dealing with client assets)
and Article 24 of MiFID II (dealing with certain conduct rules) which, subject to certain conditions, allow us to retain or impose standards going beyond the minimum standard in MiFID II. We explain further below how we are exercising the discretion MiFID II provides to impose additional standards.
2.10 As we made clear in our various MiFID II implementation CPs, we interpret MiFID II as
requiring us to apply the standards in the legislation to firms based outside of the EU that have a branch based in the UK which we authorise and which conducts investment services and activities. The minimum standard but with a wider scope (to achieve consistency of regulatory standards and to avoid regulatory arbitrage)
2.11 The Financial Services Authority (FSA, our predecessor regulatory organisation)
sought to have consistent regulatory standards and to avoid arbitrage across key areas covered by MiFID, in particular organisational requirements, client asset rules and conduct of business rules. MiFID standards were applied to non-MiFID firms, such as alternative investment fund managers and UCITS management companies. They were also applied to non-MiFID business conducted by MiFID firms, such as business involving insurance-based investments and pensions.
2.12 Consistency of regulatory standards is an issue that has concerned us in implementing
MiFID II and has influenced how we have implemented the organisational requirements, client asset rules and conduct of business rules. In these areas we have, in many cases, retained the wider application of MiFID standards that the FSA introduced and we have applied the MiFID II standards in these areas to non-MiFID firms and non-MiFID business where taking this approach (which generally involves making incremental Handbook changes) does not result in significant additional burdens on industry.

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2.13 In implementing MiFID, the FSA created a ‘common platform’ for organisational
requirements. This sought to ensure that firms subject to MiFID and the Capital Requirements Directive (CRD) could comply with a single set of systems and controls requirements. The common platform was then used as the basis for systems and controls requirements for various types of non-MIFID business, albeit applied as a mixture of rules and guidance.
2.14 We are updating the common platform in implementing MiFID II. Aspects of the
enhanced organisational requirements in MiFID II are therefore being applied to nonMiFID firms as guidance, and we are introducing a new rule extending the application of a number of aspects of the MiFID II organisational requirements to all of a UK investment firm’s designated investment business, including business which is not covered by MiFID II.
2.15 Where the MiFID II requirements on client assets enhance the standards in our Client
Assets Sourcebook (CASS) we have applied the enhanced standards to non-MiFID designated investment business. The original approach of having a single sourcebook for client assets rules for designated investment business was supported by industry and most respondents to our consultation on the implementation of MiFID II supported continuing this approach.
2.16 We will not in the main apply the conduct requirements in MiFID II to business involving
pensions and insurance-based investments. Parts of the Insurance Distribution Directive (IDD) package remain to be finalised, and we will consult separately on the application of its conduct standards to insurance-based investments. But there are areas where we are extending aspects of the MiFID II conduct standards to certain non-MiFID business. These include:

Inducements in relation to research. We will be applying the MiFID II research and
inducement rules to non-MiFID discretionary investment management business. This is consistent with the scope of application of our existing use of dealing commission rules, on which the rules in MiFID II build and we think the same issues, such as ensuring value for money in spending clients’ money on research, arise in relation to the consumption of research to discretionary investment managers whether or not they or their business is covered by MiFID II.
Client categorisation. We will be applying the same criteria establishing the scope
of clients who can be classified as eligible counterparties and the same client categorisation of local authorities for MiFID and non-MiFID designated investment business. This is to ensure that the same basic protections apply to local authorities across all of the designated investment business they undertake.
Disclosure requirements. We will apply aspects of the MiFID II rules on
communicating with clients to non-MiFID designated investment business where these can be inferred from the existing provisions and do not impose an additional burden. This should ensure that the overall approach to the presentation of information to clients is consistent across all types of designated investment business, helping clients to compare information from different firms.
Independence. We will adopt the MiFID II independence standard for personal
recommendations to retail clients in relation to or non-MiFID retail investment products (such as insurance-based investments and personal pensions). In our view

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Best execution. We will apply the MiFID II best execution standards to firms
authorised under the UCITS Directive and, with the exception of the reporting obligation in RTS 28, to Article 3 firms (although we are not now intending, contrary to our proposals in CP16/29, to apply the new requirements in MiFID II rules to AIFMs, small authorised AIFMs and residual CISs). UCITS are a key retail product and we think it is appropriate that firms managing these products are held to high standards when dealing on behalf of their funds.
Investment research. We will apply the MiFID II provisions on the production and
dissemination of investment research to certain types of non-MiFID firm. The MiFID II standards are very similar to those under the existing directive that we apply to non-MiFID firms and we believe the production of research by non-MiFID firms raises the same regulatory risks, chiefly around conflicts of interest, as does production of research by MiFID firms.
Product governance. We will apply the MiFID II rules on product governance as
guidance to firms undertaking non-MiFID designated investment business. The MiFID II standards are similar to our existing expectations in relation to product governance and many firms will conduct both MiFID and non-MiFID designated investment business.
2.17 Firms have expressed concerns that we are not only applying the MiFID II inducement
and research rules to a wider scope of firms but that we are interpreting them in a stricter fashion than other Member States. As we have consistently made clear, however, we consider it important to have a common approach across the EU to the interpretation of key aspects of the MiFID II research and inducement rules. Therefore we actively participated in ESMA work on interpretative Q&A on inducements in relation to research, and we agree with and will abide by the interpretations in those Q&A that ESMA has published.
2.18 We have, however, also had a lot of requests from industry to provide comment to
assist interpretation and the practical application of the inducements in relation to research rules. Responding to this, we therefore cover in this PS a small number of practical issues about the application of the regime. We believe that what we say is consistent with both MiFID II and the ESMA interpretative Q&A on this topic, and responds to the requests we have had to provide more information about the practical implementation of the regime. Above the minimum to preserve existing UK standards
2.19 MiFID and MiFID II both contain provisions that enable Member States to apply
requirements which are additional to those contained in the EU legislative package, subject to meeting certain conditions. MiFID II enables us to retain, and apply new, additional requirements which can be shown to be justified and proportionate in the areas of client asset and investor protection. New additional requirements have to be notified to the Commission which then has to make public an opinion on whether it thinks the requirements are justified.

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2.20 In implementing MiFID II we will need to use these provisions to:

Maintain our existing Retail Distribution Review (RDR) adviser charging and platform
rules which we believe are crucial to managing conflicts of interest and the potential for bias in the sale of retail investment products.
Extend the MiFID II inducement bans for firms providing independent investment
advice and portfolio management. For firms providing services to retail clients, we will: (i) extend the inducement ban to the provision of restricted (as well as independent) advice; and (ii) prohibit the acceptance of commission and benefits, rather than their acceptance and retention (ie to ban rebating of inducements). Again we believe this is necessary to ensure that retail clients are sold the investment products they need to meet their investment requirements rather than just the products firms want to sell. Both of these will require notifications of new additional requirements to the Commission under MiFID II.
Keep existing CASS rules, specifically in the two areas that go beyond MiFID II: first,
a requirement for a daily report on clients’ assets from prime brokers to their clients; and second, a restriction on set-off rights relating to client money. The former helps to ensure that there is more effective control of client assets and should help to assist with a more timely return of those assets in the event of an insolvency. The latter, which will require a notification of new additional requirements to the Commission under MiFID II, is a means of ensuring that clients’ assets are not diminished in an insolvency as a result of being set off against obligations not directly related to their business.
2.21 There are also some aspects of our regulatory framework that we intend to retain as
part of maintaining a high standard of regulation in the UK.
2.22 MiFID II requires that firms benefiting from the optional exemption in Article 3
are subject to requirements which aew at least analogous to certain provisions in MiFID II. This list of requirements does not cover all the organisational and conduct requirements we currently apply to these firms, for example it does not include best execution. In implementing MiFID II we have not cut back the obligations and conduct requirements on Article 3 firms to just those contained in the list in MiFID II. We did not think it was the intention of the changes to Article 3 to lower the conduct standards that individual Member States applied to these firms, as opposed to ensuring that each Member State was imposing at least a certain set of requirements. It is also our view that the obligations we impose on such firms that go beyond those listed in Article 3 help to ensure a more rounded regime of investor protection for clients receiving services from these firms.
2.23 MiFID II Article 25(1) introduces a requirement that firms must ensure that individuals
providing advice or information to clients possess the necessary knowledge and competence to ensure that firms meet their investor protection obligations (under Articles 24 and 25).
2.24 ESMA has published guidelines setting criteria for the assessment of knowledge
and competence. These guidelines acknowledge that they only establish minimum standards and that national regulators ‘can require greater levels of knowledge and competence for staff giving advice and/or for staff giving information’. We have certain specific standards in our Training and Competency sourcebook that go beyond the minimum standards in the guidelines, in particular the requirements we have for those

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2.25 We are in the process of implementing the senior managers and certification regime
(SMCR) for all FSMA authorised firms, including investment firms. This will help firms and us to be clear about which individuals in senior management are responsible for what aspect of a firm’s business. Greater personal accountability will focus minds and drive up standards. There is no direct equivalent to SMCR in MiFID II. However, we believe that because MiFID II does not directly address this area, there is scope for Member States to have their own rules for their firms. A recital in the MiFID II implementing regulation says that the legislation’s organisational requirements: ‘… should be without prejudice to systems established by national law for the registration or monitoring by competent authorities or firms of individuals working within investment firms’.
2.26 There are two important aspects of the FSA’s implementation of the organisational
requirements in MiFID that we are retaining in our implementation of MiFID II. These are:

SYSC 4 – When implementing MiFID, the FSA retained a rule that firms needed to
apportion responsibility for significant responsibilities relating to the operation of the firm amongst senior management and we are not changing this as part of MiFID II implementation. This rule predates the implementation of MiFID and, whilst there is no direct equivalent to this rule in MiFID (or MiFID II), we continue to believe that this is an important part of effective governance of investment firms and accountability of senior management. It is also consistent with the enhanced emphasis on accountability as part of the senior managers and certification regime.
SYSC 6 – When implementing MiFID, the FSA applied the bedrock organisational
requirement that a firm should have adequate policies and procedures sufficient to ensure compliance with its obligations, not just to its obligations under MiFID but with ‘…its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime.’ We continue to believe that this is important to ensure that firms are adequately organised across all their business and pay particular attention to arrangements to counter the risk of financial crime and are not changing this approach in implementing MiFID II. Modifications to the minimum through policy choice
2.27 As explained above, in most cases our decisions to apply requirements which are
additional to those contained in MiFID II, or to exercise discretions afforded by the legislation, are driven by a desire to preserve existing domestic standards. However, in a small number of cases, we have taken decisions to reflect new policy positions. Whilst we have exercised discretion to provide additional consumer protections through some of our decisions, in others, we are seeking to tailor certain obligations to the specific attributes of UK markets.
2.28 The main areas where we have made new discretionary policy decisions are as follows:

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Client categorisation. MiFID II requires local authorities to be categorised as retail
clients by default to ensure that they benefit from the greatest level of investor protection. However, such clients may request to be treated as elective professional clients subject to satisfying certain criteria. MiFID II allows us to adopt alternative or additional criteria for local authorities requesting categorisation as elective professional clients. The criteria we will apply, set out in detail in Chapter 8, are intended to ensure that the quantitative opt-up criteria are more appropriately aligned to the structure and nature of UK local authorities, both when undertaking treasury management and pension administration activities. We believe the criteria appropriately balance the ability of local authorities to access the financial services they require whilst securing an appropriate degree of investor protection.
Taping. Applying our taping rules, as amended by MiFID II, to discretionary
investment managers (currently they only have to tape when they have significant dealings with brokers based outside the UK) is an extension of scope rather than substance. But as it diverges from our current approach to taping by investment managers (and MiFID II does not require us to apply taping requirements to firms when conducting portfolio management), we list it as a new policy choice.
Inducements. Following the Financial Advice Market Review (FAMR) the regulated
activity of advising on investments has been amended. We now plan to consult again on amendments to our inducement rules to make clear that advisory firms cannot continue to receive significant hospitality (or other inducements) from product providers and claim that this is compatible with the rules on the grounds that the relevant benefit is not in connection with services provided to individual clients. There is no specific rule to this effect in MiFID II, although the policy position is consistent with the legislation’s efforts to ensure that third-party payments do not cause firms to act contrary to the best interests of their clients. If we go ahead with this following the consultation, it will require a notification to the Commission under MiFID II.
Principles for Businesses. In implementing MiFID, the FSA limited the application
of our Principles for Businesses (PRIN) to MiFID business involving ECPs. This was to align with EU legislation. We are reversing this in implementing MiFID II. This reflects the fact that MiFID II applies certain conduct standards to dealings with ECPs and therefore we believe it is consistent with what MiFID II is trying to achieve. But because PRIN does not derive directly from MiFID II, this is a policy choice.

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Table 1 – Additional requirements in the FCA implementation of MiFID II
Handbook reference
Approach
Notes apply
MiFID II requirements only apply
MiFID II requirements to wider scope of business apply additional requirements to preserve existing standards apply modified requirements following new policy decisions High Level Standards PRIN X • Application to business with eligible counterparties to reflect the extended scope of MiFID II’s conduct requirements SYSC X • Retention of the common platform (which includes non-MIFID firms) for the application of organisational requirements X • Retention of the apportionment of responsibility rule in SYSC 4

Retention of the requirement in SYSC 6 to maintain policies and procedures
to ensure compliance with obligations under the regulatory system X • MiFID-derived taping rules applied to investment managers (exemption removed) APER X • Retention of the approved persons regime and the senior managers and certification regime FIT X • Retention of the approved persons regime and senior managers and certification regime TC X • The requirements in MiFID II for the assessment of knowledge and competence of staff are explicitly minimum harmonising. We have therefore retained our existing requirements in TC which go beyond the minimum requirements specified in ESMA guidelines GEN X • Part of the implementation of the requirement in MiFID II for thirdcountry firms to be treated no more favourably than EU firms Business Standards COBS X • Certain aspects of COBS are applied to non-MiFID firms and business including research and inducements, client categorisation, describing advice services and best execution X • RDR rules on adviser charging and platforms are maintained
MiFID II’s new inducement bans are extended to reflect the scope of
existing RDR rules
X • Use of discretion to introduce bespoke opt-up criteria for local authorities seeking categorisation as professional clients CASS X • Application of MiFID requirements to all designated investment business (including non-MiFID business) is maintained CASS X • Maintaining the requirement for a daily report on clients’ assets from prime brokers
Restricting set-off rights relating to client money
MAR X • Following the regimes in MiFID II PROD X • PROD is only applied as guidance in relation to non-MiFID business Regulatory Processes SUP X • Retention of the approved persons regime and senior managers and certification regime DEPP X Redress DISP X • Retaining certain aspects of our complaint handling rules for MiFID complaints COMP X Other
Article 3
firms
X • Maintaining certain existing requirements for Article 3 firms which are beyond the scope of at least analogous requirements MiFID requires us to apply Structured deposits X

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 3 Perimeter Guidance Manual (PERG) Introduction
3.1 This chapter summarises the feedback we received on the changes proposed to the
Perimeter Guidance Manual (PERG) in CP15/43, CP16/29 and CP16/43. The chapter is relevant to regulated and unregulated firms, and individuals performing investment services and activities. Draft perimeter guidance in CP15/43
3.2 In CP15/43, we proposed to issue guidance on the scope changes imposed by MiFID II,
including various topics such as:

the new service of operating an OTF and the associated definition of ‘multilateral
system’
the extension of the MiFID service of executing client orders to cover issuance of
securities including why the issue of its own securities by an ordinary commercial company should not be within the MiFID perimeter
the fact that the matched principal exclusion no longer applies to the MiFID dealing
on own account definition, although it remains relevant for prudential capital purposes
structured deposits and how they fit into the MiFID and RAO perimeters
changes to the exemptions from the MiFID perimeter
3.3 We asked users of PERG whether they agreed with our proposal to continue to
offer perimeter guidance on the scope of EU legislation by updating PERG 13. More specifically, we asked whether they agreed with our interpretation of a multilateral system.
3.4 All respondents welcomed the updating of PERG to take account of MiFID II related
scope changes. On the detail of the changes to PERG 13, including the topics identified above, we received a range of responses, the most detailed of which concerned the definition of multilateral system and related issues.
3.5 Whilst some respondents welcomed the draft guidance, there were differences of
opinion as to whether the scope of the definition of multilateral system should be construed more broadly or more narrowly. The principal comments made in the responses included the following as being examples of what should not amount to operating a multilateral system:

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internal crossing by asset managers
ad hoc crossing of client orders in the course of principal brokerage activity
matched principal trading effected through voice trading
post-trade risk reduction activities
off-venue arranging in relation to block trading where the blocks are executed on a
trading venue
3.6 There were also comments to the effect that although the definition of multilateral
system does not explicitly require contract conclusion, this is implicit in the definition by virtue of Article 1(7) MiFID II. This provision provides that all multilateral systems must operate either in accordance with the authorisation and other requirements relating to MTFs or OTFs, or those applicable to regulated markets.
3.7 We also received comments on other aspects of the draft guidance. As regards
the extension of the MiFID service of executing client orders to cover issuance of securities, it was suggested by one respondent that it would be helpful to make clearer in the guidance that execution of orders involves a service provided to the client, so that the extension to the activity of executing orders applies only in the context of providing a service.
3.8 There were some drafting suggestions provided on the guidance on dealing on own
account, new exemptions and regulated activities relating to structured deposits. Other detailed suggestions included requesting more explicit guidance in regard to local firms and revising the ESMA Q&A relating to market-making. Our response on the draft perimeter guidance in CP15/43 We will update PERG to take account of MiFID II related scope changes, giving guidance on the scope of the directive. We are grateful for the various suggestions for clarifying the scope of the meaning of ‘multilateral system’. Since providing the draft guidance for consultation, ESMA has produced Q&A addressing issues regarding multilateral and bilateral systems9 , including answers relating to issues identified in paragraph 3.5 above. A number of responses to our consultation concerning the issue of multilateral systems stressed the need for a common approach across Member States and ESMA is well placed to help deliver this outcome. On reflection, we think that it is best to rely on achieving a common convergent approach through ESMA Q&A. We may opt to make perimeter guidance on the question of what is a ‘multilateral system’ at a later stage, but for the time being have focused our Q&A on the scope of operating an OTF or an MTF, with a view to enabling firms to consider whether and what authorisation they require. 9 See ESMA Questions and Answers on MiFID II and MiFIR market structures topics https://www.esma.europa.eu/sites/default/files/library/esma70-872942901-38_qas_markets_structures_issues.pdf

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Markets in Financial Instruments Directive II Implementation – Policy Statement II As for Article 1(7) of MiFID II, we have included a rule in the Market Conduct Sourcebook (MAR) giving effect to this provision. We remain of the view that any system that merely receives, pools, aggregates and broadcasts indications of interest, bids and offers or prices should not be considered a multilateral system, although this may amount to activity under Article 25(2) of the RAO. Our guidance in MAR implementing
Article 1(7) of MiFIR reflects this. We have revisited our guidance on
flexible forward contracts to express our view that the length of the delivery period is not relevant to whether or not an instrument is an option, although it is a relevant factor when considering whether the contract is likely to be a means of payment. As regards the extended definition of the MiFID service of executing client orders to cover issuance of securities, we do not consider that it is necessary or helpful to address issues concerning investment services or activities in this respect, as the definition itself makes no such distinction. We remain of the view, however, that the issue of its own securities by an ordinary commercial company should not be within the MiFID perimeter and that no further clarification is needed in this respect. We appreciate and have taken note of several of the drafting suggestions and observations received and have reflected this in the amendments to PERG 2 and PERG 13. As for local firms and authorisation issues more generally, whilst we have not amended the corresponding PERG text, we note that issues relating to these firms were considered as part of the FCA’s MiFID II Application and notification user guide.10 Draft perimeter guidance in CP16/29
3.9 In CP15/43, we commented that we would issue a subsequent CP addressing scope
issues contained in the MiFID II delegated acts that were not available at the time of our first consultation. Amongst the matters on which we proposed guidance for in CP16/29 were:

what is a personal recommendation for the purposes of MiFID II?
what is the scope of the expanded category of financial derivatives, notably in
relation to FX products?
what is the scope of the amended categories of commodity derivatives?
how are emission allowances treated under MiFID II?
what is the scope of the exemptions for professional firms and commodity trading
firms under MiFID II?
10 See 3.24-3.25 https://www.fca.org.uk/publication/documents/mifid-ii-application-notification-guide.pdf

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3.10 We asked whether readers agreed with the proposed amendments to PERG 2 and
PERG 13 and if not, where and why they disagreed.
3.11 The text was positively received by most respondents although there were some
suggestions as regards the content of the perimeter guidance, notably on the following themes:

In the case of flexible forward contracts, the guidance should be revisited noting that
the length of the delivery period has no bearing on whether an instrument is a future or an option, although it may be used to determine whether the means of payment exclusion for FX products in the MiFID II delegated regulation applies.
The PERG guidance should take account of the future development of similar
products to binary bets albeit with more than two possible outcomes.
Clarity as to what is meant by ‘use of the internet’ in connection with the giving of
‘personal recommendations’.
The use of a narrative approach as opposed to Q&A in PERG 13.
Our response on the draft perimeter guidance in CP16/29 We have revisited our guidance on flexible forward contracts to express our view that the length of the delivery period is not relevant to whether or not an instrument is an option, although it is a relevant factor when considering whether the contract is likely to be a means of payment. As regards products similar to binary bets with multiple outcomes, we would expect these contracts to fall within the definition of contracts for differences prior to the MiFID II increases in scope. We have clarified what is meant by ‘use of the internet’ in connection with the giving of ‘personal recommendations’ in Q20. So far as adopting a narrative approach as opposed to Q&A in PERG 13 is concerned, we remain of the view that for guidance on EU directives, a Q&A approach remains the most effective approach for ensuring accessibility to the widest audience. Draft perimeter guidance in CP16/43
3.12 The consequential amendments to PERG set out in CP16/29 were accepted by
respondents although one respondent noted that the amendments to PERG 2 should refer to Annex 1 Section C of MiFID II where they relate to futures.
3.13 We also included guidance on the MiFID II exemption for professional firms in PROF
to be read in conjunction with PERG 13. We received no objections to this proposed guidance.

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3.14 We will make the guidance in the Professional Firms sourcebook (PROF) relating to
professional firms subject to the Part XX FSMA regime and the effect of the Article 2 MiFID II exemption for professional firms.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 4 Client Assets Sourcebook (CASS) Introduction
4.1 This chapter covers responses to the questions in Chapter 7 of CP16/19 and Chapter
18 of CP16/29 on the proposed amendments to our Client Assets Sourcebook (CASS) arising from the MiFID II implementation. CP16/19
4.2 In CP16/19 we consulted on changes to CASS to implement the safeguarding of client
assets provisions in MiFID II. We noted that our implementation proposals would not mean significant changes to the existing CASS regime because MiFID II is broadly aligned with CASS: we think most new MiFID II requirements are broadly implemented already. Maintaining a single rulebook
4.3 We proposed continuing our single rulebook approach, implementing MiFID II for
all designated investment business to ensure the same standards and investor protections. We also proposed that professional clients of non-MIFID firms11 could continue to opt-out of the client money rules (CASS 7).
4.4 In CP16/19 we asked:

Q17 – Do you agree with our proposal to implement MIFID II requirements for MiFID
and non-MiFID business maintaining a single rulebook? If not, please give reasons.
4.5 All respondents agreed with our proposal on the basis that it would maintain simplicity,
clarity, high standards of investor protection and manageable costs for firms. One noted that it would continue to place an additional regulatory burden on UK nonMiFID firms (eg certain UCITS management companies and AIFMs) compared to firms in other EU member states (in particular, requirements to appoint a client assets oversight officer and maintain a CASS resolution pack). Our response on maintaining a single rulebook In light of the feedback received, we are continuing the approach proposed in consultation. The overwhelming majority of responses to our pre-consultation survey and the CP did not think the new rules would be burdensome, including for non-MiFID firms. Our consultation concerned incremental changes to CASS to implement 11 CASS 7.10.12R.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II MiFID II and applying these to all designated investment business. In our pre-consultation survey, we concluded that these changes do not materially impact firms conducting non-MiFID business, including UCITS management companies and AIFMs, either because they are not engaged in the relevant activity or the new requirements are already covered by CASS. UCITS management companies and AIFMs are subject to a limited set of the CASS rules in certain circumstances. We did not consult on removing any existing requirements for nonMiFID firms and will continue to maintain a consistent standard of protection for client assets for all designated investment business. Implementing MiFID II safeguarding of client assets provisions
4.6 We proposed the following changes to the existing CASS rules for all designated
investment business, including non-MiFID business:

prohibit title transfer collateral arrangements (TTCAs) with retail clients and require
firms to consider the appropriateness of TTCAs for non-retail clients
only allow firms to agree with a third party that custody assets can be used to satisfy
a firm’s obligations to that third party (for example, under a lien) if required by law, and to record such arrangements in client contracts
extend safeguarding provisions to third party custodians who delegate to further
sub-custodians
when placing a client’s money in a qualifying money market fund (QMMF), require
firms to make internal assessments and obtain express client consent
provide an exemption for firms from the prohibition on depositing over 20% of client
money in a group bank if they meet certain conditions
require firms to have measures in place to prevent unauthorised use of client assets,
and
require firms to ensure appropriate collateral is provided and monitor its continuing
suitability when arranging securities lending for clients
4.7 We also proposed to keep existing CASS provisions that are being implemented by
MiFID II and update the drafting as required.
4.8 In CP16/19 we asked:
Q18 – Do you agree with our proposals to implement MiFID II safeguarding of client
assets provisions? If not, please give reasons.
4.9 Most respondents broadly supported the proposals. Some said they agreed that most
new MiFID II requirements were already covered by CASS and where MiFID II goes further, there would be minimal impact.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Prohibition on transfer collateral arrangements (TTCAs) with retail clients
4.10 One respondent suggested allowing firms to retain existing TTCAs with retail clients.
Another respondent suggested that the CBA did not account for the widespread use of TTCAs with retail clients. Inappropriate use of TTCAs with non-retail clients
4.11 A few respondents considered this proposal provided less flexibility to firms than under
MiFID II by requiring them to consider the ‘extent by which’ rather than ‘whether’ the amount subject to TTCA is in excess of a client’s obligations. They were concerned that the draft rules might prevent them from taking margin or collateral in advance, maintaining a buffer of collateral to counter market fluctuations and client trading decisions, and managing credit appropriately or conservatively. They also suggested that firms should not be prevented from considering the appropriateness of TTCAs per class of client, rather than individually. One respondent highlighted that the proposed risk disclosure to clients overlaps with disclosure requirements under client reporting and information rules (CASS 9) and Article 15 of the Securities Financing Transactions Regulation (SFTR). Custody and client money liens
4.12 The following comments were made, in most cases by a single respondent:

The proposed rules do not accommodate a situation where a client instructs the
firm to grant a security interest, lien or right of set-off to a third party over the client’s safe custody assets.
The interpretation of the MiFID II text implied in the draft rules could disrupt the
operation of omnibus accounts in custody chains and require a firm to negotiate away liens by Central Securities Depositaries (CSDs), Central Counterparty Clearing Houses (CCPs) and other market infrastructures.
Requests for clarification on the level of risk disclosure of liens over client assets.
The same respondent questioned whether the proposal addresses liens required by rulebooks of local market infrastructures (eg CCPs and CSDs). They also said the cost of updating firm books and records could be significant.
Suggestion to amend the proposed guidance12 on clearing and settlement debts
to include ‘properly incurred liabilities’ arising on behalf of clients when providing services to them.
Asking whether granting a third party a lien over client assets in respect of
discretionary credit extended by that third party to a firm’s clients could be said to be needed in order “to facilitate settlements”. The respondent suggested that clients would otherwise have to prefund all transactions if third parties did not provide such liquidity.
Drafting suggestions to address a concern that the third party’s right to exercise
the lien could be interpreted as being contingent on the firm recording it in the client contracts and its own books and records. 12 CASS 6.3.6BG.

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The proposed rules on client money liens were unnecessary, as MiFID II is already
implemented in CASS 7.13
Removing the exemption to allow firms to agree to liens with third parties to ‘access
to the local market’ would require renegotiation of existing custodian liens in a global custodian network. One respondent said that if firms need local legal advice for each jurisdiction they hold assets in, they would incur significant costs.
The proposed guidance14 on requiring firms to disclose in the client contracts ‘all
the terms’ under which liens may be granted would not be beneficial for firms with multiple sub-custodians and could result in lengthy client disclosures. Delegation of safekeeping duties to a third party
4.13 Some respondents asked if firms could rely on their sub-custodians’ due diligence to
ensure appropriate control over delegation. Others questioned the level of oversight firms need over the custody chain. One respondent suggested it was not practicable to require only regulated sub-custodians in the custody chain for safekeeping duties. Internal firm assessments of qualifying money market funds (QMMFs) and express client consent
4.14 No comments were received on the proposed internal firm assessments when
depositing client money in a QMMF. One respondent questioned the types of money market funds that would be considered a QMMF in light of the ESMA guidance on the common definition of money market funds15 and the forthcoming Money Market Funds Regulation. They also questioned whether placing cash in a QMMF requires permissions under the custody rules (CASS 6) and is subject to the COBS rules for investments.
4.15 On express client consent when depositing money in a QMMF, one respondent asked
if agreements with existing clients who had not opted out under existing rules need to be repapered. Another asked if the existing rules16 relate to situations where the firm itself makes the decision to place client money into a QMMF, rather than the individual clients making these investment decisions. Depositing client money in a group bank
4.16 Some respondents suggested the exemption from the prohibition on depositing over
20% of client money in a group bank could apply to CASS medium and CASS large firms (in addition to CASS small firms) where their client money holdings fall into the CASS small threshold.
4.17 A few respondents also felt the timing of notifying the FCA on diversification
assessments should be changed from “without delay” to “one month” in line with other notification requirements. 13 The respondent pointed to the provisions on client money held by third parties (CASS 7.14), record keeping (CASS 7.15) and acknowledgement letters (CASS 7.18; CASS 7 Annex 2R to 4R). 14 CASS 6.3.6CG and CASS 7.11.60G. 15 CESR/ESMA guidelines on common definition of European money market funds https://www.esma.europa.eu/sites/default/files/library/2015/11/10-049_cesr_guidelines_mmfs_with_disclaimer.pdf 16 CASS 7.13.

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4.18 Some respondents requested clarity on the following:

The meaning of ‘appropriate measures’ and ‘close monitoring’, and to what the
requirement to take remedial measures applies.
The level of detail that client contracts should contain regarding omnibus account
risk and how a firm can clearly set out what their clients have agreed.
The way in which firms need to consider the settlement of trades and the risk of
settling one client’s trade with other clients’ assets, including guidance around the use of commercial settlement systems (eg CREST) and that the inclusion of disclosures required by COBS 6.1.7R in the firm’s terms of business may not be sufficient to meet the ‘express prior consent’ requirement for use of assets.
Whether new CASS 6.4.1CR (appropriate measures to prevent use) and CASS
6.4.1R(3) (express prior consent of a client) are mutually exclusive.
Whether ‘express prior consent’ is only required when firms intend to use client
assets and do not envisage the unintended consequences of an omnibus structure.
Whether unauthorised use of client assets as a result of an omnibus structure is a
rule breach if appropriate controls are in place to prevent such an occurrence and appropriate actions are taken to fund any shortfall arising.
4.19 One respondent felt firms with an appointed global sub-custodian will struggle to
meet the proposed rules especially where contractual settlement is offered on pooled assets. They felt this proposal would push the industry to pre-fund any trading which is not carried out through their own nominee. Taking collateral when arranging securities lending
4.20 One respondent was unclear on whether this proposal was placing responsibility on
the firm to determine the appropriateness of collateral at the individual security level. They also questioned whether the proposed guidance17 will apply to both bilateral and trilateral collateral arrangements. Another respondent was concerned that the proposed rules may bring nearly all securities lending activities within the scope of the custody rules (and, if so, that this was not reflected in the CBA). Appointment of a single officer for safeguarding of client assets
4.21 A number of respondents suggested the proposed rules were more restrictive
than MiFID II, as the drafting restricts the single officer from undertaking additional responsibilities. One requested guidance on ‘small and non-complex firms’. Another requested that, given the Senior Managers and Certification Regime, (SMCR) a single job title is defined within the rules (such as ‘CASS Oversight Officer’ or similar) with a Glossary definition explaining the scope. Recitals
4.22 One respondent commented that the recitals give helpful insight into the meaning of
the MiFID II text and suggested incorporating these into the Handbook rules. 17 CASS 6.4.2BG.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on implementing the MiFID II safeguarding of client assets provisions Client consent We agree that where there are new requirements or new standards for consent in MiFID II, this will require repapering client agreements. Comments on the CBA As with the CBA for proposed rules in other policy areas, the CASSspecific CBA dealt with instances where the MiFID standard would be extended to non-MiFID business under our single rulebook approach, rather than the areas where we do not have discretion over implementation. We did not receive any cost data or evidence from consultation respondents of the proposals being a significant impact on MiFID or non-MiFID business. Our pre-consultation survey confirmed that the majority of CASS firms conduct both MiFID and non-MiFID business, and therefore would already be implementing the new requirements for both their MiFID and non-MiFID business. Prohibition on TTCAs with retail clients Firms must terminate existing TTCAs with retail clients – retaining them is contrary to MiFID II. Inappropriate use of TTCAs with non-retail clients We believe the wording ‘extent by which’ is in accordance with the MiFID II requirement for an assessment of whether collateral taken ‘far exceeds’ the client’s obligation, not just ‘whether’ it exceeds it. The rules do not prevent taking margin or collateral in advance, maintaining a buffer to counter market fluctuations and client trading decisions, or appropriate credit risk management (subject to the arrangements being justifiable as appropriate under the new rules). It may also be possible for firms to satisfy themselves that it is appropriate to enter into a TTCA on a ‘class of client’ basis, but compliance with the relevant rules will be determined on a per client basis as individual clients within a class may have varied obligations to the firm. We have introduced guidance stating that a firm may choose to combine its client communication regarding TTCA risks with communications made under SFTR Article 15 or CASS 9. Custody and client money liens In response to the comments on custody and client money liens:

The final rules implement the prohibitions set out in MiFID II with only
the permitted exceptions stated in MiFID II. MiFID II does not include an exception for where a client has instructed the firm to grant a lien on its behalf that extends wider than the recovery of debts permitted under MiFID II, so we have not included this in the new rules.
We have deleted the reference to ‘at the time’ in the new rules. There
is a separate requirement on the firm to ensure that the ownership status of the assets is clear in client contracts and in the firm’s books and records.

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On the level of risk disclosure required to clients around liens, this is
only required for a general, wide-reaching lien required by applicable law in a third country jurisdiction in which the client assets are held. We consider a firm can determine the best way to record a lien in its books and records, but this should be clear in a way that allows ownership rights to be readily established on insolvency, as per MiFID II.
The final drafting of the rules is not intended to disrupt the use of
omnibus accounts in custody chains. We have added guidance explaining how ‘applicable law’ should be understood in this context.
We agree that the MiFID II rules on client money liens are already
implemented in the CASS 7 acknowledgement letter rules. As a result we have deleted the client money lien rules18on which we consulted.
Regarding expanding the guidance19 to include ‘properly incurred
liabilities’ and whether discretionary credit extended by a third party can properly be said to be needed to facilitate clearing and settlement, the guidance is only to make it clear that firms are able to grant security interests or liens over client debts relating to clearing or settlement.
We are not adopting any transitional provision for existing lien
arrangements as the acceptable circumstances for general liens has been clearly identified since the ESMA technical advice to the Commission on MiFID II in December 2014.20 Firms will also have time in between this publication and 3 January 2018 (when MiFID II comes into force) to amend existing arrangements as necessary.
MiFID II does not require firms to obtain local legal advice in each
jurisdiction in which client assets are held. However, it does require firms to consider their arrangements with third parties and, broadly speaking, if it appears that any lien or set-off arrangements over client assets cover debts other than client debts, the rules do not permit this unless the applicable law in the third country jurisdiction requires it.
We expect firms to record any security interest, lien or right of set-off
in client contracts and in their books and records, ultimately in a way that allows ownership rights to be readily established on insolvency. We expect these records to evidence that the client has agreed to the firm being able to grant a third party a lien over the client’s assets (and not necessarily list all the terms in the client contracts) and to allow the firm to identify all the client assets that are subject to a lien (including where this involves the firm being informed by a third party) at all times. 18 CASS7.11.59R – CASS7.11.60G. 19 CASS6.3.6BG. 20 https://www.esma.europa.eu/document/technical-advice-commission-mifid-ii-and-mifir

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Delegation of safekeeping duties to a third party In line with MiFID II, we expect a firm subject to CASS to ensure its custody agreements only provide for further delegation that complies with the MiFID requirements on where assets can be held. MiFID II continues the existing MiFID requirement21 to ensure the custody chain comprises only regulated custodians. We are retaining this requirement in our rules with the existing exception that allows a firm to deposit a safe custody asset with an unregulated sub-custodian in a third country if:

required by the nature of the asset or the investment services
connected with the asset require it to be deposited with a third party in that third country; or
the asset is held on behalf of a professional client and the client
requests in writing that the asset is deposited with a third party in that third country.
Under MiFID II, if a firm delegates any of its holding and safekeeping
functions, the same exceptions will apply to the delegate.
Internal firm assessments of QMMFs and express client consent We are keeping the proposed QMMF definition, which tracks the MiFID II definition. The ESMA guidance on the common definition of money market funds is separate from MiFID II and we are not adopting it here.22 When a firm places client money in a QMMF as part of its requirement to comply with CASS 7.13.3R on segregation, the firm will need to have the relevant permissions to hold any units pursuant to CASS 6 and to comply with those rules.23 When doing so, a firm will have to comply with other applicable rules, including COBS. We are not allowing firms to grandfather clients who did not opt out of QMMFs previously as though they have given ‘express client consent’, as MiFID II does not permit this. However, if a firm’s agreements with clients amounted to the firm having obtained express consent then repapering may not be required. In accordance with MiFID II, client money may be placed in a QMMF.24 Any QMMF units created must be held as the client’s safe custody assets in accordance with CASS 6. However, money deposited in a QMMF is still treated as ‘client money’ for the purposes of meeting the obligation to segregate client money. Accordingly, we expect a firm to report money placed in the QMMF as client money and the units in the QMMF as safe custody assets. When any QMMF units are liquidated and held as money, the money must be paid into a client bank account, and is only reportable as client money. 21 CASS 6.3.4R(1) states that “…a firm must only deposit safe custody assets with a third party in a jurisdiction which specifically regulates and supervises the safekeeping of safe custody assets for the account of another person with a third party who is subject to such regulation.” 22 The ESMA guidance on the common definition of money market funds is transposed in COLL 5.9. 23 CASS 7.13.26R to CASS 7.13.27G. 24 CASS 7.13.3R.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Depositing client money in a group bank MiFID II does not specify the exact nature of ‘small balances’ of client money, so we have interpreted this as a balance that meets the existing concept of the CASS small client money threshold. We agreed with feedback that this should be regardless of any value of custody assets held and amended the rules accordingly. Firms meeting these requirements should therefore be able to make use of the exemption from the prohibition on depositing over 20% of client money in a group bank provided they also meet the remaining MiFID II conditions. Firms must already undertake an annual CASS classification exercise25 so firms should use these parameters to evaluate whether they meet the ‘small balance’ of client money requirement in the context of this rule. Diversification assessments for the purpose of this rule could be done at the same time as the classification exercise for efficiency and we have amended the guidance accordingly. Firms should be mindful of the need to review their assessments if their circumstances change so that they no longer meet the criteria. MiFID II requires firms to notify the FCA of their assessments. Making the notification at the time of the assessment represents no additional burden to the MiFID II standard and increases the effectiveness of supervision. Preventing unauthorised use of assets In response to comments on preventing unauthorised use of assets:

A firm should ensure it takes ‘appropriate measures’, which may
include more than those listed in new CASS 6.4.1CR. We expect firms to be able to evidence that they are taking appropriate measures, for example, this may include having a policy for dealing with trades that do not settle as expected. We have amended the rules to make it clear that the requirement on remedial measures applies if the firm cannot deliver on the settlement date.
Client contracts should allow clients to make an informed choice.
Firms should agree with their clients the actions they will take, in accordance with MiFID II.
In respect of commercial settlement systems, the existing rules
prevent use of one client’s assets for another’s trade unless the relevant client has given express prior consent.26 A firm cannot use a retail client’s assets except for securities financing transactions and with express prior consent.27 The combination of existing and new rules requires a firm to put in place appropriate measures to prevent unauthorised use of client assets. We consider it is clear that the disclosures required by COBS 6.1.7R in a firm’s terms of business are not sufficient to meet the ‘express prior consent’ requirement, as these disclosures do not involve obtaining any consent from the client. 25 CASS 1A.2. 26 CASS 6.4.1R. 27 CASS 6.4.1G.

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CASS 6.4.1CR and CASS 6.4.1R (3) are not mutually exclusive.
We expect firms to evidence their appropriate measures to prevent
unauthorised use of client assets. This could, for example, include a policy to address unintended consequences occurring in omnibus account structures. The use of one client’s assets for other clients’ transactions is a breach of the rules.
MiFID II does not require a firm to pre-fund transactions to ensure
prevention of unauthorised use of assets. The firm could put in place other measures, such as appropriate controls over executing client orders to prevent sales transactions from being executed before assets are received. Taking collateral when arranging securities lending MiFID II places responsibility on the firm for ensuring that a borrower of safe custody assets provides appropriate collateral and that the firm monitors the continued appropriateness of such collateral. The guidance28 applies where the firm is party to the securities lending agreement under MiFID II. In a trilateral agreement, we consider this requirement applies if the firm is still arranging for the lending to take place. The new rules require appropriate collateral to be provided, but do not require the firm itself to take the collateral, which could be another party. These rules apply to securities lending in respect of safe custody assets. Responses to our pre-consultation costs survey and the ESMA MiFID II consultation29 indicated that the clear majority of firms already take collateral in these circumstances. We therefore do not believe these changes have a large impact. Appointment of a single officer for safeguarding of client assets We agree that the single officer for safeguarding of client assets can undertake additional responsibilities where appropriate and we have amended the rules accordingly to clarify this in line with the MiFID II requirement. Certain firms (eg banks) are currently subject to the Senior Managers and Certification Regime (SMCR) and we have taken this in to account in drafting our final rules. We will consider the interaction of the CASS single officer requirement with the SMCR in the context of investment firms when this is consulted on in the future. Recitals We continue to have regard to the recitals in interpreting our rules that implement MiFID II but will not copy all of them into our Handbook. 28 CASS 6.4.2BG. 29 https://www.esma.europa.eu/document/technical-advice-commission-mifid-ii-and-mifir

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Changes in CP16/29 – consequential changes in CASS
4.23 In CP16/29, we consulted on consequential changes to CASS 9 which arose from
the proposed amendments to COBS which in turn came from new disclosure rules in MiFID II.30 The amendments were largely administrative, incorporating CASS crossreferences to MiFID II disclosure requirements. We asked:

Q66 – Do you agree with our proposed consequential changes to CASS? If not, how
could we amend them?
4.24 Nearly all respondents supported our proposed changes. One said there was not
enough information in the consultation about the aims of the proposal to enable them to reach a view. Our response to consequential changes in CASS In light of the feedback received, we are implementing this as proposed in the CP. The changes were made to ensure consistency with the amendments to COBS 6 and 16 required under the new disclosure rules under the MiFID II delegated regulation, whilst continuing the existing level of consumer protection. 30 Article 49 and Article 63 respectively, of the MiFID II delegated regulation

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 5 Complaints handling Introduction
5.1 In this chapter we summarise the responses we received to changes that we proposed
in CP16/19 and CP16/43 to our Dispute Resolution: Complaints sourcebook (DISP) arising from the implementation of MiFID II.
5.2 In CP 16/19 we proposed copying out the complaint handling requirements of MiFID
II into DISP, and creating a new section for the complaints handling rules for MiFID complaints.
5.3 CP16/43 consulted on changes to further align the requirements that apply to MiFID
complaints with the existing rules in DISP. Specifically, we proposed that firms should be able to apply an approach similar to that which applies to non-MiFID complaints which are resolved within three business days, in terms of the response that is sent to consumers. Scope of application of MiFID II complaints handling rules
5.4 Some respondents felt that separate rules for the handling of MiFID II scope
complaints could present operational challenges and that there should be one set of rules for all complaints. Other respondents welcomed the separate rules and said that they would find this helpful in that their business is entirely within the scope of MiFID so they would only need to follow the one set of rules. As there are additional requirements for MiFID investment firms in relation to MiFID complaints that are directly applicable under EU law, we have set these out separately for ease.
5.5 Respondents queried how different provisions of the MiFID complaint handling rules
apply to different types of firms. The application of the MiFID II complaint handling rules varies depending on the type of firm. For example, application of a provision may depend on whether the complaint relates to the MiFID business of a branch of a European Economic Area (EEA) firm in the UK. Our response on the scope of application of the MiFID II complaints handling rules We propose not to extend the MiFID II complaint handling requirements to all complaints, as we do not intend to make rules where they are not required. We also think that separate rules should make it easier for firms to identify which rules apply to MiFID complaints. Although there may be challenges in the early stages of the implementation of these rules, we expect complaints to be dealt with impartially, and without undue

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Markets in Financial Instruments Directive II Implementation – Policy Statement II delay. We generally intend for the same rules to apply to firms’ complaint handling regardless of subject matter, and respondents agreed that similar rules to those in DISP 1.5, relating to resolutions within the close of three business days, should also apply to MiFID complaints. We have included a table in DISP 1.1A.7R that sets out which provisions apply to different types of firms. This should help firms to identify which provisions apply to their business. It may be helpful for firms to note that we do not have sets of discrete complaint handling rules for other kinds of business, though some of the rules in DISP only apply to certain kinds of business, eg managing UCITS. Access to the Financial Ombudsman Service
5.6 Respondents also queried who can complain to the Financial Ombudsman Service,
and stated that the Financial Ombudsman Service’s jurisdiction should be extended to match the scope of MiFID II. Our response on access to the Financial Ombudsman Service The MiFID II complaint handling requirements apply to retail clients, professional clients and eligible counterparties (in relation to eligible counterparty business). The Financial Ombudsman Service may only look into complaints from or on behalf of an eligible complainant, and was set up to resolve certain disputes quickly and informally. We do not intend to revise the definition of ‘eligible complainant’ so that it specifically covers all retail clients, professional clients and eligible counterparties (in relation to eligible counterparty business) because we do not believe that it is appropriate that the Financial Ombudsman Service should handle complaints from professional clients and eligible counterparties unless they are consumers or small businesses. It should be noted that an individual who is acting outside of their trade, business, craft or profession is already included within the definition of ‘eligible complainant’31 and so may be able to refer a complaint to the Financial Ombudsman Service regardless of whether the individual is a retail client, a professional client or an eligible counterparty. Complaints reporting and publication
5.7 Respondents asked if we are going to change the complaint returns form and the
complaints publication report.
31 See DISP 2.7.9AR for further details.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on complaints reporting and publication The general complaints reporting rules and complaints data publication rules apply to MiFID complaints. We do not think we need to make any changes to the way that this information is submitted as
part of implementing MiFID II. However, we will update how we publish
complaints data so that it is clear whether or not the data is specific to complaints from eligible complainants.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 6 Inducements, including adviser charging Introduction
6.1 In this chapter, we provide our response to feedback received to our proposals in
Chapter 2 of CP16/29. Our approach to inducements in relation to research is set out in
the next chapter.
6.2 We did not receive any substantive feedback on the relevant CBA section for the
discretionary aspects of our proposals.32
6.3 As noted in CP16/29, we proposed separating the inducement rules into two sections:

a new COBS 2.3A which implements the new MiFID II inducement bans and will apply
to MiFID, equivalent third country and Article 3 firm business
the existing (but revised) COBS 2.3 which will apply to other designated investment
business – ie business that is not MiFID, equivalent third country or Article 3 business
6.4 We also proposed retaining our existing domestic adviser charging rules in COBS 6.1A
and 6.1B.
6.5 We consider that it is important to have a consistent inducements regime (and indeed
a consistent conduct regime) for business involving MiFID financial instruments, insurance‑based investments and pensions. However, we will need to take into account the Insurance Distribution Directive (IDD) implementing measures once these are final. Therefore, we will retain our existing rules for the time being for insurance‑based investments and pensions.
6.6 Since CP16/29 was issued, the Treasury has published the response to its consultation
on changing the definition of ‘advising on investments’ in Article 53(1) of the Regulated Activities Order (RAO). The effect of this change is that a regulated firm with permission to carry out a regulated activity other than, or in addition to, the permissions of ‘advising on investments’ and/or ‘agreeing to advise on investments’ will only require the Article 53(1) permission to ‘advise on investments’ where that firm provides a personal recommendation. We have published a technical note explaining this change.33 32 Set out in paragraphs 2-37 on pages 137-142 of Annex 2 of CP16/29. 33 www.fca.org.uk/firms/financial-advice-market-review-famr/changes-regulated-activities-order

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Providing investment advice and portfolio management services to retail clients
6.7 Respondents to DP15/334 supported a consistent inducements standard across all
advisers.
6.8 In CP16/29, our broad proposals for implementing MiFID II’s inducement ban, in relation
to retail clients, were to:

extend the MiFID II requirements to restricted advice given to retail clients
prohibit the acceptance of commission and benefits (ie to ban rebating), rather than
banning their acceptance and retention, and
amend the adviser charging rules and MiFID II inducement rules to apply the ban
on soliciting and accepting inducements in connection with the firm’s business of providing advice – rather than only to inducements provided in relation to the provision of a particular personal recommendation Extending the MiFID II inducement ban to restricted advice provided to retail clients
6.9 In CP16/29, we proposed applying the MiFID II inducement ban for independent advice
to all advice (ie independent and restricted advice) provided to retail clients, in line with our existing national standards which were introduced by the RDR. This would apply in relation to MiFID, equivalent third country and Article 3 firm business – as well as advising on retail investment products (RIPs), in line with existing requirements under the RDR.
6.10 We asked:
Q2: Do you agree with our proposal to apply the MiFID II inducement rules for
independent advice to all advice provided to retail clients? If not, please give reasons why, including evidence as to why, in your view, the costs of such an approach would outweigh benefits.
6.11 All, but one, respondents commenting directly on this question agreed with our
proposal. The main reasons provided for agreeing were:
that the rules already apply under the RDR, and are in line with the RDR objectives
(mainly to mitigate the consumer detriment created by commission payments)
it will ensure a standard approach between restricted and independent advice; and
between advice on MiFID financial instruments and non-MiFID RIPs, and
there should be consistent rules for restricted and independent advice, and also for
vertically integrated firms
34 www.fca.org.uk/publication/discussion/dp15-03.pdf

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on extending the MiFID II inducement ban to restricted advice provided to retail clients We are taking forward the changes necessary to implement the MiFID II inducement ban in relation to independent advice, and are extending these requirements to the provision of restricted advice but only where restricted advice is provided to retail clients in the UK (see further below). Prohibiting acceptance of commission and benefits
6.12 In CP16/29, we proposed applying our existing RDR rules, which ban advisers
from accepting inducements in relation to advice on RIPs to retail clients, in our implementation of the relevant MiFID II requirements.
6.13 We also proposed extending this ban on accepting inducements to both independent
and restricted advice, and portfolio management, provided to retail clients for all MiFID financial instruments and structured deposits, including such advice given by Article 3 firms and equivalent third country firms.
6.14 We asked:

Q3: Do you agree with our proposal to ban firms providing advice or portfolio
management services to retail clients from receiving and rebating monetary benefits to such clients? If not, please give reasons why, including evidence as to why, in your view, the costs of such an approach would outweigh benefits.
6.15 Of those respondents commenting directly on this question, virtually all agreed with
our proposals.
6.16 The main reasons provided for agreeing were:
Even if these payments are rebated to the client, they could still potentially impact
the advice provided by the adviser, or the decisions made by the portfolio manager
This reflects the current RDR ban on inducements
If firms are permitted to receive and then rebate benefits, this could both create
confusion for customers, and would be likely to lead to opaque charging structures
The practical difficulties and costs involved in accounting to clients for third party
payments received outweigh any likely benefits
6.17 One respondent suggested that the ban should have the same territorial application as
the RDR adviser charging rules, which do not apply where the retail client is outside the UK.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on prohibiting acceptance of commission and benefits We are proceeding with our CP proposals – including the additional requirements of banning firms that provide independent or restricted advice or portfolio management services to retail clients from accepting and rebating monetary benefits to such clients. We consider that this is a necessary alignment with our existing RDR approach. As suggested in the responses, we will limit the territorial application of our additional domestic requirements so that they are the same as for the domestic adviser charging rules and so will only apply where the retail client is in the United Kingdom. This means that firms providing independent advice or portfolio management services to retail clients outside the United Kingdom will be subject to the same MiFID II requirements as those providing independent advice or portfolio management services to professional clients; and firms providing restricted advice to retail clients outside the United Kingdom will be subject to the MiFID II inducement rules as they apply to firms with the exception of those providing portfolio management or independent investment advice (as is the case for firms providing restricted advice to professional clients). Inducements provided in relation to providing advice (RDR adviser charging rules)
6.18 In CP16/29, we proposed retaining the existing RDR adviser charging rules, despite the
introduction of the new MiFID II inducements rules. The RDR rules would continue to have a different scope from the MiFID requirements, and RIPs which fall within MiFID will be subject to both MiFID II and RDR requirements.
6.19 However, we proposed amending the RDR adviser charging rules to:

clarify that the inducements ban applies to any inducements received in connection
with a firm’s business of providing advice, and not just in relation to specific personal recommendations, and
confirm that only minor non-monetary benefits can be accepted in relation to advice
on RIPs, whether these fall under MiFID or not
6.20 In addition, and similar to our approach under the RDR adviser charging rules, for MiFID
business not falling under the RDR rules, we proposed that the MiFID inducement ban would apply to a firm’s wider business of providing advice and not just to the provision of particular services.
6.21 We asked:
Q6: Do you agree with our proposal to extend the MiFID II limitation on nonmonetary benefits to the wider business of providing advice in respect of RIPs?

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Q7: Do you think we should extend the MiFID limitation on non-monetary benefits to
the wider business of providing advice for all MiFID products, and not just RIPs?
6.22 All respondents to these questions supported the proposed approach, with the
exception of one trade body which answered ‘No’ to Question 7 because of the change to the definition of ‘advising on investments’ in the RAO proposed by the Treasury.
6.23 Other respondents asked whether:
legacy trail commission payments permitted by the RDR rules (COBS 6.1A.4AR and
6.1A.4AAG) could continue once the new rules were in force, and
discretionary portfolios would be captured if not structured as funds
Our response on inducements provided in relation to providing advice (RDR adviser charging rules) We are taking forward the changes necessary to implement MiFID II, with the extension of the inducements ban to restricted as well as independent advice where it is given to retail clients in the United Kingdom. We will also take forward the changes necessary to apply the limitation on non-monetary benefits to advice given on all RIPs, not just those falling under MiFID. After the consultation on CP16/29 closed, the Treasury published a response to its consultation on changing the scope of the ‘advising on investments’ activity in article 53(1) of the RAO. As stakeholders were not aware of the final outcome of the Treasury’s consultation when responding to CP16/29, we propose to consult again on our proposal to apply our inducements ban more widely to a firm’s business of providing advice – for both RIPs (under the RDR rules) and MiFID products which are not RIPs – in a forthcoming CP dealing with consequential changes arising from the RAO change. These changes have not, therefore, been included in the rules in the Appendix to this PS. On the detailed questions posed by firms:
The new rules will not affect the provisions in COBS 6.1A.4AR and
COBS 6.1A.4AAG on continued payment of trail commission. To assist firms we have sought to clarify the relationship between the MiFID II inducement requirements and the RDR rules. We have also introduced a new transitional provision to make clear that the new MiFID II requirements in COBS 2.3A only apply to inducements which are paid, provided or received in respect of services that are provided to clients on or after 3 January 2018. For these purposes, it is important to note that the date on which the relevant commercial relationship is initiated is not relevant. The relevant consideration is the date on which the service is provided.
Firms providing the MiFID service of portfolio management cannot,
under the new rules, receive commission, regardless of whether

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Markets in Financial Instruments Directive II Implementation – Policy Statement II assets they manage for a client have or have not been put into a fund structure. Providing independent investment advice and portfolio management services to professional clients
6.24 In CP16/29, we said we would implement MiFID II’s ban on the receipt and retention
of all monetary and non‑monetary benefits from third parties, other than ‘minor non‑monetary benefits’, for both independent advice and portfolio management (discretionary investment management), in relation to professional clients (as required by MiFID II).
6.25 We also said we did not intend:

to extend the inducement ban to restricted advice provided to professional clients,
or
to apply the rebating ban to independent advice provided to professional clients
6.26 In effect, this would mean that firms will be able to accept, but not retain, payments
in relation to independent advice provided to professional clients; and to receive commissions for restricted advice provided to professional clients.
6.27 But we also said we would consider feedback on extending the rebating ban to
portfolio managers when dealing with professional clients, as it may be more practical for firms and will help to prevent bias in investment decisions.
6.28 We asked:
Q4: Do you consider that the ban on receiving and rebating monetary benefits to
clients should also apply to professional clients? If so, please explain why and provide cost -benefit data. If not, please give reasons why.
6.29 Respondents were almost evenly split on this matter.
6.30 In the main, those agreeing noted that a uniform approach would create a level playing
field; and that, in the advice space, from a practical point of view, there is no significant reduction in the duties of the intermediary when dealing with a professional client, and therefore there is no practical reason why business with professional clients should be treated differently, and the costs borne by the adviser are largely unaffected.
6.31 Those disagreeing noted that rebating to professional clients is common practice,
and, if disallowed, could impact the ability of fund managers to negotiate reduced management charges in respect of funds in which they invest on behalf of those clients.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on providing independent investment advice and portfolio management services to professional clients While we will not extend the ban on receiving and rebating monetary benefits in relation to services to professional clients, we note that, from a practical point of view, firms may take a commercial decision not to accept and rebate third party payments in relation to these clients so that they are able to apply consistent standards across their business. Acceptable minor non-monetary benefits – all clients
6.32 The RDR sought to eliminate commission bias as a feature of the retail distribution
market, removing as far as possible product provider persuasion or influence over adviser remuneration, and thereby reducing product bias.
6.33 Our supervisory thematic reviews conducted since the implementation of the RDR
adviser charging rules found widespread provision of non-monetary benefits, such as hospitality, which appeared to be in breach of our rules and which were, in many cases, excessive.35 We are aware that the provision of hospitality within the MiFID ‘acceptable minor nonmonetary benefits’ framework remains an issue with stakeholders, and that this is especially the case in the wholesale context. However, MiFID II tightens the acceptable hospitality perimeter. It states that hospitality is acceptable if it is “of a reasonable de minimis value, such as food and drink during a business meeting or a conference, seminar or other training events … [such as] … participation in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service”. This is reflected in the new COBS 2.3A.
6.34 In addition, firms are reminded of their general obligations to identify, prevent, or
manage conflicts of interest – including those caused by third party inducements or by a firm’s own remuneration and other incentive structures.
6.35 One respondent suggested that post-trade delegated reporting services provided by a
broker to fund managers could constitute an acceptable minor non-monetary benefit. Our response on acceptable minor non-monetary benefits – all clients We consider that post-trade delegated reporting services could be considered, subject to certain limitations set out in Chapter 7, as part of the overall execution service provided, rather than being treated as a separate benefit. However, as we discuss more fully in the next chapter, we have exercised the limited discretion we have in this area by adding two new 35 www.fca.org.uk/publications/thematic-reviews/inducements-and-conflicts-interest-thematic-review-key-findings

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Markets in Financial Instruments Directive II Implementation – Policy Statement II types of acceptable minor non-monetary benefits: one in relation to research trial periods, and the other in relation to connected research.
Article 3 firms
6.36 In CP16/29, we proposed subjecting Article 3 firms to the same requirements in
relation to inducements as those that apply to MiFID firms. In essence, this means that the MiFID II inducement ban (other than minor non-monetary benefits) in relation to independent and, for retail clients, restricted advice will apply also to Article 3 firms providing advice, as will both the restriction on rebating inducements to retail clients and the core MiFID II inducement rule set out in Article 24(9).
6.37 We asked:

Q5: Do you agree that we should apply MiFID II’s requirements in relation to
inducements to Article 3 firms? If not, please explain why, and also provide costbenefit data to support your explanation.
6.38 Of those respondents that commented directly on this aspect of our proposals, all but
one agreed.
6.39 The main reasons for agreeing included:
applying the MiFID II requirements is the most practical and least complicated way of
complying with the MiFID II requirement for Article 3 firms to be subjected to at least analogous requirements
this would ensure consistency with MiFID firms, and equal treatment across the
industry, putting all distributors on a level playing field and thereby preventing regulatory arbitrage between MiFID and non-MiFID firms
Article 3 firms are already broadly operating within these requirements, and
from a consumer perspective, there is little reason why Article 3 firms should not
need to comply with the same rules as other firms Our response on Article 3 firms We are finalising the rules on the basis that Article 3 firms will be subject to the same requirements in relation to inducements as MiFID firms. We appreciate that our implementation of MiFID II introduces new layers of application to COBS. We will be considering what further steps we can take to assist firms in navigating the sourcebook.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Advising on structured deposits
6.40 In CP16/29, we asked whether we should apply only the MiFID II inducement
requirements to advice on structured deposits, rather than making them subject to the RDR adviser charging rules.
6.41 We asked:

Q8: Do you agree with our proposal not to subject advice on structured deposits
to our existing RDR adviser charging rules and, instead, to apply only the MiFID II inducement requirements to such business? If not, please give reasons why.
6.42 The majority of those respondents that commented directly on this question
disagreed, and felt that we should rather apply all the RDR rules to structured deposits, and not only the MiFID inducements rules.
6.43 The main reasons for disagreeing with our proposal included that this:
would likely create confusion for the industry, and for clients – where structured
deposits are often considered alongside RIPs in the advice process
would be costly in terms of implementing segregated systems and controls to
maintain compliance (respondents did not provide specific cost estimates)
may create a disparity between the requirements for different product types
designed to meet the same or similar customer needs – where a consistent approach would better serve both industry and consumers alike and avoid the additional complexity arising from having different standards applying to different product types, and
would not help to mitigate the potential risk of market distortions arising from
regulatory arbitrage
Our response on advising on structured deposits Structured deposits are not included in the definition of RIP. This means that, although they may be considered alongside RIPs when firms are providing advice, advice on such products is not subject to all the adviser charging rules (including detailed disclosure requirements). We are not aware of any significant consumer confusion or detriment arising from this position; and respondents did not provide specific cost estimates of complying with different approaches. Therefore, we do not propose requiring firms to comply with the adviser charging rules for advice on structured deposits – although the MiFID II inducement rules will apply to firms when selling, or advising on, a structured deposit. However, firms are free to go further than our rules in order to have a single process for selling investments should they wish, and treat structured deposits as if they were within the scope of the adviser charging rules.

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6.44 We have also taken the opportunity to more closely align the wording of the
inducements rule with the wording of the core MiFID II inducement rule set out in
Article 24(9). In particular, we have clarified – in line with the revised text of MiFID II –
that the inducements rule concerns inducements received from parties other than the client or a person on behalf of the client.
6.45 Additionally, we have copied out the presumption in MiFID II that a firm which fails
to comply with the inducements rule is to be regarded as not having fulfilled its obligations in relation to conflicts of interest and the requirement that the firm must act honestly, professionally and in accordance with the best interests of the client.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 7 Inducements relating to research Introduction
7.1 This chapter summarises our responses to feedback received in relation to our
consultation on inducements and research within CP16/29. As part of our response, we detail any changes we are proposing or point to other relevant material, such as ESMA Q&A material that has been published since CP16/29.
7.2 Chapter 3 contained our proposals for implementation36 through new sections of the
Handbook – COBS 2.3B and COBS 2.3C.
7.3 Using an intelligent copy out approach, we mostly replicated the MiFID II requirements.
However, in line with the current scope of the dealing commission regime, we proposed that we extend MiFID II requirements to collective portfolio managers (CPMs). We also provided additional guidance and discussion in CP16/29 linked to the new MiFID II requirements to provide further clarity on operational aspects of research payment accounts (RPAs) and what can constitute a minor non-monetary benefit. We indicated we would retain certain guidance provisions from our existing use of dealing commission regime in COBS 11.6, where we considered they remained relevant in the context of the new MiFID II approach.
7.4 We asked a number of questions seeking views on our general approach to
implementing these MiFID II provisions, extending them to CPMs; additional guidance we had proposed, whether any further guidance was necessary, and if any modifications were needed in applying these standards to Alternative Investment Fund Managers (AIFMs).
7.5 Please read this chapter alongside Chapter 20, where we also discuss our final policy on
certain modifications of the research rules for other CPMs. Implementation of core MiFID II requirements and scope
7.6 We proposed two new COBS sections:

COBS 2.3B sets out requirements that, if met, allow a firm to receive third party
research without it constituting an inducement.
COBS 2.3C sets out requirements on firms that supply both execution and research
to provide discrete pricing for each of those services (and any other services) to ensure greater transparency to recipient firms, particularly those that may wish to 36 These link to the main inducements rules set out in Article 24 of MiFID II, and Articles 12 and 13 of the MiFID II delegated directive.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II avail themselves of the option of paying for research from their own resources or through a RPA.
7.7 We asked:

Q9: Do you agree with our approach to transpose (implement) the MiFID II proposals
for the receipt of research linked to the new MiFID II inducement rules as a new COBS 2.3B? If not, please state why and provide any suggestions for an alternative approach.
7.8 Most respondents agreed with our proposals. However, several responses queried the
intended scope of the requirements in COBS 2.3C. Specifically, those respondents suggested it was unclear whether a MiFID investment firm supplying execution and research services was required to offer separate pricing to third country firms (ie those firms outside the EEA, without a UK presence).
7.9 On a similar theme, a couple of stakeholders also queried whether we had intended
to require brokers to price services separately to all MiFID firms, or only to recipients that offer independent investment advice or portfolio management services. These responses argued that MiFID II implied a narrower application of requirement in Article 13(9) of the MiFID II delegated directive to price services separately, linking it to the enhanced restrictions on the receipt of inducements set out in Article 24(7) and (8) of MiFID II, and recommending that the FCA should not seek to apply this more broadly.
7.10 Another scope issue raised by respondents was how certain execution-related
services would need to be treated for the purpose of the new inducements requirements given the deletion of COBS 11.6. Stakeholders expressed a concern that the removal of the explicit provision in COBS 11.6 that permits services directly related to the execution of trades on behalf of the investment manager’s customers37 to be received in return for dealing commissions, implied that certain execution-related aspects of services provided by brokers may no longer be acceptable or would have to be separately charged and paid for under MiFID II.
7.11 In particular, industry responses queried whether brokers’ activities such as working
large orders, taking trades on risk, and structuring derivative trades, as well as their use of standard connectivity services38, could be treated as being part of the execution service provided to the underlying client in return for execution fees, rather than a separate ‘benefit’ to the firm that would be subject to the inducements rules.
7.12 Another similar issue that was raised was whether brokers could provide transaction
reporting for buy-side firms in order for them to meet their obligations under MiFIR without an additional charge. Most stakeholders felt this should be acceptable either on the basis it is ‘paid’ for within existing charges or costs for execution services, or alternatively it could be considered as a minor non-monetary benefit. 37 See COBS 11.6.3R(3)(c)(i) and COBS 11.6.4E. 38 Such as the Financial InformationeXchange service (FIX).

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on the implementation of core MiFID II requirements and scope We have clarified the scope of COBS 2.3C – the requirement on brokers to price execution and research or other services separately – to make clear that investment firms do not have to price separately to third country firms based outside the EEA, although they may choose to do so voluntarily. However, we will proceed with our approach that pricing should be provided to all MiFID investment firms regardless of the activities they are carrying out. We view this as consistent with the specific provisions in MiFID II as well as the wider emphasis on transparency over costs and charges. Our policy intention is to reduce inducements risks and improve transparency and accountability over costs passed to investors, as well as ensuring a priced research market that enhances competition. Discrete pricing of execution services by UK-based firms on an EUwide basis is a key part of achieving well-functioning, more transparent markets in execution and research services. It would also seem impractical and undesirable for firms only to offer separate pricing depending on the type of service or activity the recipient investment firm is carrying out in turn. We acknowledge points raised by respondents that it could be unclear as to how certain ‘execution-related’ services or functions should be treated under MiFID II, following the deletion of our use of dealing commission rules. We take the view that certain activities can be considered as inherent to the provision of execution services and received by the underlying client in return for execution costs and charges. This would include activities inherent to facilitating an order and that take place between the point at which an order is received and executed by a firm, and the final settlement, in a similar way to the existing provision in COBS 11.6.4E. For example, we accept that working large orders, taking trades on risk, or structuring a series of derivatives transactions would form part of the execution service itself and are not a separate benefit received by a firm. However order transmission systems used by a broker39, do not appear to be provided to either the firm or its clients as a distinct benefit. Since MiFID II already provides a definition for the service of executing orders on behalf of clients, we are not making any changes to our implementation of MiFID II into the Handbook. We think that a MiFID investment firm could accept transaction reporting offered by a broker as part of the execution service provided to its clients, provided it does not influence best execution and is offered as a standard term of business by the broker (eg it is not selectively provided for free to some firms but not others). We view this as consistent with the nature of the execution service, which should generally result in a transaction that is settled and
reported as necessary in line with regulatory requirements to the benefit of the client. 39 Such as FIX connections.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our interpretation does not extend to services that are not related to the execution of an order and its proper settlement and reporting. For example, provision of third party trade analytic tools, order management systems, or RPA administration services to a MiFID investment firm, should not be considered as inextricably linked to an execution service. Firms subject to the enhanced inducements restrictions would need to procure such services separately using their own resources, and could not pay for them through enhanced execution costs or research charges passed to their clients. Extension to firms carrying out CPM activities
7.13 We proposed to extend the MiFID II inducements approach, including provisions
on receipt of research, to UK-based firms carrying out CPM. This includes UCITS management companies, full-scope UK AIFMs, incoming EEA AIFM branches, small authorised UK AIFMs, and residual collective investment scheme (CIS) operators.
7.14 We sought views both on this overall approach, and on whether any modifications were
necessary or desirable to the MiFID II provisions to ensure they made sense and were appropriate in a CPM context. We also asked whether we should apply requirements to non-discretionary portfolio management, to the extent this occurs. The FCA definition of investment management currently includes both discretionary and nondiscretionary investment management, and we were keen to understand whether ‘non-discretionary’ activity warrants similar investor protection standards or not. Specifically, we asked:

Q10: Do you agree with our approach to extending the research and inducements
requirements to firms carrying out collective portfolio management activity? If not, please give reasons why.
Q14: Should we consider any modifications to the requirements linked to the use
of RPAs under the inducements and research provisions for full-scope UK AIFMs of internally managed AIFs? If so, please provide details on what modifications we should consider and why.
Q15: Should we apply the new MiFID II inducements standards to firms carrying
out non-discretionary portfolio management activity (as defined in our Handbook glossary), including where they receive third party research, in the same way as for other types of portfolio management? Please provide evidence to support your views.
7.15 Those who supported our approach welcomed common standards for the UK asset
management sector regardless of the legal structure of a portfolio or fund. A trade body considered that there would be competition benefit from broadly applying both the separation of payments for research by UK investment managers and the discrete pricing of research services by brokers as introduced under MiFID II.
7.16 Among those respondents that did not support the approach, a common theme
linked competitiveness concerns with a view that UK-based fund managers may be disadvantaged and made less competitive if we applied MiFID II standards to their

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Markets in Financial Instruments Directive II Implementation – Policy Statement II businesses. This was particularly linked to the fact the other EU member states may not choose to take the same approach as the FCA. However, evidence was not provided to challenge our CBA or indicate specifically what negative effects these reforms would have on firms’ ability to compete for business.
7.17 We also received views from representatives of CPMs that specialise in private equity
funds or venture-capital business. These responses noted that for such activities, research was generally purchased as part of conducting due diligence to support transactions intended to take controlling stakes in companies that are not public. These responses queried the relevance of the MIFID II approach to their model and stated it was unclear whether the research they acquired was caught by the glossary definition of ‘research’ for the purposes of these measures.
7.18 Representation from private equity firms argued that third party research they
procured was generally paid for separately from a transaction, although it may be charged to the fund based on pre-agreed terms on costs and charges and ex post disclosures detailing costs invoiced to the investors. Where they did receive more general research from brokers, they argued it was incidental to their activities, had marginal, if any, value for their business, and would be disproportionate to require them to establish a research charge and RPA structure. Our response on the extension to firms carrying our CPM activities We will proceed with our proposals to extend the MiFID II requirements on inducements and research to most forms of CPM, including UCITS management companies, full-scope AIFMS and most small authorised UK AIFMs and residual CIS operators. We view the MiFID II reforms as bringing important transparency and accountability over research costs, which are equally relevant to investors in funds. MiFID also makes some key enhancements compared to our current dealing commission rules. As we set out in our CBA CP16/29, we think the changes will benefit consumers by improving CPM firms’ oversight and control of research costs passed to investors, and also result in wider efficiencies in the market for research. We view the potential benefits are likely to outweigh the costs to firms. Our analysis was not challenged in responses. We did not receive any specific evidence to suggest these reforms would materially impact the competitiveness of UK firms. Since we already apply domestic dealing commission rules to all forms of CPM, we do not view the incremental strengthening of standards in the MiFID II derived rules as imposing a significant additional compliance burden for firms who already comply with the existing UK framework. We also continue to believe that applying these reforms broadly to all forms of investment management will be operationally and commercially easier for many UK firms that manage both MiFID portfolios and various types of funds. If, as we expect, these reforms lead to UK asset managers becoming more efficient and effective in their procurement of research, and also allow better scrutiny and control over execution services, this will result in lower-cost funds and / or better net performance. This will make UK-managed funds more attractive to investors both in the UK and internationally. There is also a possibility that EU standards in sectoral

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Markets in Financial Instruments Directive II Implementation – Policy Statement II legislation for UCITS management companies and AIFMs will converge to the MiFID II standards in due course. In the interim, we believe it is important to maintain robust and consistent investor protection standards for UK consumers and firms in this area. We also, however, accept the arguments for exempting certain CPM activities, including those relating to private equity or venture capital business. We have proposed in our final rules to exempt AIFs or CISs whose core investment policy does not generally involve investing in financial instruments that can be registered in a financial instruments account opened in the books of a depositary or physically delivered to the depositary or generally invests in issuers or non-listed companies in order to acquire control over such companies from the extended MIFID II inducements standards. This is designed to provide both a clear exemption for private equity business and also makes clear that collective funds investing in non-MiFID financial instruments, such as commercial property, are not captured. We view this exemption as providing proportionality for these types of activity. The conduct risk of a firm over-paying for research through poorly scrutinised, bundled transaction fees or having their trading behaviour influenced by their ability to obtain research from a certain broker appears reduced in the private equity model, where transactions are generally infrequent and often carried out on a negotiated basis. Inducement risks are also mitigated by existing conventions of directly invoicing the fund for specific research / due diligence services, and requirements in AIFMD for managers to agree ex ante with investors the scope of charges that can be deducted from the fund. For these reasons, we view extending the MiFID II inducements approach as disproportionate for this type of business. As the CBA for CP16/29 was conservative in its approach to calculating costs, and so included all CPM firms, we believe that this change in approach should result in lower one-off and on-going costs for firms than we estimated in CP16/29. Based on figures from a trade association that suggest there are 137 UK-based private equity firms, the exemption proposed here could reduce one-off costs from extending the MiFID II standards to CPM firms by a range of between £1.6m to £3.7m, with on-going costs reduced by between £860,000 to £2m compared with our original CBA estimates.40 This represents an approximate 30% reduction in estimated costs. Guidance on our interpretation of MiFID II provisions
7.19 In CP16/29, we proposed guidance to help firms by making clear our interpretation
of certain aspects of the MiFID II delegated directive requirements. In some cases, we took the view that certain existing guidance from our existing use of dealing 40 These cost reduction figures have been calculated using: the same average firm cost estimates; and the same assumptions on the proportion of firms who will incur costs as utilised in CP16/29.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II commission regime would remain pertinent and relevant to how we would interpret elements of the new MiFID II proposals. We proposed retaining such provisions in substance as part of the new COBS 2.3B section.
7.20 We also set out in CP16/29 our views on certain operational elements of the new
regime, while not necessarily proposing specific drafting in the Handbook instrument at that stage.
7.21 We sought views from stakeholders on the guidance we had proposed, and also if
there were any areas market participants felt would benefit from FCA. We asked:

Q11: Do you agree with proposals to retain some guidance provisions from the
existing COBS 11.6 in the new COBS 2.3B section, where they continue to be relevant under the new proposals? If not, please give reasons why.
Q12: Do you have any views on areas where we have proposed new guidance
provisions to clarify our interpretation of steps firms could take to ensure compliance with the new inducements and research proposals and the detail of the proposals? If not, please give reasons why and any alternative suggestions.
Q13: Do you have any views on whether further guidance provisions are needed to
clarify other aspects of the new inducements and research proposals and how firms should interpret and implement changes to comply with these provisions? If so, please detail specific aspects on which you think FCA guidance is desirable.
7.22 We also noted that we expected ESMA would produce supervisory convergence Q&As
on some aspects of the MiFID II requirements in this area to encourage a harmonised approach by national competent authorities (NCAs) across the EU. We stated we would review and if necessary revise any guidance we have proposed in light of such material and would seek to align with ESMA’s views.
7.23 Generally stakeholders welcomed additional guidance from us to provide greater
clarity, although many provided detailed comments on specific areas or proposals. To provide specific feedback to discrete points raised, this feedback section is split into further sub-headings and responds to issues under each heading in turn. Operational aspects of RPAs – status of RPA funds and frequency of sweeps
7.24 CP16/29 included Handbook guidance on the status of the funds kept in an RPA where
we provided details on the client money treatment of these funds.
7.25 Some respondents felt that the guidance went beyond the requirements in the MiFID
II delegated directive and queried how it would impact the operational arrangements of firms with complex international footprints looking to adopt a commission sharing agreement (CSA)-like mechanisms to collect research charges from execution commissions.
7.26 Several respondents provided feedback on what an appropriate and workable time
frame for transferring funds to an RPA should be. We had suggested that research charges should be ‘swept’ to an RPA either immediately or within the settlement period

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Markets in Financial Instruments Directive II Implementation – Policy Statement II of the transaction, although no time period was specified in the draft guidance itself, which simply stated ‘without undue delay’.
7.27 Typically, stakeholders argued for longer timeframes and cited the operational
difficulties, including increased costs, that a requirement to transfer the research charge within short timescales would entail. In particular, they noted that the amounts of research charge deductions may be quite small on a per trade basis, making it inefficient to move funds immediately or within a few days. Respondents also noted that current market practice is for a CSA provider to ‘reconcile’ the precise amounts that an investment firm has requested to be deducted alongside execution for research on a periodic basis across a number of trades to streamline this process.
7.28 The most common alternative timeframe suggested by respondents for the ‘sweep’
was 30 days (one month). A few argued for a longer period (two months or quarterly) or suggested that no set timeframe was necessary.
7.29 A further point of discussion raised was whether an investment firm was required to
have only a single RPA per budget or could have several RPAs, provided they had a consolidated ‘virtual’ account to ensure total RPA balances can be managed to meet the budget and to provide a single audit trail of payments made from RPA funds. While in CP16/29 we indicated that a single consolidated RPA appeared to be more efficient and consistent with the intention of the MiFID II reforms, we did not prescribe this in the proposed Handbook drafting. Our response on the operational aspects of RPA – status of RPAs funds and frequency of sweeps Since the publication of CP16/29, ESMA has published a series of supervisory convergence questions and answers on inducements and research (IR Q&As) in section 7 of its document ‘Questions and Answers:
On MiFID II and MiFIR investor protection topics’.41 The ESMA IR Q&As provide a common interpretation of how research charge deductions into an RPA should be treated, in line with the MiFID II delegated directive. ESMA’s IR Q&A2 makes clear that once a charge is deducted from a client’s funds into an RPA, those monies belong to the investment firm – although they must retain full discretion and control over the use of the RPA if they choose to use a third party to administer those funds. Furthermore, ESMA considers that the money in an RPA should be ringfenced, clearly separated from other funds of the RPA administrator and legally owed to the investment firm. The third party provider should also ‘have no right of set-off over the money or be entitled to use it as collateral or otherwise for its own benefit’. We view ESMA’s IR Q&A2 as consistent with the guidance on the legal status and protection of the RPA funds that we consulted on. We are therefore confirming this guidance. We remain of the view that it is an important safeguard to ensure that the funds held in an RPA are fully under the control of the portfolio manager, even when the administration of the RPA is outsourced to third parties. It also provides 41 ESMA ‘Questions and Answers on MiFID II and MiFIR investor protection topics’, see:
https://www.esma.europa.eu/sites/default/files/library/esma35-43-349_mifid_ii_qas_on_investor_protection_topics.pdf

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Markets in Financial Instruments Directive II Implementation – Policy Statement II a strong behavioural incentive for the portfolio manager to take full responsibility for allocating the research budget in the best interest of its clients. In response to feedback on how quickly research charge deductions should be passed into an RPA, we have amended the proposed guidance. We have decided to include in the final guidance that the investment firm should ensure that the transfer of research charges into an RPA where using a third party to facilitate the deduction from its clients should be effected without undue delay, but, in any case, within 30 calendar days from a transaction taking place. We view this approach provides certainty for firms as to what our minimum expectations are, which aligns with current industry good practice where firms are using CSAs. We think it is important to set a maximum limit given the safeguards afforded to the RPA, including the explicit requirements set out in Article 13 of the MiFID II delegated directive and the emphasis in Recital 28 on the need for portfolio managers to retain sufficient control over the collection of client research charges and the payments to research providers. Notwithstanding the maximum limit of 30 days, we expect firms making research deductions from their clients through third parties to consider earlier movement of funds into an RPA where appropriate to ensure full control over funds. For example, this may be the case if a significant amount of research charges are generated prior to 30 days or if RPA arrangements allow more frequent transfers without disproportionate costs or resource implications. We have carefully considered views received on whether a single RPA should be required per budget or if a ‘virtual’ RPA that gives a consolidated view of funds held in multiple underlying RPAs with different brokers could be acceptable. While we continue to view a single consolidated RPA as likely to be more efficient in practice, we do not intend to prevent a virtual RPA with multiple underlying RPAs provided that each individual RPA is still adequately protected in line with COBS 2.3B.19G and ESMA’s Q&A2, as cited above (ie each RPA’s funds must be ring-fenced and legally owed to the investment firm to which the research charges belong). RPA funding and payment mechanisms
7.30 Portfolio managers with international business models highlighted the potential
complexities of operating research budgets and funding arrangements spanning more than one jurisdiction, especially when firms decide to adopt a transaction-based deduction method for the collection of the research charges from its clients.
7.31 Stakeholders also requested further clarity as to whether firms could adopt a
combination of different research funding methods to pay for research. One respondent also queried whether payment netting arrangements could be allowed where research charges are being passed from a broker’s CSA account in to an RPA,

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Markets in Financial Instruments Directive II Implementation – Policy Statement II while on the same date the investment firm wishes to allocate a payment from an RPA to that same broker for research services received. Our response on RPA funding and payment mechanisms MiFID II provides flexibility on the approach firms can adopt to fund research. We consider that firms should have the ability to implement a combination of RPA-based methods and use of their own resources (ie profit & loss) to pay for external research. This flexibility may be helpful for firms to choose the best model to fit the types of assets being managed (eg an equity portfolio versus fixed income), or depending on operational and regulatory constraints they may face in any other jurisdictions where they also operate. This freedom of choice may, however, translate into firms implementing complex arrangements. MiFID II requires firms to put in place appropriate controls and management oversight to ensure that the research budget is used in the best interest of their clients and that those controls should include clear audit trails of the payments made. A firm must also set out in its research policy how it intends to allocate costs fairly across clients and portfolios. The complexity of a firm’s operational arrangements does not allow a dilution of these MiFID II obligations. Firms will also need to identify whether a mixed funding approach gives rise to any potential conflicts of interest between itself and its clients, or between two groups of clients, which they would need to take all reasonable steps to prevent or manage. We consider that payment netting is not consistent with the clear requirement in MiFID II that research payments can only be made from an RPA where such costs are being passed to clients by a firm, and that RPA payments must be made in the name of the firm even when using a third party to administer them. We also view netting as having the potential to reduce both the transparency and oversight applied by the investment firm and our ability to supervise such arrangements. Netting may reduce the incentive on the investment firm to scrutinise research payments and controls over budget allocations, and could result in fully bundled execution and research fees continuing with only superficial re-papering by firms. Valuation and pricing of research
7.32 A number of respondents queried our expectations around ex ante valuation or pricing
agreements required by investment firms seeking to receive research. This followed a general discussion of the implications of the reforms in CP16/29. Many respondents wished to maintain a predominantly ex post valuation approach.
7.33 Others queried whether comments about ex-ante agreements meant an annual
budget had to be pre-allocated to providers, in which case they argued this may not be in the best interests of clients. It was noted that investment firms would vary the

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Markets in Financial Instruments Directive II Implementation – Policy Statement II amount of research they consume and value from any given provider over time, and the quality of service provided may also materially change (eg if key analysts at a provider firm left mid-year through the budget period). Our Response on valuation and pricing of research In ESMA’s IR Q&A 10, sets out clear expectations around the approach that firms should adopt to ensure that their research budget is allocated in the best interest of their clients. While not requiring ex ante agreements to allocate fixed budgets to specific providers, this should entail, as a minimum, that a firm formulates, ex-ante, ‘a clear methodology to establish what they expect to pay providers for research before they receive and consume services.’ ESMA’s IR Q&A 10 suggests this could include a firm setting ‘measureable ex ante criteria as to how it will value the types, level and quality of service. This can provide the basis for agreements with each service provider on the level of payment expected for the anticipated provision of services.’ We view these points as particularly important for investment firms to consider in order to ensure the total amount of payments to a given provider are justifiable on behalf of its clients and to ensure relative consistency in what different research providers are paid based on services received. ESMA’s IR Q&A 10 is also clear that any ex post variation in payments made to the research firm based on actual services received should be made ‘in a proportionate and predictable manner based on those [ex ante] criteria.’ As we indicated in CP16/29 and as reinforced by ESMA’s related IR Q&A material, firms should have in place clear frameworks to evaluate the type, level and quality of research services before reception and consumption. Payments to third party research providers from a set budget must also be subject to management control and oversight. It remains the case that firms should perform regular ex post assessments of the overall quality of the research services they have received, which should, in particular, be used to inform future procurement decisions and agreements with providers. While firms should have agreements in place with research providers prior to receiving substantive services, these should provide scope for service and payment levels to be reviewed on a regular basis (eg in-year) to ensure that research procured remains in the best interests of the client. Trial Periods and connected research linked to new issuances
7.34 Many respondents queried whether free trial periods of research services were
acceptable and a number of stakeholders strongly argued that these were necessary in order to allow new entrants to access the research market. It was argued that buy-side firms needed to be able to assess whether to establish a new relationship with a provider and it would not be in the client’s best interests if an investment firm

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Markets in Financial Instruments Directive II Implementation – Policy Statement II had to commit immediately to a contract and payment terms, with costs potentially passed onto clients, without sampling a research provider’s service.
7.35 Where respondents suggested trial periods be allowed, most also acknowledged
that these would need to be limited in nature to avoid undermining the MiFID II inducements regime. Limiting the length of time for which material could be received under a trial rather than requiring a research agreement and payments was a common suggestion. Periods suggested varied from a few months to up to a year. Others also suggested that a trial could be subject to a non-repeat clause to limit the scope for trials to be exploited.
7.36 In the context of wider stakeholder concerns expressed about the continued
availability of research on small and medium sized corporates under the new regime, specific points were raised around the ability of investment firms to receive ‘connected’ investment research provided by analysts of a syndicate bank acting on behalf of a corporate issuer in a primary issuance context. Respondents noted that while they felt the minor non-monetary benefit exemption in Article 12(3) (b) of the MiFID II delegated directive (which we proposed to copy out in COBS 2.3A.15R(5)(b)) was potentially intended to cover this type of material, it was unclear whether it had this effect. This is because ‘connected research’ is still produced as ‘investment research’ and hence is not directly commissioned or paid for by an issuer. These respondents felt ‘connected research’ should not be considered as a material inducement, in order to allow investment firms interested in a new issuance receiving it without charge. Our response on trial periods and ‘connected’ research linked to new issuances We have considered carefully views on trial periods. MiFID II provides limited legal discretion in this area, since although member states can indicate other types of acceptable minor non-monetary benefit, these still have to be reasonable and proportionate, and of such a scale and nature that they are unlikely to influence an investment firm’s behaviour in any way that is detrimental to its clients. However, we have taken a view that a limited trial period for a research service subject to other strict conditions could constitute an acceptable minor non-monetary benefit for firms. We have amended COBS 2.3A.19R on this basis. The conditions include that an investment firm (a) can only receive a trial for up to three months; (b) should not be required to provide any monetary or non-monetary consideration to the research provider for research received during the trial; and (c) should not accept a new trial with the same provider within a 12 month period from the date on which a previous trial, or existing research agreement, ceased. An investment firm must also ensure that receiving research for a trial period is consistent with the other conditions for acceptable minor non-monetary benefits, as noted above, and should keep adequate records to allow them to demonstrate that each research trial received is compliant with these conditions. At the end of a trial period, in order to avoid further research from a provider constituting an inducement, a firm would need to either cease receiving it or establish a research agreement and payment terms. An investment firm supplying free

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Markets in Financial Instruments Directive II Implementation – Policy Statement II research trials should also consider their own inducements obligations. In particular, where a firm is subject to COBS 2.3C, it should ensure that the supply of a free trial is not unduly influenced or conditioned by levels of payment for execution services. We view this approach as balancing the valid comments received around promoting competition and new entrants into the research market, while ensuring trials are consistent with and will not undermine the MiFID II inducements framework, and the risk that firms do not act in their clients’ best interests. We agree with views that ‘connected research’ written by a bank’s analyst on an issuer in the specific context of a primary market capital raising event should be acceptable as a minor non-monetary benefit where it is clearly circulated to inform potential investors about that specific issuance prior to a deal being completed. We view it as comparable in nature and scale to issuer- commissioned research coverage in this limited scenario, which is already permitted under Article 12(3) (b) of the MiFID II delegated directive. We have therefore created an additional ‘minor non-monetary benefit’ provision in COBS 2.3A.19R. This is designed to indicate ‘connected’ research can be provided and accepted without being considered as material research that would not be receivable by those firms subject to the enhanced inducements regime, or would have to be separately paid for from their own resources or an RPA. This is a very limited exemption, and does not extend to any on-going provision of research outside a specific capital-raising context. We believe that these targeted easements provide sufficient and appropriate flexibility to support the continued production of SME research in line with prevailing market mechanisms across that market segment. We also consider that a more transparent and priced market should be supportive of a more diverse and competitive landscape for the generation and supply of value-adding research across the whole market. We however remain open to considering the need for, and merit of, further clarifications to support SME research where robust evidence from stakeholders suggests that such clarification would help to support the functioning of markets without distorting execution decisions.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Payments for RPA administration and mixed use services
7.37 One respondent queried whether the concept of ‘mixed use’ services, which we
address in our existing dealing commission rules, remained relevant under the MiFID II inducements and research rules. They suggested that COBS 11.6.8AG could be usefully retained within the new COBS 2.3B.
7.38 Another respondent queried how an investment firm would be expected to pay for
a third party providing an RPA administration service under MiFID II. They queried whether this could be paid for from a deduction from the RPA itself or execution fees. Our response on payments for RPA administration and mixed use services We think the MiFID II inducements and research rules remove the need for our existing guidance on ‘mixed use’ services. An investment firm can only pay for research from an RPA and must apply appropriate controls and senior management oversight to ensure it manages and uses its research budget in the best interest of its clients. Going forward, we also expect that providers of research and other services should be more transparent in identifying the charges for research, even if they are not directly subject to the pricing requirement that applies to firms providing order execution services alongside research. We would expect investment firms to bear costs from their own resources where they cannot clearly identify a research element of a broader service, rather than use RPA funds. We also continue to consider that items such as market data services do not constitute research, as we have previously stated in relation to our use of dealing commission regime, and we do not expect such services to be funded from RPAs in future. We consider that administering an RPA will be a discrete service provided to an investment firm. Since it would clearly not meet the description of research under the new rules, such a service cannot be paid for from an RPA. Since the use of an RPA is dependent on the research model chosen by an investment firm, any third party provision of an RPA administration service is neither inherent to executing transactions nor is it a minor non-monetary benefit, and so cannot be deemed as being paid for using execution commissions. We therefore view that an investment firm should pay a discrete charge to an RPA administrator for that service from the firm’s own resources. How such charges or fees are determined is a commercial decision for the investment firm and RPA administrator. A broker does not need to charge for facilitating research charge deductions and temporarily holding these before transferring them into an RPA, but only needs to identify a separate charge if it provides an RPA itself (which they are permitted to do under MiFID II).

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Further guidance requests and wider issues
7.39 Several responses were received on the arrangements that firms should seek to
put in place to avoid receiving unwanted or unsolicited research. Some stakeholders said that the language around ‘blocking’ research in CP16/29, if taken literally, would impose a requirement that would not be workable in practice especially in light of the various means of communication that can be used to transmit research (post, email, telephone and messaging tools).
7.40 Other respondents asked for additional guidance as to what constitutes research.
7.41 A number of stakeholders also provided feedback on research on financial instruments
other than equities and how this could be funded. Several of them saw parallels between fixed income research and macroeconomic analysis and suggested that they should both be treated as minor non-monetary benefits.
7.42 Many who answered CP16/29 also highlighted the potential tensions arising from MiFID
II reforms in relation to the US regulatory framework.
Our response on further guidance requests and wider issues Some of the clarifications that respondents sought have since been provided by ESMA through its IR Q&As. ESMA’s IR Q&A 3 clarifies how investment firms can deal with unrequested research provided free of charge by explaining that firms have to have in place mechanisms to determine the nature of any service, benefit or material paid or provided by third parties to decide whether it can be deemed acceptable. If they do not wish to pay for it, firms should take reasonable steps to either stop receiving or cease benefiting from the content of this research. Ways to achieve this may include automatic filtering of senders and materials where practicable or using the compliance function to monitor, assess and determine whether the incoming material can be consumed in compliance with the MiFID II rules. Training of front-office staff to recognise what research or other material can be accepted or not is also likely to be appropriate. While we will not provide list of what may constitute research, ESMA’s IR Q&As 6, 7 8 and 9 tackle relevant issues and provides guidance as to what can be considered a minor non-monetary benefit, clarifies the nature of corporate access and defines what should be considered macroeconomic research. However, firms will still have to exercise judgement on the specific nature and content of material, rather than rely on how research is labelled or where it originates from within a supplier’s organisation. In particular, as a starting point, ESMA’s IR Q&A8 says that most macroeconomic analysis is likely to be capable of suggesting, implicitly or explicitly, an investment strategy and, as such, we would expect it to be discretely priced and paid for. ESMA’s IR Q&A 9 notes that research on fixed income, currencies and commodities (FICC) is also not carved out from the MiFID II inducements restrictions, unless research providers

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Markets in Financial Instruments Directive II Implementation – Policy Statement II choose to make it available to the public free of charge. ESMA’s IR Q&A 9 also suggests that some FICC research, where similar to macroeconomic research, may lend itself to being priced and paid for through subscription agreements. MiFID II’s interaction with the US and other third countries’ regulatory frameworks We are aware of the issues that the MiFID II reforms create with US regulation which will affect, in particular, whether US broker dealers will be willing to receive separate payments for research due to the implications of the Investment Advisors Act. However, as ESMA’s IR Q&A 4 clarifies, there is no exemption to the MiFID II obligations for an investment firm. This is to ensure, that should it wish to receive material third party research, a firm must either pay for it from its own resources or from an RPA. We understand that US brokers are in discussions with the US SEC to explore the potential for arrangements that would allow US broker dealers to accept research payments by EU firms once MiFID II applies from 3 January 2018. It is not yet clear whether this will provide a solution to the issues, so we will continue to monitor the situation and if necessary provide an update in due course.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 8 Client categorisation Introduction
8.1 This chapter summarises the feedback we received on the changes we proposed to
make to the client categorisation rules in respect of local authorities, and our response.
8.2 In CP16/29 we proposed to:

Clarify that only a national government or a public body dealing with public debt at
national level can be categorised as a per se eligible counterparty (ECP).
Clarify that only a national or regional government or a public body which manages
public debt at national or regional level can be categorised as a per se professional client.
Give effect to MiFID II’s bar on opting‑up elective professional clients to ECP status.
Give effect to MiFID II’s retail categorisation of local authorities.
Exercise our discretion to introduce either additional or alternative quantitative
opt‑up criteria for local authorities, so that certain local authorities can potentially be categorised as elective professional clients. As part of this, we proposed the separate application of opt-up criteria for local authorities’ treasury management functions and pension fund administration functions, and to apply consistent rules across MiFID and non-MiFID business.
8.3 In CP15/43 we proposed to:
update PRIN 1 Annex 1 to remove the possibility of firms categorising local
authorities as ECPs for non-MiFID investment business when applying the FCA Principles for Businesses, (PRIN).
8.4 We modified our approach following feedback, and have now:
added a fourth quantitative criterion to COBS 3.5.3BR(2), that the local authority is
using investment services as part of administration of a pension fund within the local government pension scheme (LGPS);
decided to apply the same requirements to both MiFID and non-MiFID investment
business conducted with local authorities; and
made further changes to the discretionary criteria, which should allow a greater
number of local authorities to be able to opt-up to professional client status.

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8.5 Our proposed approach remains the same to:

prevent smaller local authorities from being able to opt-up to professional client
status (particularly when exercising their treasury management functions), while allowing larger ones to be able to exercise this option;
have a common approach to categorisation of clients across MiFID and non-MiFID
business for this type of client; and
exclude local authorities from the list of eligible counterparties in PRIN 1 Annex 1 for
the purposes of applying PRIN in respect of non-designated investment business. Categorising local authorities as ‘retail’ or ‘elective professional’ clients
8.6 Most respondents agreed that smaller local authorities should be categorised as
retail clients and be given extra regulatory protections, but felt larger authorities and local authority pension business should not be the subject of these rules given their sophistication and existing statutory protections.
8.7 Others asked whether we could continue to allow local authorities administering LGPS
pension funds to be categorised as per se professional clients.
8.8 Many noted that being categorised as ‘retail’ may prevent local authorities from making
certain investments (eg private equity and infrastructure funds, and certain forms of derivatives). They felt this may increase investment costs, hamper investment returns, prevent effective risk management and result in having to purchase higher cost alternatives.
8.9 Finally, some asked for a definition of what a ‘local public authority or municipality’ is,
and highlighted potential difficulties of distinguishing between treasury management and pension scheme administration business. Our response on categorising local authorities as ‘retail’ or ‘elective professional’ clients It is a MiFID II requirement that local authorities are categorised as ‘retail’ clients. We have chosen to exercise a discretion we have to set ‘alternative or additional quantitative criteria’ for local authorities requesting to be opted-up to professional client status. We discuss these criteria in the following sections. We would note more generally that being a ‘retail’ client when receiving investment services is intended to provide appropriate additional protections, not necessarily to exclude parties from certain products or services. However, we recognise that this may be a practical consequence of the categorisation in some limited cases, due to the interplay with other regulatory requirements and/or the commercial decisions of investment firms.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II A ‘local public authority or municipality’ is not defined in MiFID or MiFID II, given the many different types of these bodies across the EU. To ensure legal consistency with MiFID II, we will not introduce our own definition. It is our view that firms should be able to distinguish between treasury management and pension fund administration, given the need for pension funds to be separately recorded and funds held in segregated accounts. However, we recognise that investment firms may need to modify their processes to provide appropriate treatment to different functions of the same entity. The opt-up process
8.10 Many firms and local authorities commented that, compared with being categorised
as per se professional clients, the need to go through an opt-up process to become an elective professional client would be time-consuming, burdensome and costly. However, we received little challenge to our CBA or alternative assessments of the time, cost and burden involved with opting up.
8.11 Respondents thought that the process may be inconsistently applied in practice,
leading to varied outcomes. A few queried our view that investment firms should apply the rules on client categorisation of local authorities as implemented in the client’s jurisdiction, rather than that of the firm. They further noted that a non-harmonised approach would hamper the cross-border provision of services in the EU. Our response on the opt-up process It is a MiFID II requirement that local authorities are categorised as ‘retail’ clients, with the ability to opt-up upon satisfying a set of qualitative and quantitative criteria, using the procedure described. We recognise that having to opt-up to a professional client status, rather than automatically being a professional client, will involve some extra work from investment firms and their local authority clients. We looked at this as part of our CP16/29 CBA, and we received no new evidence to challenge our assumptions that the impact would likely be proportionate and relatively small. We intend that the process and criteria for opting up should be clear and transparent, to make it as easy to apply as possible. The tests must be carried out by the investment firm and it will need to gather sufficient evidence to satisfy itself that the tests have been met in relation to each client. We recognise that individual firms may make different judgements about the same local authority client, but such judgements may be appropriate with respect to the qualitative test depending on the specific products or services a firm intends to offer. The client categorisation rules in COBS 3 will apply to firms authorised to do business in the UK, and our rules are designed to give appropriate levels of regulatory protection to UK local authorities. MiFID II specifically allows for a non-harmonised approach to opting up

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Markets in Financial Instruments Directive II Implementation – Policy Statement II local authorities in different member states, depending on the specific needs of those clients in each jurisdiction. EEA member states are thus given discretion to set alternative or additional quantitative criteria to those in the fifth paragraph of Annex II (II.1) of MiFID II. Therefore, we continue to believe it is in line with the intention behind MiFID II that firms should defer to the criteria deemed appropriate for local government in the territory in which they are located. Where such member state discretion is not used, or the client is located in a third country, we would expect firms to use the quantitative test in the fifth paragraph of Annex II (II.1). The qualitative test
8.12 Respondents supported the application of the qualitative test, as a broader
assessment by firms on the expertise, experience and knowledge of their clients regarding the types of investment or service being offered and the risks involved. Many asked for more detail about how this should be applied in practice, including who (eg which individual(s) or group of individuals within an entity) needs to be assessed for this purpose.
8.13 Explanations were provided of typical arrangements for the governance of, and
decision-making in relation to, local authorities’ pension funds, including the role of elected officials on pension committees, section 151 officers42, other staff and external advisors. Some respondents noted their adherence to the CIPFA Code of Practice for Treasury Management, which they suggested may help demonstrate treasury managers’ ability to understand the risks of certain investments. Our response on the qualitative test MiFID II requires the qualitative test to be applied to local authorities seeking to opt-up to professional client status, with the test itself unchanged from MiFID. It is important that an investment firm is confident that a client can demonstrate their expertise, experience and knowledge such that the firm has gained a reasonable assurance that the client is capable of making investment decisions and understanding the nature of risks involved in the context of the transactions or services envisioned. COBS 3.5.4 requires that the qualitative test should be carried out for the person authorised to carry out transactions on behalf of the legal entity. ‘Person’ in this context may be a single person or a group of persons. We understand that the persons within a local authority who invest on behalf of pension funds are elected officials acting as part of a pensions committee. In those circumstances, firms may take a collective view of the expertise, experience and knowledge of committee members, taking into account any assistance from authority officers and external advisers 42 Section 151 of the Local Government Act 1972 requires appointment by a local authority of an officer who has responsibility for the proper administration of their financial affairs (eg, a chief financial officer).

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Markets in Financial Instruments Directive II Implementation – Policy Statement II where it contributes to the expertise, experience and knowledge of those making the decisions. We also understand that typically the person(s) within local authorities who invest the treasury reserves of those authorities are likely to be officers of the authorities, who are delegated authority from elected members and act under an agreed budget and strategy. Given different governance arrangements, we cannot be prescriptive, but we would stress the importance of firms exercising judgement and ensuring that they understand the arrangements of the local authority and the clear purpose of this test. It remains a test of the individual, or respectively the individuals who are ultimately making the investment decisions, but governance and advice arrangements supporting those individuals can inform and contribute to the firm’s assessment. We agree that adherence to CIPFA Codes or undertaking other relevant training or qualifications may assist in demonstrating knowledge and expertise as part of the qualitative test. The quantitative test – approach for Local Government Pension schemes (LGPS)
8.14 Respondents particularly queried the need to re-categorise local authorities as
retail clients under MiFID II in respect of their administration of their authorities’ employee pension scheme. It was noted that although there had been previous failings in treasury management at some authorities as outlined in CP16/29, there were contrasting examples of successful and appropriate investment of local authority pension funds.
8.15 Information was provided on the LGPS of which larger authorities in England & Wales
are members, with similar schemes in Scotland and Northern Ireland. Respondents also directed us to the LGPS Regulations43 which make express provision for authorities being assisted to appropriately fulfil this role (eg the requirement to take ‘proper advice’44). It was explained that in England and Wales, the LGPS is undergoing changes to create eight ‘pooled’ investment vehicles that would each invest on behalf of a number of local authorities to reduce costs and bring scale to investments. Further, the UK Government’s hope that such funds would include increased investment in UK infrastructure was noted. There was a concern that MiFID II and our proposals would hold back or hamper the pooling agenda. Our response on the quantitative test – approach for Local Government Pension Schemes (LGPS) We recognise that local authority pension schemes are established within the framework of the LGPS Regulations and are subject to the oversight of the Pensions Regulator, as well as the broader public policy 43 Eg, The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016. 44 Ibid, Regulation 7.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II goals of the pooling agenda. These measures have similar goals to those in MiFID II, such as ensuring that local authority pension schemes receive appropriate investment services, and that they understand the costs and risks involved with such service. Some expressed concerns about interpreting the quantitative criteria in light of the common governance of local authority pension scheme administration, and recognise that the drafting of our proposed rules was not sufficient to achieve our policy intention of allowing all local authorities administering LGPS pension funds to have the ability to successfully opt up. Therefore, our rules will add a fourth criterion that the client is subject to the LGPS Regulation for their pension administration business. Local authorities must continue to meet the size requirement, as well as one of the two previous criteria or the new fourth criterion. This will assist all local authority pension fund administrators who wish to opt-up to meet the quantitative test, but maintain the need for local authorities to qualitatively demonstrate their sophistication to become professional clients. We agree with views that compliance with the LGPS Regulations, including taking proper advice, will contribute to the assessment of knowledge and expertise of the local authority client when making decisions. The quantitative test – undertaking 10 transactions on average per quarter
8.16 In CP16/29 we thought that in respect of local authority pension business, all local
authorities (with the exception of a handful of internally managed funds) would not undertake an average of 10 transactions per quarter in their pension business. This is largely because local authorities investing pension fund money tend to invest in collective investment schemes or delegate management of their portfolio to an external portfolio manager, and this form of investment occurs infrequently.
8.17 It was also suggested that many treasury managers would not undertake 10 or more
transactions per quarter, owing to their agreed budgeting and financing strategy. A few respondents felt that local authorities may be tempted to ‘churn’ their portfolio (buying and selling, and re-buying investments) in order to hit the 10 transactions per quarter level to achieve or retain elective professional client status. Our response on the quantitative test – undertaking 10 transactions on average per quarter We accept that some local authorities will not be able to meet this part of the quantitative test (particularly when investing pension funds). However, it continues to be our view that regular and recent experience of carrying out relevant transactions remains a useful proxy for assessing sophistication. We have received no arguments against this view, and so confirm that we will retain this test as one of the four available criteria for enabling a local authority body to opt up.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II While theoretically this criterion could be ‘gamed’ by firms and clients by churning portfolios, we believe it is an unlikely course of action for local authorities who are accountable to the electorate and have specific statutory duties requiring prudent management of their financial affairs.45 In future, we could scrutinise any firm who appeared to be recommending this course of action to its client and question whether the firm was acting in the client’s best interest and whether the firm believed that an artificially higher number of trades contributed to the expertise, experience and knowledge of their client. The quantitative test – employment in the financial sector for at least 1 year in a professional position
8.18 Many respondents expressed concern and confusion about how firms were supposed
to apply the test that the client works or has worked in the financial sector for at least 1 year. In those responses, it was asked whether the test should apply to the local authority as a legal entity, the relevant local elected officials responsible for the decision, the section 151 officer, or the professional advisor.
8.19 Some questioned what constituted the ‘financial sector’ within our proposed rules.
They noted that local authority staff in treasury or pension management functions are professional treasury managers and accountants, but have often not worked for FCA authorised firms, and elected officials typically are not expected to have experience working at financial institutions. Many also believed that the ‘financial sector’ was limited to the regulated financial sector, but noting that we did not define the term. Our response on the quantitative test – employment in the financial sector for at least 1 year in a professional position We accept we could be clearer about who this test is applied to, while ensuring it can be applied flexibly to different governance arrangements. We also recognise that employment in the financial sector is a criterion that can only apply to a natural person. In response, we have amended the proposed drafting in COBS 3.5.3BR(b)(ii) to note that ‘the person authorised to carry out transactions on behalf of the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the provision of services envisaged’. This should allow local authorities to delegate authority to make investment decisions on their behalf to professional staff with at least one year’s experience. We recognise that this redrafted criterion may not be useful for assessing the collective decision making involved in investing local authority pension funds. However, we think this will be less problematic given our new fourth criterion aimed at LGPS administering authorities. 45 Section 12, Local Government Act 2003

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Markets in Financial Instruments Directive II Implementation – Policy Statement II We do not interpret the term ‘financial sector’ in a limited way for the purposes of COBS 3.5.3BR(2)(b)(ii), and firms may reasonably assess that a professional treasury manager has worked in the financial sector for at least one year, if their role provides knowledge of the provision of services envisaged. This meets the purpose of the test, to ensure the person acting on behalf of a client has the expertise, experience and knowledge necessary in relation to the investment or service being sold and the risks involved. The quantitative test – portfolio size threshold
8.20 In CP16/29, we asked:

Q16: Do you agree with our approach to revise the quantitative thresholds as part
of the opt‑up criteria for local authorities by introducing a mandatory portfolio size requirement of £15m? If not, what do you believe is the appropriate minimum portfolio size requirement, and why?
8.21 We received a range of responses to this question extending from full support for the
£15m mandatory portfolio size requirement to suggestions that the UK should not use its discretion provided and retain the default £500,000 threshold in Annex II (II.1) of MiFID II. A common alternative proposal was to set the threshold at £10m.
8.22 Many respondents quoted the size of their own financial portfolio balances, in relation
to their treasury management activities and their pension fund administration. A number of respondents questioned the basic assumption of our analysis leading to the £15m threshold, and felt that this number restricted many more authorities than just small town and parish councils, with some believing it captured “half” of all local authorities.
8.23 It was noted that local authorities could ‘game’ this requirement by borrowing extra
funds with which to invest, so as to meet the minimum threshold. Our response on the quantitative test – portfolio size threshold We have changed the portfolio size threshold to £10m. This follows further data and case studies provided by local authorities, Department for Communities and Local Government (DCLG) new data, and wider CP responses. We believe £10m is closer to our policy goal of restricting the ability of the smallest, and by implication the least sophisticated, local authorities (town and parish councils, and the smallest county and district councils) to opt-up, but giving larger ones the ability to do so more readily, (provided they meet the other criteria). Based on the number of local authorities we estimated were investing in MiFID scope instruments and understanding the quoted portfolio size in the DCLG dataset for 2014/15, in CP16/29 we estimated that 63

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Markets in Financial Instruments Directive II Implementation – Policy Statement II additional local authorities would not be able to opt-up to professional client status for the purposes of engaging in MiFID business as a result of our consulted upon policy. At a £15m portfolio size threshold, this increased to 78 additional local authorities which would not be able to opt-up to professional client status for the purposes of engaging in MiFID business when we used the new 2015/16 DCLG dataset.46 Applying the £10m threshold to data over the following years:

2014/15 – 27 local authorities would not be able to opt-up to
professional client status; and the estimated one-off costs for investment firms would decrease from £1.7m to £0.8m and on-going costs from £0.8m to £0.3m.
2015/16 – 42 local authorities would not be able to opt-up, and the
one-off costs for investment firms would decrease from £2.0m to £1.1m, and on-going costs would reduce from £0.9m to £0.5m.47 While a local authority’s ability to borrow extra funds to ‘game’ this requirement may be possible, it is questionable whether local authorities would be able to justify this approach while at the same time making budgets and investment strategies available for public scrutiny. Application to non-MiFID scope business
8.24 In CP16/29, we asked:
Q17: Do you agree with our approach to extend these proposals to non‑MiFID scope
business? If not, please give reasons why.
8.25 Most respondents supported extension of our proposals to cover the provision of nonMiFID scope investment services to local authorities, on the proviso that we establish
a sensible and workable regime. A minority felt that we should not extend our approach to non-MiFID business given the limits of our approach as set by MiFID II, which they believed to be inappropriate. These respondents typically favoured retention of the automatic ‘per se’ professional client categorisation of a ‘local authority or public authority’ as a large undertaking under COBS 3.5.2R(3)(f). Similar comments were made in response to Q26 in CP15/43 regarding a change to the client categorisation of local authorities for MiFID and non-designated investment business in relation to the application of PRIN. 46 The 2015-16 DCLG data did not become available until after the publication of CP16/29. Now available here:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/612305/Borrowing_and_Investment_Live_Table_ Q4_2016_17.xlsx 47 Where respondents quoted that “half” of all local authorities would be unable to opt-up to professional client status, we believe this refers to the absolutely number of local authorities potentially impacted, rather than only those who are currently believed to use MiFID services but may not be able to in the future.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on the application to non-MiFID scope business Given most support our proposal and view that clients receiving similar investment products or services should receive similar protections, we will extend the same criteria for the categorisation of local authority clients to MiFID and non-MiFID investment business. We believe this establishes common criteria, and requires investment firms to provide retail investor protections to local authorities, unless following an assessment they find that the client is sophisticated enough to understand the nature and risks of the proposed investments as professional clients. We believe we have addressed questions about the clarity of the application of our rules, as noted above. Principles for Businesses (PRIN)
8.26 In CP15/43, we asked

Q26: Do you agree with our proposal to update PRIN 1 Annex 1 to delete the
possibility of local authorities being treated as ECPs for the purposes of PRIN in respect of non-designated investment business? If not, please give reasons why.
8.27 Respondents to this question made similar comments and expressed similar
concerns to those that were made to Q16 of CP16/29. These included concerns about transitional arrangements for re-categorising local authority clients, who may no longer be eligible counterparties. On balance, most respondents supported this proposal and felt that it was appropriate to apply consistent treatment in respect of MiFID and non-designated investment business when applying PRIN. Our response on the Principles for Businesses (PRIN) Considering all feedback received to both consultations, we have decided to apply our changes to PRIN 1 Annex 1 to both designated and non-designated investment business. This means that local authorities should not be considered as eligible counterparties for the purposes of those rules. We discuss transitional arrangements below. As noted above, we continue to believe that clients receiving similar investment products or services should receive similar protections, particularly between MiFID and non-MiFID investment business and we set out our case for this in CP16/29. Transitional arrangements
8.28 Although we did not cover the issue of transitional arrangements in CP16/29, many
respondents requested an appropriate transitional arrangement so that firms would have time to assess their local authority clients after 3 January 2018. Additionally, they questioned whether, if an existing investment product had been previously sold or

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Markets in Financial Instruments Directive II Implementation – Policy Statement II service provided, they would need to sell the assets or cease the service if the client could not be opted-up under the proposed new criteria. Our response on transitional arrangements MiFID II gives us very limited discretion with regard to transitional arrangements for applying these rules in respect of local authorities and provides no ability to extend the deadline for compliance with this requirement beyond 3 January 2018. We consulted in CP16/43 on proposed transitional arrangements that would allow investment firms to re-assess the categorisation of local authority clients between the 3 July 2017 implementation deadline and 3 January 2018. These proposals are being taken forward (see Chapter 24). However, firms will not be expected to re-consider categorisation of existing clients other than local authorities, where MiFID II rules are the same as existing MiFID rules transposed at COBS 3. Otherwise, we have made further consequential drafting changes to transitional provisions at COBS TP 1 that were added when MiFID was implemented in 2007, but that are no longer carried across into MiFID II. More generally, COBS 3.5.8G notes that professional clients have the responsibility to keep investment firms informed about any changes that affect their current categorisation. Further, at COBS 3.5.9R, if the firm becomes aware that the client no longer fulfils the initial conditions that made the client eligible to be an elective professional client, it must take “appropriate action”. Neither MiFID II, nor our rules specify what ‘appropriate action’ is, which will depend on the facts of the case and what would be in the client’s best interest. Firms must exercise judgement and consider what would be in the best interests of the client. For example, if a client no longer meets the quantitative test to opt up to professional client status, a firm may decide it is appropriate to cease providing investment services but to do so in a way that minimises losses to the client.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 9 Disclosure requirements Introduction
9.1 This chapter summarises our responses to feedback received in relation to our
proposals in CP16/29 to implement the MiFID II disclosure requirements. We proposed updates to the disclosure provisions in two sourcebooks, General Provisions (GEN) and the Conduct of Business sourcebook (COBS).48
9.2 In particular, we proposed new provisions in: COBS 2.2A, COBS 4.5A, COBS 6.1ZA,
COBS 14.3A and COBS 16A in relation to MiFID business.
9.3 The revised disclosure framework should provide for appropriate investor protection,
detail the information to be provided to clients and potential clients, and detail how firms should report to clients. Our approach to the disclosure requirements (suitability reports) applying in relation to the provision of advice is discussed in Chapter 11.
9.4 Our final proposals affect firms that carry on investment business that is MiFID
business and, as relevant rules are amended slightly, firms that undertake non-MiFID business. In this chapter, ‘MiFID business’ refers to MiFID or equivalent third country business, or business undertaken by Article 3 firms. And, ‘non-MiFID business’ refers to business undertaken by firms that is not MiFID business, or Article 3 firm business.
9.5 In this chapter we publish new rules:

for firms doing MiFID business49
for Article 3 firms50
relating to how firms doing MiFID business must disclose information to professional
clients and ECPs. For non-MiFID firms, unless the firm is an Article 3 firm carrying on MiFID-scope business, the rules that apply in relation to professional clients and ECPs are unchanged.
9.6 For all firms, we publish amended application provisions to make it clear which chapter,
or section of a chapter, applies in relation to a firm’s MiFID business or non-MiFID business. 48 These provisions are in: GEN 1 (Appropriate regulator approval and emergencies), COBS 1 (Application), COBS 2 (Conduct of business obligations), COBS 4 (Communicating with clients, including financial promotion), COBS 6 (Information about the firm, its services and remuneration), COBS 14 (Providing product information to clients), and COBS 16 (Reporting information to clients). 49 that implement the MiFID II provisions in Articles 24(3), 24(4) first and last paragraphs, 24(4)(b) and (c), 24(5), 24(6), 24(11), 25(6) and 30(1) second paragraph; and we publish provisions that copy out MiFID Org regulation provisions in Articles 44, 46 to 51, 59 to 63, and recital 73. 50 those that are detailed in MiFID II Article 24(3), 24(4) first and last paragraphs, 24(4)(b) and (c), 24(5), and 25(6).

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9.7 We publish new and more detailed costs and charges disclosure requirements for firms
doing MiFID business. For non-MiFID firms, unless the firm is an Article 3 firm, the rules that apply in relation to costs and charges are unchanged.
9.8 We publish new disclosure provisions relating to firms doing MiFID business that apply
in relation to:

cross-selling/bundled products or services
some more detailed post-sale reporting requirements
a revised requirement to retain records for at least five years
9.9 For firms doing non-MiFID business, the rules that apply in relation to cross-selling/
bundled products or services, and record-keeping are unchanged; the rules in relation to post-sale reporting obligations are also substantially unchanged.51
9.10 We also clarify that:
We will not, for now, consider proposing a standardised format setting out how
firms should calculate and disclose point-of-sale or post-sale information, including information on costs and charges (so firms will need to develop their own approach to disclosure that will meet the needs of their clients and reflect their business propositions).
Unless the firm is an Article 3 firms carrying on MiFID-scope business, our existing
disclosure rules will continue to apply to firms doing non-MiFID business in the same way they do now. However, these rules may have been re-cast slightly to ensure consistency with the equivalent rules that apply to firms carrying on MiFID business, and some flexibility will now apply in relation to periodic statements provided online. Information to clients and potential clients
9.11 In CP16/29 (Q18) we asked whether respondents agreed with our approach to
implementing the MiFID II disclosure requirements. Most respondents agreed with our approach. One thought the new provisions would create difficulties for clients who do not use the internet and prefer to transact in part or exclusively by using the telephone or paper. Another thought the introduction of new or updated client agreements would result in costs to firms who would need to send out revised client agreements or terms of business. There were mixed responses to providing separate rules for MiFID and non-MiFID business. One asked how firms should disclose charges pre-sale, before the advisory service is given and the recommended products and service are known. Our response on information to clients and potential clients We could have applied the revised MiFID II disclosure provisions to all investment firms, an approach which would have led to simpler 51 We are introducing an exemption to the post-sale reporting obligations so a firm doing non-MiFID business can avoid the need to provide periodic statements if clients can, and do, access up-to-date statement online. (See para 9.28)

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Markets in Financial Instruments Directive II Implementation – Policy Statement II drafting. However this would have resulted in costs arising to deliver new disclosure standards that would not necessarily improve investor protection for clients of firms carrying on non-MiFID business. Having considered the responses we consider that having separate regimes is the most appropriate and cost-effective approach. We recognise, and covered this in our CBA, that firms may need to review their business models in order to ensure they comply with the new requirements and give their clients the information required. In particular, we recognise that firms will need to make changes if they have clients who transact using only paper and telephone communications. Fair, clear and not misleading information requirements
9.12 In CP16/29 we proposed to amend our existing rules or introduce new provisions that
would impose, align with or reference the new requirements in MiFID II Article 24(3) and Article 30(1), second paragraph. These provisions contain the conditions with which firms must comply in order to ensure the information they disclose is fair, clear and not misleading, including information disclosed in relation to the past and future performance rules. Although we proposed to introduce some updated detail into existing provisions, we considered the amended text to impose substantially the same requirements as the existing text.
9.13 In CP16/29 (Q19) we asked about the proposal not to extend the ‘fair, clear and
not misleading’ information requirements to firms communicating with an eligible counterparty in relation to non-MiFID business. Although some of the respondents who commented agreed with this proposal, a number of respondents argued that communications to ECPs by firms doing non-MiFID business, including Article 3 firms, should also be subject to the fair, clear and not misleading rule in the same way as it applies to firms doing MiFID business. Our response on fair, clear and not misleading information requirements We accept that a level playing field for all firms that communicate with ECPs may appear to be desirable. However, no evidence has come to our attention to suggest harm in relation to non-MiFID firms’ communications to ECPs, and so extending this provision, that would involve such firms in increased compliance costs, could not be justified. At present all firms need to ensure that their communications to ECPs are not misleading52, and this is the position that will continue to apply to firms doing non-MiFID business. 52 Given PRIN 3.4.1R, although Principle 7 requires firms to communicate with clients in a way that is fair, clear and not misleading, the only requirement of Principle 7 relating to ECPs is that a firm must communicate information to ECPs in a way that is not misleading.

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9.14 In CP16/29 we proposed rules that would impose, align with, or reference the new
requirements in MiFID II Article 24(4) first and last paragraphs, 24(4)(b) and (c), and that would apply different requirements to firms doing MiFID business and firms doing non-MiFID business. In particular, we proposed applying requirements that would require firms doing MiFID business to provide, in good time, more detailed, aggregated and on-going information about costs and charges that go beyond what is currently required. We did not propose applying similar detailed costs and charges disclosure and timing requirements to firms doing non-MiFID business.
9.15 In CP16/29 (Q20) we asked about the proposal not to extend the MiFID requirements
in relation to costs and charges to non-MiFID business (that is not the business of an
Article 3 firm). We were interested in identifying whether firms would face difficulties if
they needed to provide different costs and charges disclosure for their MiFID and nonMiFID business.
9.16 Several respondents agreed with our decision to avoid gold-plating and not propose to
level-up standards applying to non-MiFID firms to align with MiFID II. Others disagreed with this proposal. They indicated that different MiFID and non-MiFID costs and charges disclosure requirements could be confusing, and stated that they would prefer a consistent costs and charges disclosure approach applying to all firms. A couple of firms mentioned that they would like it if firms that carry out both MiFID and non-MiFID business could operate a single, compliant disclosure regime. Our response on information disclosure, timing, and costs and charges We realise the MiFID II provisions will result in firms doing MiFID business needing to alter their approach to providing cost and charges disclosures. In relation to firms that carry out non-MiFID business, we are not convinced, and were provided with no specific evidence, that there are benefits to consumers which justify imposing the more detailed MiFID II disclosure requirements. So, we will make the rules as proposed. We recognise that many firms carry out both MiFID and nonMiFID business. Where this is the case, a firm may want to consider an approach that involves complying with the MiFID disclosure requirements in relation to both the MiFID and non-MiFID aspects of its business. A firm should only apply a MiFID disclosure requirement to its non-MIFID business where it is satisfied that it imposes an equivalent requirement or a higher standard compared to the otherwise applicable non-MiFID disclosure requirement, and compliance with the MiFID disclosure requirement would also entail compliance with the otherwise applicable non-MIFID requirement.53 53 For example, a non-MIFID disclosure rule may require a firm to disclose information about A, B and C while the equivalent MiFID disclosure rule requires disclosure about, A, B, C, D and E. In this example the MiFID disclosure requirement can be said to be “higher” than the equivalent non-MIFID requirement and, in this type of situation, a firm complying with the higher MiFID requirement will comply with the applicable non-MiFID requirement.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Comprehensible information about a firm, its services and investments:
standardised format
9.17 In CP16/29 we proposed a new rule54 to give effect to MiFID II Article 24(5). This rule
will require firms to provide information referred to in MiFID II Article 24(4) and (9) in a comprehensible form and in such a manner that clients are reasonably able to understand the nature and risks of the investment service and of the specific type of financial instrument that is being offered and, consequently, to take investment decisions on an informed basis. MiFID Article 24(5) also states that we can allow for this information to be presented in a standardised format. In CP16/29 we referred to feedback we received to DP15/3, and reiterated that we recognise the importance of consistency across the various disclosures consumers receive. However, for a number of reasons, we do not consider it appropriate to develop a standardised format for disclosure of costs and charges at the current time. We maintain this view.
9.18 In CP16/29 (Q21) we asked about our proposal not to propose a standardised format
for point-of-sale and post-sale disclosures. A number of respondents agreed with this approach, others disagreed. It was generally accepted that, ideally, all competing firms would calculate and disclose information, including information about costs and charges, using both consistent and comparable methodologies, and consistent and comparable formats. The potential benefit for consumers, aiding comparability if firms take a uniform approach to disclosures, was noted. However, several respondents accepted that any proposal for standardised disclosure formats would need to reflect the MiFID II disclosure requirements, the Packaged Retail and Insurance-based Investment Products (PRIIPs) key information document (KID) and the new disclosure requirements that will be required for insurance-based investment products as part of the Insurance Distribution Directive (IDD). Several respondents stated that they would welcome an indication from us on the point-of-sale and post-sale disclosures that will be expected, and the degree of costs and charges granularity that would be required. Others recognised that, given the various products affected and the diverse costs and charges firms apply in practice, developing a standardised approach that could be used to give a fair and comparable impression of all the different outcomes would be challenging. Our response on comprehensible information about a firm, its services and investments: standardised format We do not propose standardised format for point-of-sale or post-sale disclosures, including costs and charges disclosures, at the current time. We realise that the absence of a standardised format, although it gives firms flexibility to develop disclosures that suit their target customers and business models, will mean different firms will most likely develop different approaches to disclosure, and this will make it harder for consumers to compare alternatives. However, given the practical challenges that exist for developing a standardised disclosure format, the fact that a viable standardised form does not yet exist, and the need to consider the different requirements 54 COBS 2.2A.5R.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II in MiFID II, the PRIIPs Regulation and the IDD, we plan to proceed as proposed. In the near-term, we will continue to engage with any industry-led development of a standardised format. Changes to reporting to clients and periodic statements
9.19 In CP16/29 we proposed rules that would implement or reflect the MiFID II
requirements for the provision of reports to clients on the service provided, including the costs and charges incurred, and the new 10% depreciation reporting requirements applying to a client’s managed portfolio, or position in leveraged financial instruments or contingent liability transactions. In CP17/8 we also proposed a consequential amendment to our rules55 so that, regarding reporting obligations, our rules would apply to firms carrying on non-MiFID business as they do now.56
9.20 We also proposed introducing an exemption, in line with MiFID II provisions, to allow
firms doing non-MiFID business to avoid the need to provide periodic statements. This exemption would apply if the firm provided its clients with access to an online system containing their up-to-date statement, and had evidence that the client accessed the online statement at least once during the previous quarter. In CP16/29 (Q22) we asked if respondents agreed with our proposal to introduce this exemption. Our response on reporting to clients and periodic statements Most respondents agreed with this proposal. However, some respondents disagreed with this approach, as they favoured a consistent approach to periodic disclosure by MiFID and non-MiFID firms to benefit clients. One respondent stated that, although they supported the proposal in principle, they believed the system functionality to support the evidencing of the required online access was likely to be expensive (no specific figure was mentioned). We appreciate this and accept that some firms will choose to continue to provide clients with periodic statements, in addition to providing access to statements online which will not be monitored. There were no objections to the consequential amendments proposed in CP17/8. We will make the rules as proposed. 55 COBS 16.2 and 16.3. 56 In CP17/8 we consulted on consequential amendments to COBS 16 Annex 1R to reflect policy proposed in CP16/29.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 10 Independence Introduction
10.1 This chapter summarises the feedback we received on the changes we proposed to
independence rules in CP16/29. We provide our response to that feedback and indicate our final approach to transposing MiFID II.
10.2 In CP16/29, we provided feedback to DP15/3, which compared our current
independence requirements to the new MiFID standard and asked for feedback on how we should incorporate the new standard in our Handbook. We also proposed a new standard of independence for advice in respect of MiFID financial instruments, structured deposits and non-MIFID RIPs (such as insurance-based investments and personal pensions). Comparison of Retail Distribution Review (RDR) and MiFID II standards
10.3 In CP16/29, we provided our analysis of the MiFID II and UK standards for
independence. The approach we proposed sought to achieve a similar outcome and level of consumer protection in respect of our current independence standard (ie that personal recommendations must be based on a comprehensive and fair analysis of the relevant market and be unbiased and unrestricted).
10.4 We did not expect there to be widespread, significant implications for firms arising
from the implementation of MiFID II’s independence standard. However, we considered that it would allow some independent advisory firms to more often narrow the scope of their advice and to provide more specialist or specific advice (provided this is made clear to consumers).
10.5 We asked in Q23:

Do you agree with our analysis of the two (MiFID II and RDR) independence
standards?
10.6 All those who responded to this question agreed with our approach and analysis of
the two independence standards, and noted that there was likely to be little practical difference between them. A few respondents also considered that guidance on the MiFID standard would be helpful. Our response on the comparison of RDR and MiFID II standards We will adopt the MiFID standard as proposed, and add the guidance we consulted on to help firms demonstrate that they are meeting the

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10.7 The scope of MiFID II differs from the RDR, as such, in CP16/29 we set out the
implications of possible alternative policy options including maintaining the RDR standard for advice on RIPs alongside the MiFID II standard on shares, bonds and derivatives. We explained how this would specify two, near identical standards for independence in COBS, one for MiFID products and one for non-MiFID products. This could create complexity and confusion for consumers and create significant uncertainty for no clear benefit, particularly given the extent of the similarity between the standards. We therefore proposed that the new MiFID standard should be applied to MiFID financial instruments, structured deposits and non-MiFID RIPs.
10.8 We asked in Q24:

Do you agree with our proposal to apply the MiFID standard of independence to
financial instruments, structured deposits and other non-MiFID RIPs for UK retail clients?
10.9 All those who responded agreed with our proposed approach, mainly citing reasons of
avoiding complexity and potential consumer confusion, while maintaining consistent regulatory standards. Our response on the scope of application of the new standard We will apply the MiFID standard across the board to advice on financial instruments, structured deposits and other non-MiFID RIPs (when advising retail clients in the UK). This means that for advice that falls outside the scope of MiFID II, with certain limited exceptions, we propose to apply as rules the provisions of the MiFID II delegated regulation. This will be relevant to, amongst others, non‑MiFID (including Article 3) firms and MiFID firms providing advice to retail clients on RIPs which are not financial instruments. Application of detailed MiFID II delegated regulation requirements
10.10 In CP16/29 we explained that while most of the detailed requirements on
independence within the MiFID II delegated regulation reflect current COBS requirements, there are a small number of new, obligations on firms which, in our view, are unlikely to generate sufficient benefits to consumers to merit being extended to advice on non‑MiFID products.

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10.11 The first of these is a requirement preventing an individual adviser from providing both
independent and restricted advice. The MiFID II delegated regulation explains that this is intended to reduce potential consumer confusion about the type of advice they are receiving. We explained our view that it should be possible to ensure that the client is aware of the type of advice being provided and so proposed not to read this across to advice which falls outside of MiFID II.
10.12 We asked in Q25:

Do you agree with our approach to implementing MiFID II’s requirements around
providing both independent and non-independent (restricted) advice?
10.13 The majority of respondents agreed with our approach, but some were concerned
about the MiFID restriction on an individual adviser offering both independent and restricted advice and did not see the rationale for it. Some explained that it would prevent smaller firms from offering a range of different services to their clients to best meet their needs.
10.14 CP16/29 also proposed that we do not apply two other requirements to non-MiFID
business, for firms to:
distinguish, when recommending their own products (or those provided by entities
with close links) the range of products provided by entities which do not have any links with them
avoid giving undue prominence to their independent advice services over nonindependent advice services in client communications
10.15 This was on the basis that the potential benefits arising from these obligations were
unlikely to outweigh the costs. Also in respect of the second requirement above, it was not clear what specific consumer detriment this was intended to guard against, given that any communications must be fair, clear and not misleading.
10.16 We asked in Q26:
Do you agree with our approach to reading across these further requirements from
the MiFID II delegated regulation?
10.17 A majority of respondents supported our approach, whereas a few trade associations
preferred a consistent approach for both MiFID and non-MiFID business. Our response on the application of detailed MiFID II delegated regulation requirements We recognise that the MiFID II requirement preventing an adviser providing both independent and restricted advice is likely to be an issue for firms who give both types of advice and a particular difficulty for firms with only one adviser. However, since this requirement is stipulated in the MiFID II delegated regulation, we are required to implement it. As we explained in the CP16/29, we are limiting the impact of the requirement as far as possible, by not applying it to non-MiFID business more broadly. This will allow advisers who do not advise on MiFID Financial Instruments

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Markets in Financial Instruments Directive II Implementation – Policy Statement II or structured deposits to continue to provide both independent and restricted advice. In respect of the two requirements detailed in paragraph 10.14 above the majority of respondents agreed with our proposal not to read them across more broadly and no evidence has been provided to alter our view. We have therefore not extended these obligations to nonMiFID business, as proposed in the CP.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 11 Suitability Introduction
11.1 This chapter summarises our responses to feedback received in relation to our
proposals in CP16/29 to implement the MiFID II suitability requirements.
11.2 MiFID II expands on existing suitability provisions and adds some new requirements.
Most of the suitability requirements are contained in regulations, making them directly applicable, with limited scope for us to exercise any discretion in our implementation.
11.3 We proposed including the new requirements in a separate chapter (COBS 9A) for
MiFID business, and leaving the current requirements in place for non-MiFID business pending consultation on implementation of the IDD.
11.4 In CP16/29 we asked in Q27, Q28 and Q29:

Do you have any comments on our proposal to keep the current rules for non-MiFID
products pending implementation of the IDD?
Do you have any comments on the new COBS 9A in Appendix 1?
Do you agree that the new COBS 9A should apply in full to Article 3 firms?
11.5 Suitability rules for MiFID and non-MiFID business
11.6 Respondents generally supported our approach; they understood our rationale of not
wanting to implement MiFID requirements which may, in the near future, conflict with the IDD, until the IDD outcomes became known.
11.7 There were very few comments on the detail of the new COBS 9A, and respondents
generally agreed that the new COBS 9A should apply in full to Article 3 firms. The new requirement relating to switching has led trade bodies to request guidance on the costs and benefits to be assessed on switching. There were some further requests for guidance on other parts of the MiFID II delegated regulation. Our response on suitability rules for MiFID and non-MiFID business We will finalise the rules on the basis of the split Handbook approach – ie a new suitability COBS chapter for MiFID business, and leaving the existing requirements in place for non-MiFID business at least until we consult on the implementation of the IDD and will also apply the new COBS 9A to Article 3 firms.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II We have raised stakeholder concerns around the practicalities of complying with the new switching requirements (Article 54(11) of the MiFID II delegated regulation), and the more general need for guidance on the suitability provisions, with ESMA. ESMA is updating its existing suitability guidelines, and we expect these matters to be covered. ESMA is aiming to consult on these updated guidelines in the summer, and to finalise them around the time MiFID II comes into force in January 2018. We would encourage all stakeholders to respond to ESMA’s consultation.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 12 Appropriateness Introduction
12.1 This chapter summarises our responses to feedback received in relation to our
proposals in CP16/29 to implement the MiFID II appropriateness requirements.
12.2 Under MiFID, there is a distinction between ‘complex’ products and other ‘noncomplex’ products. The appropriateness test (for non-advised sales) must be carried
out when a firm executes, or receives and transmits, a client order in relation to a complex product.
12.3 Because MiFID II narrows the scope of products deemed automatically non-complex,
the appropriateness test needs to be carried out in relation to a wider range of products.
12.4 Firms will also need to record the results of a test, including

when a warning has been given, but the client wishes to proceed with the transaction
regardless, and
whether the firm decided to carry out the client’s request in spite of its warning
Updated rules on the appropriateness test
12.5 In CP16/29, we said that, in our view, investment trusts and non-UCITS retail schemes
(NURS) are neither automatically non-complex nor automatically complex, but must be assessed against the criteria set out in the MiFID II delegated regulation. We also said that when firms apply these criteria, they should adopt a cautious approach if there is any doubt as to whether a financial instrument is non-complex. This remains our view of how this part of MiFID II should be interpreted, and how firms should apply these rules.
12.6 The new provisions for MiFID products were set out in a draft COBS 10A, while the
current rules will continue to apply to a non-MiFID firm when it arranges or deals in a non-readily realisable security, derivative or warrant for a retail client and (through COBS 22.2) where a retail client wishes to buy mutual society shares.
12.7 We asked:
Q30: Do you agree that, for non-MiFID firms, we should limit the current rules in
COBS 10 to direct offer financial promotions relating to a non-readily realisable security, derivative or a warrant (and also, through COBS 22.2, to mutual society shares)?

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Q31: Do you agree with our proposal to limit the new COBS 10A to MiFID products?
Q32: Do you have any comments on the new draft of COBS 10A?
12.8 There were very few replies, and little comment, to Q30 and Q31. On Q32, the following
issues were raised by respondents, in particular whether:
the appropriateness test should cover substitutable products?
clarity could be provided around which firm is responsible for determining whether a
product is complex or non-complex, the product provider or distributor? Our response on the updated rules on the appropriateness test We have not made any substantive changes to the draft rules we consulted on in CP16/29. On the first issue raised, as noted in the CP, we are leaving the question of consistency for insurance-based investment products until we consult on the IDD. Regarding the second issue, the distributor is responsible for ensuring compliance with the relevant rules. PROD 3.3.1R, for example, states that a distributor must understand the financial instruments it distributes to clients and assess the compatibility of the financial instruments with the needs of the clients to whom it distributes investment services, taking into account the manufacturer’s identified target market of end clients. PROD 3.3.17R states that distributors must have in place procedures and measures to ensure that when deciding the range of financial instruments and investment services to be distributed, and the target market, all applicable rules are complied with, including appropriateness.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 13 Dealing and managing Introduction
13.1 This chapter covers our final decisions for implementing the MiFID II requirements
on best execution. This includes the requirements on client order handling, record keeping of client orders and decisions to deal, limit order display transactions and personal account dealing. Best execution Introduction
13.2 In this section we summarise the responses we received on our proposals for
implementing the MiFID II best execution rules to both MiFID and non-MiFID business, and summarise our final policy approach. Implementing MiFID II best execution standards for MiFID firms
13.3 In implementing the MiFID II best execution rules, we consulted on deleting the
existing COBS 11.2 chapter and replacing this with the new COBS 11.2A. The proposed COBS 11.2A chapter reflects the MiFID II best execution rules as detailed in MiFID II as well as some of the existing Handbook guidance we proposed to retain.
13.4 In clarifying the application of the new MiFID II RTS 27 reporting requirements to
trading venues (regulated markets, MTFs, OTFs and SIs), we proposed to include references to RTS 27 in the MAR sourcebook and cross-references to these in the new COBS 11.2A. We have similarly included appropriate references to the RTS 27 reporting obligations in COBS 11.2C in order to clarify the application of these requirements to investment firms (such as market makers and other liquidity providers) that are categorised as execution venues.
13.5 In CP16/29 we asked:

Q33: Do you agree with our proposed approach to implementing the MiFID II
requirements on best execution? If not, how could we amend our proposed approach?
Q34: Do you agree with our proposal to add new guidance to the Handbook Chapter
on best execution? If not, please explain why.
13.6 The majority of respondents agreed with, or raised no substantive comments on, our
proposed approach for implementing the MiFID II best execution requirements for MiFID-scope firms. We received only a few comments on our proposed approach, mainly pointing out some minor errors or inconsistencies in the draft legal instrument which we have amended in the final draft version.

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13.7 We were asked to clarify how some of the best execution rules that are derived
from the MiFID II legislation apply to firms receiving and transmitting orders. This is because some of the language contained in the MIFID II delegated regulation and the RTS 28 reporting requirements (which apply to portfolio managers and receivers and transmitters of orders by virtue of Article 65(6) of the MiFID II delegated regulation) is not tailored to their activities but rather is framed in the context of direct execution of client orders.
13.8 We also received some requests for clarification regarding whether the provision in
Article 27(3) of MiFID II (proposed through changes to COBS 11.2A.50 R in CP16/29)
to inform the client where an order was executed, relates to existing regulatory requirements or alternatively imposes a new obligation on firms.
13.9 The large majority of respondents agreed with our proposals for including new
guidance on best execution and provided no comments on our approach. Our response on implementing MiFID II best execution standards for MiFID firms We intend to implement the MiFID II best execution rules for MiFID business as consulted on, subject to very limited changes to address the minor inconsistencies pointed out in the CP responses. We have also re-ordered the sequencing of the provisions for greater clarity and readability of the new COBS 11.2A and have moved the provisions relating to UCITS management companies to a separate section COBS 11.2B. As a consequence, the provisions relating to the obligation on investment firms to produce RTS 27 reports on execution quality when acting as market makers or liquidity providers has been re-numbered as COBS 11.2C. To clarify how some of the MiFID II requirements apply to firms that do not directly execute clients orders but rather place or transmit client orders for onward execution (ie they do not directly execute on a venue), we note that the relevant provisions should be interpreted in light of
Article 65 of the MiFID II delegated regulation. This provision imposes
best execution requirements on portfolio managers and firms that receive and transmit orders for execution, and places an obligation on them to provide disclosures in relation to the entities or intermediaries to which they pass orders in the chain of execution. This is consistent with
Article 65(6) of the MiFID II delegated regulation, which obliges firms to
provide information on the entities it selects for the execution of orders. We also clarify that Article 27(3) of MiFID II, requiring a firm to inform the client where an order was executed, does not impose a further reporting obligation. Instead, it is referring to the existing reporting obligations in
Article 25(6) of MiFID II.
In CP16/29 we proposed deleting the existing best execution Handbook provisions contained in COBS 11.2. Following consultation responses, we will however retain a number of the existing best execution provisions in COBS 11.2 (with appropriate modifications) and apply these to non-

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Markets in Financial Instruments Directive II Implementation – Policy Statement II MiFID firms to which we will not be extending the enhanced MiFID II best execution standards at this stage (discussed further below). We will go ahead with our proposals to include new Handbook guidance for best execution as consulted on. Application to non-MiFID business
13.10 In CP16/29, we asked in Q35:

Do you agree with our proposals for non-MiFID business? If not, what alternative
approach could we consider?
13.11 In CP16/29 we consulted on our discretionary proposals to extend the MiFID II best
execution rules to non-MiFID business where they execute, receive and transmit orders or take decisions to deal (with appropriate modifications to take account of the specific business models of certain firms). We clarified that best execution obligations already apply to non-MiFID firms and business where it involves the execution of orders, placing orders for execution as part of portfolio management activities, or the reception and transmission of orders to other entities for execution in MiFID financial instruments.
Article 3 firms
13.12 We consulted on extending some of the improved MiFID II best execution standards
to financial advisers exempt from MiFID II under Article 3. However, we proposed to do this on a modified basis by exempting them from the obligation to produce an annual report consistent with the RTS 28 publication requirements (under Article 65(6) of the MiFID II delegated regulation). We explained that the incremental improvements to the regime build upon current requirements that these firms must already comply with where they receive and transmit client orders to other entities for execution.
13.13 The majority of respondents agreed with or raised no substantive issues on our
proposal to extend some of the MiFID II incremental enhancements of the best execution regime to Article 3 financial advisers on a modified basis in view of the investor protection and transparency benefits. We did receive some requests to clarify our expectations regarding application of the updated best execution rules to
Article 3 firms. We also received some views expressing concern that this could be
more onerous for small scale Article 3 financial advisers, though respondents did not challenge what we said in our CBA in CP16/29. Our response on Article 3 firms We will extend the MIFID II best execution regime to Article 3 financial advisers, as consulted in CP16/29. This means that Article 3 firms will be subject to the enhanced MiFID II best execution standards, aside from the requirement to produce an annual report on execution quality and order routing activities consistent with RTS 28. We explained in CP16/29 that given that most Article 3 firms are typically servicing retail clients, our proposed approach would ensure that consumers benefit from consistent disclosure and investor protection standards, whilst also calibrating this to take account of the specific activities of the majority

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Markets in Financial Instruments Directive II Implementation – Policy Statement II of Article 3 firms. We received no evidence or cost data challenging the CBA in CP16/29. In CP16/29 we explained that Article 3 financial advisers are already subject to the MiFID best execution rules since we decided to apply these standards to such firms when implementing the MIFID best execution requirements to put them on an equal footing with MiFID financial advisers. Therefore Article 3 financial advisers already owe a duty of best execution in all circumstances when receiving and transmitting orders for the sale and purchase of financial instruments (including units in collective investment schemes). We explained in CP16/29 that we expect our proposals to have a minimal incremental impact on these firms, given that the MiFID II obligations build on the existing best execution framework. Also, given that the majority of Article 3 firms’ activities are limited to the reception and transmission of client orders in units in collective investment schemes, a number of the MiFID II best execution provisions would not be relevant to their activities. Firms should already comply with their current best execution obligations. Going forward, firms must consider how they reflect the enhanced standards, particularly in relation to execution arrangements and polices in their practices, as relevant. As we stated in CP 16/29, Article 3 firms will need to update their execution arrangements to meet the strengthened overarching best execution obligation on firms to take all sufficient steps to obtain the best possible results for clients. Firms will also need to include additional disclosures in their execution policies in relation to costs, fees and venue selection. Article 3 firms are already required to review annually their execution arrangements and policies, so they can reflect any updates in the course of this review. However, given the nature of their services and activities, some of the enhanced best execution requirements will not be relevant to their activities e.g. the obligation to check the fairness of price in relation to OTC products. Collective portfolio management (CPM) firms
13.14 In CP16/29 we consulted on our approach to levelling up non-MiFID CPM firms to the
enhanced MIFID II best execution standards where these firms perform economically equivalent activities to MiFID portfolio managers. In this regard, we proposed to:

apply the MiFID II best execution standards to UCITS management companies
subject to some modifications to tailor the provisions for collective portfolio management
apply the MiFID II best execution standards to small authorised UK AIFMs and
operators of residual CISs subject to the modifications as consulted on for UCITS management companies and retaining the current concession in COBS 18.5.4R (which does not apply the best execution rules for non-retail funds for these firms)

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supplement the existing best execution obligations for full-scope UK AIFMs
and incoming EEA AIFM branches with the MiFID II best execution reporting requirements on execution quality and order routing behaviour (as set out in RTS 28)
make consequential changes to the additional COBS best execution provisions
(set out in COBS 18.5.4AR) that currently apply to full scope UK AIFMs to reflect the MIFID II changes (while noting that in substance these remain largely the same)
13.15 Due to practical timing constraints and legal complexity, we did not include drafting to
apply other MIFID II changes to best execution standards to full-scope UK AIFMs and incoming EEA AIFM branches in CP16/29. Instead, we stated that we would undertake further analysis to consider whether to apply additional aspects of the MIFID II best execution regime to full-scope UK AIFMs, pending a further review of how these are best applied in the context of AIFM activity and the existing EU legislative framework. UCITS firms
13.16 Many respondents commented on our approach to extending the MiFID II best
execution provisions to non-MiFID CPM activity. A number of responses expressed support for the overall approach of maintaining consistent standards across both MiFID and non-MiFID investment management activities. None of the CP responses challenged the cost benefit analysis contained in CP16/29.
13.17 Some disagreed with the proposal to extend the MiFID II best execution standards to
UCITS management companies arguing that the additional reporting requirements would be of less relevance and therefore of limited value to investors in collective portfolios, where assets are managed on behalf of the scheme, rather than segregated or individual mandates.
13.18 Several agreed with our proposal to level up UCITS management companies to the
MIFID II standard in line with MIFID portfolio managers. However, some requested further clarification on when and how the RTS 28 reporting requirements apply to UCITS management companies, particularly where CPM activities is delegated to a MiFID firm. One respondent suggested delaying the implementation date for first RTS 28 report by one year for non-scope CPM business given that ESMA had not provided any interpretative guidance on certain aspects of the regime at that time.
13.19 A few pointed out minor drafting inconsistencies in the legal instrument.
Our response on UCITS firms
We will extend the MiFID II best execution provisions to UCITS management companies as consulted on in CP16/29, with some modifications, which take account of technical drafting comments provided in some responses. Our view of the investor protection and market integrity benefits of extending these standards to managers of UCITS funds, as a common retail investment vehicle, as outweighing potential costs remains. In practice, many firms manage both collective funds and segregated mandates and will in any case apply common standards across their MiFID and non-MiFID business activities, thereby reducing the implementation burden.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II To clarify further the provisions for UCITS management companies, we have moved the UCITS-related best execution provisions to a separate
section in COBS 11.2B. We have also grouped similar topics together.
These drafting changes are not intended to alter the substantive effect of the provisions. We have also included in the final rules a requirement for UCITS management companies to provide information in their execution policies to explain any differences in fees applied to different execution venues such that the advantages and disadvantages of a particular choice of venue are clear. While this particular provision was not included in the legal instrument consulted on in CP16/29 for UCITS management companies, this omission was unintentional. We view its inclusion in the final rules as necessary in order to ensure consistency in standards between UCITS management companies and their MiFID counterparts, in line with our policy intention. The application of this provision is incremental to the other disclosure requirements that will be extended to UCITS management companies and should not result in any additional burden or costs. We clarify that the annual reporting requirements in line with RTS 28 under Article 65(6) of the MiFID II delegated regulation and Article 27(6) will apply (as a result of COBS 11.2B.36R) where the firm itself performs portfolio management activities. We mentioned in CP16/29 that where firms delegate portfolio management activities, the burden of compliance with the incremental improvements to the best execution regime would be borne by the MiFID portfolio manager to which it delegates this activity, including the publication of the RTS 28 reports. We note that the RTS 28 reporting requirements apply at the level of the firm rather than with respect to individual funds. We will maintain the timing of the first set of RTS 28 reports for UCITS management companies to coincide with the MiFID II timeframe. Since many firms manage UCITS funds alongside individual portfolios subject to MiFID, they will be producing these reports in any case and will face limited additional costs. Moreover, ESMA has now provided additional clarity on key aspects of the RTS 28 reporting requirements, including the level of detail firms are expected to provide in their first set of reports.57 Full-Scope UK AIFM and incoming EEA AIFM branches
13.20 CP responses expressed stronger push back to our proposals to apply the MiFID II RTS
28 reporting requirements to full-scope UK AIFMs and incoming EEA AIFM branches (particularly where they do not carry out any MiFID related portfolio management activities). Respondents cited the general regulatory burden for this sector. Some responses also raised concerns regarding the potential competitive disadvantage they may face in comparison to their counterparts based in other EU jurisdictions that 57 See Chapter 1 of ESMA’s ‘Questions & Answers MiFID II and MiFIR on investor protection topics’.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II would not be subject to the higher best execution standards pending any changes to the sectoral legislation for AIFs in AIFMD. No specific evidence was provided on this point. Our response on full-scope UK AIFMs and incoming EEA AIFM branches We have decided not to apply the MIFID II RTS 28 reports and other aspects of the enhancements of the best execution rules to full-scope UK AIFMs and incoming EEA branches, at the current time. This means full-scope UK AIFMs and incoming EEA AIFM branches will remain subject to the existing best execution standards as set out in the AIFMD delegated regulations and supplemented by the existing COBS 18.5.4AR (which will be moved to COBS 18.5A.8R). We have reconsidered our approach in order to enable us to take better account of the diversity in nature and scale of this set of firms, given respondents’ concerns about applying these obligations to certain types of business models. A delay will also allow us to consider the overall legislative framework for AIFMs. In particular, we will consider the outcome of the European Commission’s review of AIFMD (which is due to commence later this year), which could propose enhancements to the best execution standards for AIFMs. However, we may still consider extending the MiFID II standards at an earlier stage if we detect evidence of poor outcomes in this sector linked to execution practices that could be addressed by such reforms. Our response on small authorised UK AIFMs and residual CIS operators We will also delay the extension of the MIFID II best execution rules (including the RTS 28 reporting requirements) to small authorised UK AIFMs and residual CIS operators (as consulted on in CP16/29). This will ensure this set of generally smaller firms are not subject to higher standards (where they do not make use of the concession in COBS 18.5.4R) than full-scope AIFMs. Given the level of retail investment in funds managed by small authorised UK AIFMs and residual CIS operators is generally lower than in more mainstream UCITS funds, we take the view that the investor protection risk from not applying the incremental improvements to best execution standards under MiFID II is reasonably limited. Professional investors should be sufficiently sophisticated to scrutinise execution performance based on the existing standards that we apply to these firms.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on cost implications arising from our previous two responses on full-scope UK AIFMs and incoming EEA branches, and small authorised UK AIFMs and residual CIS operators Our decision not to extend the MiFID II best execution requirements to full-scope UK AIFMs, incoming EEA AIFM branches, small authorised UK AIFMs and residual CIS operators reduces the cost estimate provided for the discretionary proposals in the CBA in CP16/29. In CP16/29 we estimated that, as a result of our discretionary proposals, the one-off industry costs would approximately range between £7.5 million – £17.1 million whilst the on-going costs would range between £2.8 million and £6.4 million. As a result of the changes to our proposals we now estimate the revised one-off industry costs to approximately range between £1.4 million – £3.1 million with the on-going costs ranging between £0.5 million and £1.2 million.58 However, in situations where a CPM firm manages both UCITS schemes and AIFs subject to best execution obligations (eg nonUCITS retail schemes), the firm may adopt a single approach to best execution by applying the MiFID II standards to AIFs. We have added guidance to clarify that where a firm does so, it will be considered to meet the respective best execution rules applicable to full-scope UK AIFMs and incoming EEA AIFM branches, or to small authorised UK AIFMs and residual CIS operators, notwithstanding the slight differences in the standards. Client order handling Introduction
13.21 In CP16/29 we consulted on implementing MIFID II rules on client order handling and
displaying limit orders. We noted that MiFID II does not make any material changes to these provisions.
13.22 MiFID II adds the term ‘trading venue’ alongside ‘regulated market’, which slightly
widens the scope of shares subject to the limit order rules, to reflect wider changes to market structure. But MiFID II also allows additional methods for making client limit orders public and clarifies that the choice of venue must be made in line with a firm’s execution policy. We also noted that MiFID II applies client order handling rules when firms advise on or sell structured deposits.
13.23 We proposed amendments to COBS 11.3 and COBS 11.4 to align with the changes in
MiFID II, principally by deleting provisions derived from MiFID and replacing those with provisions in MiFID II. We also applied the updated client order handling provisions to certain non-MiFID firms to which COBS 11.3 already applies. This includes investment advisers exempt from MiFID under Article 3 and firms carrying out collective portfolio 58 The revised cost figures have been estimated using the same methodology and assumptions utilised in CP16/29 but accounting for the reduced number of firms who will incur costs as a result of our decision to not extend the MiFID II best execution requirements to full-scope UK AIFMs, incoming EEA AIFM branches, small authorised UK AIFMs and residual CIS operators. As a result of this change we now estimate that 81 firms will incur costs from our discretionary proposals. This is composed of 71 firms that perform only CPM activity without IPM permissions and 10 firms with both CPM and IPM permissions but that would not voluntarily choose to level up to the MiFID II standards across their business regardless of our decision.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II management, including UCITS management companies, small authorised UK AIFMs and residual CIS operators. It applies where their activity involves the execution of orders, or the transmission or placing of orders in MiFID financial instruments to other entities for execution.
13.24 We consulted on maintaining the current disapplication of these rules for non‑MiFID
corporate finance business, non‑MiFID energy and oil market activities and full scope UK AIFMs and incoming EEA AIFM branches.
13.25 Respondents to CP16/29 either made no comments or agreed to our proposed
approach to amending COBS 11.3 and COBS 11.4 based on changes in MiFID II to client order handling and display of limit order rules. No changes were suggested. Our response on client order handling We are finalising the amendments to COBS 11.3 and COBS 11.4 as consulted on in CP16/29. Record keeping of client orders and decisions to deal, and limit order display transactions
13.26 Here we summarise the feedback we received on the changes we proposed to make
to the record keeping chapter in COBS in order to implement MiFID II, and provides our response to that feedback.
13.27 In Chapter 9 of CP16/29 we proposed to:

delete the existing text in COBS 11.5 and copy the text in the MiFID II delegated
regulation into a new chapter entitled COBS 11.5A
apply the MiFID II record keeping requirements for client orders, decisions to deal,
transactions and order processing to Article 3 firms providing retail investment advice
apply the MiFID II record keeping requirements for orders and transactions as rules
to UK branches of third country firms
13.28 We also asked:
Whether we should apply the revised MiFID II requirements to non-MiFID firms or
business that the existing COBS 11.5 currently applies to, including small authorised UK AIFMs, residual CIS operators, non-MiFID business related to commodity or exotic derivative instruments, occupational pension schemes firms in relation to non MiFID business, and authorised professional firms with respect to activities other than non-mainstream regulated activities.
Whether we maintain the current disapplication of COBS 11.5 to Article 3 exempt
corporate finance firms, full-scope UK AIFMs, incoming EEA AIFM branches and UCITS management companies.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on record keeping of client orders and decisions to deal, and limit order display transactions Feedback received was supportive of our main implementation proposals and we will implement this approach without further modifications. Most respondents to the two questions were keen for us to maintain the status quo for the relevant firms or type of business. Applying the MiFID II transaction record keeping provisions to Article 3 retail investment advisers
13.29 In CP16/29, we asked:

Q39: Do you agree with our proposed approach to implementing the MiFID II
requirements on record keeping of client orders, decisions to deal, transactions and order processing to Article 3 firms? If not, please give reasons why.
13.30 Respondents in general supported the proposal to apply the revised requirements
to Article 3 firms providing retail investment advice to bring improved transparency on order execution and processing. Other respondents noted that applying the requirements to these Article 3 firms will be consistent with the approach for financial advisers who are MiFID investment firms. Our response on applying the MiFID II transaction record keeping provisions to Article 3 retail investment advisers We confirm that we will proceed to apply the core MiFID II requirements for the record keeping of client orders, decisions to deal and transactions to Article 3 financial advisory firms. This is because we view the MiFID II changes as providing important additional detail and transparency in these records that is relevant to their business model. The transaction record keeping requirements in the MiFID II delegated regulation have been revised to align with the taxonomy and content of the new transaction reporting regime under MiFIR. The new measures will require firms to record more granular details on the client instruction, the security traded and the different parties involved in the execution of the order. Firms will also be required to record all necessary order references that will allow their records to be matched to the new transaction reporting requirements applicable to trading venues and the exact sequence of the order execution. Applying the MiFID II transaction record keeping provisions to third country firms
13.31 In CP16/29 we asked:
Q40: Do you agree with our proposal to apply the requirements to UK branches of
third country firms? If not, please give reasons why.
13.32 There was significant support amongst all respondents who answered this question to
apply the MiFID II requirements to UK branches of third country firms.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on applying the MiFID II transaction record keeping provisions to third country firms Our approach to implementing MiFID II for branches of non-European Economic Area firms (third-country firms) is to apply the same conduct rules to these firms as we do to MiFID investment firms to ensure they are treated no more favourably than branches of EEA firms. We are therefore confirming that we will require UK branches of third country firms to adhere to the same MiFID II record keeping requirements as will apply to MiFID investment firms. Whether to extend the new MiFID II transaction record keeping provisions to other firms subject to COBS 11.5
13.33 In CP16/29 we asked:

Q41: Please give us your views on whether we should apply the new MiFID II
transaction record keeping standard to the following firms, for whom we currently propose to maintain the existing requirements in COBS 11.5 for
i. Occupational pension schemes
ii. Non-MiFID business related to commodity or exotic derivatives
iii. Small authorised UK AIFMs and residual CIS operators
iv. Authorised professional firms with respect to activities other than nonmainstream regulated activities
13.34 Most respondents did not support elevating these firms to the MiFID II standard as
they felt it would be disproportionate in terms of outcomes and cost. Our response on whether to extend the new MiFID II transaction record keeping provisions to other firms subject to COBS 11.5 For the time being, we have decided not to consult further on extending the MiFID II requirements on record keeping of client orders, decisions to deal and transactions to these firms. We intend to wait and see how the MiFID II requirements are being implemented before taking any further action. It may be the case that the landscape will evolve to the extent that these firms voluntarily adopt the new standards. However, for the meantime this means the current MiFID requirements will continue to apply to the firms identified above. These rules have moved from COBS 11.5 to COBS 18 Annex 2.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Extending the new MiFID II transaction record keeping provisions to firms not currently subject to COBS 11.5
13.35 In CP16/29, we asked:

Q42: Please give us your views on whether or not we should consider applying new
MIFID II standards on transaction record keeping to the following firms which are not currently subject to COBS 11.5, namely:
i. Article 3 exempt corporate finance firms
ii. UCITS Management companies
iii. Full-scope UK AIFMS and incoming branches of EE AIFMs
13.36 Most respondents did not support applying the MiFID II transaction record keeping
to these firms. They did not view the benefits of the proposal as proportionate to the potential costs. Our response on extending the new MiFID II transaction record keeping provisions to firms not currently subject to COBS 11.5 Further to our original analysis and feedback from industry we have decided to leave the current arrangements in place. This means that we will not consult further on extending the MiFID II requirements on transaction recordkeeping to these firms. Personal account dealing Introduction
13.37 MiFID II does not introduce any changes in the rules currently governing personal
transactions compared with MiFID. However it does extend these provisions to investment firms or credit institutions selling or advising clients in relation to structured deposits.
13.38 In CP16/29, we proposed creating a new COBS 11.7A to copy out the MiFID II
provisions, which would apply to MiFID investment firms, equivalent third country business and firms exempt from MiFID under Article 3.
13.39 We suggested retaining COBS 11.7 with minor modifications for other non-MiFID
firms that are currently subject to these requirements, including UCITS management companies.
13.40 All responses except one made no comment or agreed with our proposed approach.
The single response queried the fact that our new COBS 11.7A section copying out the MiFID II changes did not include COBS 11.7.6R (which defines a ‘relevant person’), which is currently included in COBS 11.7 and applies to MiFID firms. The respondent asked whether this was an oversight or denoted any change in the policy approach to personal account dealing.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on personal account dealing We will proceed with the changes to COBS 11.7 and COBS 11.7A as consulted on in CP16/29. The provisions on personal account dealing are included in the MiFID II delegated regulation, which also includes a definition of ‘relevant person’. We omitted COBS 11.7.6R from COBS 11.7A since we view the substantive provisions in MiFID II as having the same policy effect, without requiring an additional provision. As such, while we purposefully did not include COBS 11.7.6R within COBS 11.7A, it does not denote any change in the application of the personal account dealing rules.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 14 Underwriting and placing Introduction
14.1 This chapter summarises our responses to feedback received in relation to our
proposals in CP16/29 to implement the MiFID II underwriting and placing requirements.
14.2 MiFID II introduces new requirements for firms carrying out underwriting and placing
activities, linked to the MiFID II organisational and conduct requirements. Under our existing conflicts of interest provisions in SYSC 10, we provide some guidance for firms on the management of securities offerings through SYSC 10.1.13G to SYSC 10.1.15G. The new specific MiFID II provisions on underwriting and placing are consistent with our existing regulatory expectations under SYSC 10.
14.3 In CP16/29 we proposed to copy out the new MiFID II provisions on underwriting
and placing into a new chapter in COBS (COBS 11A). To maintain a level playing field between MiFID firms and third country firms, we also proposed to apply the new provisions as rules to the latter. Given that the new MiFID II provisions are more thorough than the existing guidance in SYSC 10, we proposed deleting SYSC 10.1.13G to SYSC 10.1.15G.
14.4 In CP16/29, we asked in Q44 and Q45, respectively:

Q44: Do you agree with our proposed approach to implementing Articles 38 to 43
of the MiFID II delegated regulation on underwriting and placing? If not, please give reasons why.
Q45: Do you agree with our proposed approach to apply Articles 38 to 43 of the
MiFID II delegated regulation on underwriting and placing to third country branches? If not, please give reasons why.
14.5 There were a limited number of responses to our proposed approach. All respondents
either positively supported our proposals or had no comments on the approach. Our response on underwriting and placing In light of the positive feedback we received, we are confirming our proposed approach in CP16/29 to implementing the MiFID II provisions on underwriting and placing.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 15 Investment research Introduction
15.1 This chapter summarises our responses to feedback received in relation to our
proposals in CP16/29 to implement the MiFID II investment research requirements.
15.2 MiFID II provisions on investment research and non-independent research are
consistent with those currently in COBS 12.2 and 12.3, with the exception of two changes:

An explicit requirement for firms to introduce a physical separation between financial
analysts and other persons whose responsibilities or business interests may conflict with the interests of the persons to whom the research is disseminated. Physical separation should exist unless it is not considered to be appropriate to the size and organisation of the firm, as well as the nature, scale and complexity of its business. In these circumstances, the firm is required to establish and implement appropriate alternative information barriers.
That MiFID II explicitly applies certain conflicts of interest requirements under
Article 34(4) of the MiFID II delegated regulation to producers of non-independent
research.
Approach to implementing MiFID II provisions on the production and dissemination of investment research
15.3 In CP16/29 we proposed to copy out the MiFID II provisions on investment research
into a single new COBS chapter (COBS 12.2), rather than retaining the current structure of COBS 12.2 and 12.3, since MiFID II does not split investment research and non-independent research in the way we currently do in COBS. In CP16/29 we also proposed retaining the reference to SYSC 10 currently in COBS 12.3.4G, to remind producers of investment and non-independent research of their wider obligations to identify and manage conflicts of interest under SYSC 10.
15.4 In line with our approach to implementing MiFID, in CP16/29 we proposed to apply the
MiFID II provisions on investment research as rules to firms conducting equivalent third country business, non-MiFID energy market participants (EMPs) and oil market participants (OMPs), and Article 3 firms carrying out corporate finance business.
15.5 In CP16/29, we asked in Q46 and Q47, respectively:
Q46: Do you agree with our proposed approach to implementing Articles 36 and
37 of the MiFID II delegated regulation on investment research? If not, please give reasons why.

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Q47: Do you agree with our proposed approach to apply Articles 36 and 37 of the
MiFID II delegated regulation to third country firms, non-MiFID OMPs and EMPs, and Article 3 firms carrying out corporate finance business, in the same way as the current COBS 12 applies them? If not, please give reasons why.
15.6 Respondents agreed with the proposed approach to implement the MiFID II provisions
on investment research, and acknowledged that there is little change to the existing COBS 12 provisions on investment research.
15.7 Two respondents stated that the new COBS 12.2 could be clearer on which provisions
apply to producers of both investment research and non-independent research, and which only apply to investment research. It was requested that we make clear that the requirement for firms to maintain physical separation of analysts does not apply to producers of non-independent research. One respondent also requested clarification that producers of non-independent research are not prohibited from participating in investment banking activities, such as pitches for new business with corporate issuers or road shows for new issues of financial instruments.
15.8 Two respondents requested further clarity on our regulatory expectations in relation
to the proportionality clause within the ‘physical separation’ provision, specifically on when it might not be proportionate for a firm to maintain physical separation and what might be examples of alternative information barriers.
15.9 One respondent referenced so-called ‘sales notes’ produced within a firm, noting that
these can sometimes be distributed in email form. It argued that this type of material should not necessarily be classified as non-independent research, even if it contains a recommendation and is intended for the public. Our response on approach to implementing MiFID II provisions on the production and dissemination of investment research In light of the positive feedback we received, we are confirming our approach as consulted on in CP16/29 to implementing the MiFID II provisions on the production and dissemination of investment research. We remind firms to carefully consider the application of the provisions set out in the new COBS 12.2, particularly in light of requests from some respondents for greater clarity on which provisions apply to producers of investment research and non-independent research. As set out in the new COBS 12.2, the requirement for firms to maintain physical separation between analysts and other persons, as well as the provision stating that analysts should not participate in investment banking activities, apply only to producers of investment research. That said, producers of non-independent research should consider their general conflicts of interest obligations under SYSC 10. Firms should also be aware that, in CP17/5, we are currently consulting on changes to COBS 12 to address conflicts of interest that arise during the production of research around the time that investment banking pitching efforts take place. It is ultimately for firms to make a judgement on circumstances when it might not be proportionate to maintain physical separation of analysts

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Markets in Financial Instruments Directive II Implementation – Policy Statement II from other persons, and on the types of alternative information barriers that could be maintained when physical separation is not proportionate. Firms should be mindful of their obligations under SYSC 10.2 if establishing and maintaining a Chinese wall, which requires them to have policies in place permitting certain individuals to withhold information from other persons. As stated in Article 36(2) of the MiFID II delegated regulation and the new COBS 12.2, an investment recommendation defined by
Article 3(1)(35) of the Market Abuse Regulation that is not presented
as objective or independent must be treated as a marketing communication (non-independent research in COBS 12). As such, any communication that meets the criteria of the definition of an investment recommendation, irrespective of its label (eg ‘sales note’) or the medium through which it is delivered, must be classified as investment research or non-independent research. When making this judgement, firms should be mindful of the relevant ESMA Q&A on this topic.59 59 See Q&A 1 in Section 3 of ESMA’s Questions and Answers on the Market Abuse Regulation:
https://www.esma.europa.eu/sites/default/files/library/2016-1664_mar_qa_december_2016.pdf

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 16 Client agreements Introduction
16.1 This chapter summarises our responses to feedback received in relation to our
proposals set out in Chapter 12 of CP16/29 to implement the MiFID II client agreement requirements.
16.2 MiFID II requires firms to enter into a basic written agreement with professional as well
as retail clients, and this must be done for each investment service or ancillary service, not just for new clients. It details what must be included in a client agreement, and simplifies the record keeping requirement, so that the record must be retained for ‘at least the duration of the relationship with the client’, so there is no obligation to keep records for at least 5 years, if longer than the relationship with the client.
16.3 In the CP, we proposed implementing the more detailed requirements only for MiFID
business and retaining the current COBS 8 for non-MiFID business. However, we proposed introducing the new record keeping requirement for non-MIFID business other than pension transfers, pension conversions, pension opt-outs or free standing additional voluntary contributions (FSAVCs), for which records will continue to be required to be kept indefinitely.
16.4 In Q48 we asked:

Do you agree with our proposed approach for client agreements?
16.5 All respondents supported our proposed approach.
Our response on client agreements
We have not made any substantive changes to the rules on which we consulted.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 17 Product governance Introduction
17.1 This chapter sets out our feedback to the responses to Chapter 13 of CP16/29. It also
confirms our final rules which will be set out in the new PROD sourcebook.
17.2 PROD sets out our product governance requirements for manufacturers and
distributors and applies to firms within the categories listed at PROD 1.3.1R.60 A firm that complies with PROD does not have to apply the guidance set out in the ‘Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD)’.61 This is because PROD is intended to achieve the same aims. However, the RPPD will remain applicable for firms not within the scope of PROD.
17.3 In addition, ESMA has published (in June 2017) its Final Report on product governance
guidelines under MiFID II. These guidelines focus on target market assessment by manufacturers and distributors of financial products. We will be considering what further steps we need to take to address these guidelines as part of our overall product governance regime. Third country (non-EEA) branches
17.4 In CP16/29, we proposed applying the MiFID II product governance requirements to UK
branches of third country (non-EEA) firms. We proposed this in order to ensure that we do not treat non-EEA firms ‘more favourably’ than EEA firms.
17.5 We asked:

Q50: Do you agree with our proposal to apply MiFID II product governance
requirements as rules to UK branches of third country firms, on the basis that these requirements have a strong conduct-focus? If not, please give reasons why.
17.6 All respondents supported our approach.
Our response on third country (non-EEA) branches We are taking forward the rules on which we consulted. Not only will this ensure branches of third country firms are not treated more favourably than EEA firms, but we consider that it will also protect investors and the integrity of our markets. 60 A MiFID investment firm; a CRD credit institution; a MiFID optional exemption firm and branches of third country investment firms. 61 The RPPD is a regulatory guide for providers and distributors on applying our Principles for Businesses and rules to treat customers fairly.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Product governance rules for MiFID business
17.7 In CP16/29, we consulted on applying the product governance rules to firms
undertaking MiFID business, and distribution firms using the Article 3 exemption. We asked:

Q51: Do you agree with our proposal to apply the MiFID II product governance
provisions as rules for firms engaged in MiFID business? If not, please give reasons why.
17.8 The majority of respondents agreed with our approach.
17.9 More specifically, some respondents sought clarity on the following range of issues,
either in response to Q51, or as stand-alone comments.
Application of the proportionality principle: One respondent suggested we should
consider developing proportionality rules for certain categories of target market.
Product governance requirements for discretionary portfolio management services:
A respondent suggested that the product governance provisions do not apply to portfolio management services. Others had raised concerns with ESMA that their draft guidelines limit deviation from the target market which might be needed to meet overall client objectives. Others commented on the difficulty of applying target market assessments to individual products in a portfolio management strategy.
Guidance on target market assessment at PROD 3.2.12G: A respondent suggested
that PROD 3.2.12G was more aligned to product testing than to the assessment of the target market, and that the reference to ‘client’ was inconsistent with the MiFID emphasis on the ‘end client’. Another respondent suggested that PROD 3.2.12G could mean that the manufacturer cannot design a complex instrument for retail clients even where it may be suitable. They said the guidance does not account for decisions taken on a client’s behalf by discretionary advisors. Other respondents suggested replacing PROD 3.2.12G with RPPD 1.19. Respondents asked for the ESMA target market categories to be included in PROD, and that we set out examples of a target market assessment for a mass retail product. They asked for clarity on what we would expect from manufacturers receiving and processing sales information from distributors.
Stress testing and scenario analysis: Respondents suggested that PROD 3.2.15G
only applies to structured products. They also said our guidance was superequivalent because it referenced ‘stress testing’ as well as ‘scenario analysis’ so would impose additional burdens on UK firms.
Information sharing requirements: Respondents raised concerns about meeting
information sharing requirements when the distributor has no direct relationship with the manufacturer, when dealing with non-MiFID entities, and when issuing products on a secondary market where there is no prior relationship with the manufacturer. They suggested that it is not possible to identify the ‘final’ distributor in the chain once securities enter the secondary market.
Cost Benefit Analysis (CBA): One respondent queried our CBA in CP16/29. The
respondent had understood that the 220 firms quoted in the CBA represented all

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Markets in Financial Instruments Directive II Implementation – Policy Statement II firms impacted by the product governance proposals. They said that more than 220 firms would be impacted. They also said that advice costs will increase. Our response on product governance rules for MiFID business On the application of the proportionality principle: PROD 3.1.2R states that a firm must comply with the PROD rules in a way that is proportionate and appropriate. In doing so, the firm must take into account the nature of the instrument or service and the target market. On product governance requirements for discretionary portfolio management services: PROD will apply to firms providing portfolio management as this investment service is within the definition of distributing, in accordance with Recital 15 and Article 10(1) of the MiFID II delegated directive. There is no exemption for such a service in MiFID II, but firms should apply these requirements in a proportionate manner that is appropriate to the underlying service. On the guidance on target market assessment in PROD 3.2.12G:
Since our CP16/29 consultation, ESMA has published guidelines which cover target market assessments for mass retail products. We have therefore not replicated this content. We have considered respondents’ comments on PROD 3.2.12G and have deleted it to address the concerns raised. PROD 3.2.11R sets out how firms should determine target market needs which is different to the content at RPPD 1.19 which is focused on information for customers. On stress testing and scenario analysis: PROD 3.2.15G aimed to help firms apply the requirements at PROD 3.2.14R (now PROD 3.2.13R). We have deleted this guidance to address the concerns raised by respondents. We would however note that the FSA’s FG12/0962 remains relevant for firms developing structured investment products and structured deposits. The guidance focuses on key governance issues in the development and marketing of structured products. On information sharing requirements: We emphasise that firms should take a proportionate and appropriate approach to meeting the PROD requirements, as noted in Article 10(1) of the MiFID II delegated directive and transposed in PROD 3.1.2R and PROD 3.3.6R. Distributors must take all reasonable steps to obtain adequate and reliable information from non-MiFID manufacturers (PROD 3.3.5R). This obligation applies proportionately depending on the degree to which publicly available information is obtainable and the complexity of the instrument (PROD 3.3.6R). As explained in CP15/43, in implementing MiFID II our general approach has been to provide detailed CBA where we exercise discretion in our implementation. We provide a high-level CBA for matters where we have little discretion, which includes our proposals for firms subject to MiFID II and firms exempt from MiFID II scope 62 http://www.fsa.gov.uk/static/pubs/guidance/fg12-09.pdf

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Markets in Financial Instruments Directive II Implementation – Policy Statement II under Article 3. This latter group are firms providing investment advice and/or receiving and transmitting client orders for a restricted range of financial instruments. These firms do not hold client assets or money and do not do business outside the UK. MiFID II requires these firms to be subject to ‘at least analogous’ requirements for each of the individual organisational and conduct requirements listed in Article 3(2)(a) to (c) of MiFID II and corresponding implementing measures. The figure of 220 quoted in the product governance CBA in CP 16/29 is our estimation of non-MiFID firms manufacturing and distributing MiFID instruments. This includes for example, AIFMs and UCITS managers. We did not receive alternative estimates of costs from respondents. We are satisfied that this accurately reflects the impact of these proposals. Product governance for non-MiFID firms
17.10 We asked:

Q52: Do you agree with our proposal to apply the MiFID II product governance
provisions as guidance for non-MiFID firms involved in the manufacture or distribution of MiFID products? If not, please give reasons why.
17.11 The majority of respondents supported this proposal. While agreeing with our
approach, one respondent questioned whether MiFID distributors would provide nonMiFID manufacturers with sales information, and suggested this is of limited use when non-complex products are sold to the mass market through execution only platforms. Our response on product governance for non-MiFID firms We expect the product governance provisions in MiFID II to lead to improved customer outcomes. Non-MiFID firms that manufacture and distribute MiFID products should apply the provisions proportionately. This will help to deliver a consistent approach to the application of product governance provisions. The related ESMA guidelines provide detail on how to address the information sharing requirements when non-MiFID firms are involved. Other matters
17.12 Although not in response to a consultation question, a couple of respondents made
the following comments.
One respondent commented on eligible counterparties (ECPs), suggesting we
should dis-apply PROD for ECPs because otherwise we would be extending the scope of the MiFID II requirements.

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Respondents asked about co-manufacturing and whether the definition of
‘manufacturer’ in PROD replaces the RPPD ‘co-manufacturer’. This query was raised particularly in the context of reverse enquiry scenarios and asked for examples of what might constitute ‘co-manufacturing’. One respondent suggested PROD 3.2.1R does not accurately reflect the MiFID II text because the additional words “for sale to clients” are not included. They suggested that this omission implies an obligation for manufacturers to ensure products are distributed to the identified target market even when they are not involved in distribution, which in their view was not the correct application of MiFID II. Our response on comments on other matters We have dis-applied PROD 3.3.1R in relation to ECP business. The remaining provisions in PROD (including PROD 3.3) that are relevant to transactions with ECPs will apply in a proportionate and appropriate manner. We have done this to accurately reflect the MiFID II text. Article 30(1) of MiFID II dis-applies Article 24(2) where a firm that is authorised to carry out certain investment services brings about or enters into transactions with eligible counterparties. PROD 3.2.6R and 3.2.7R set out the requirements for firms which comanufacture. We have not amended PROD 3.2.1R to include the words “for sale to clients” because we believe that the overarching aim of the product governance provisions is addressed here. In addition, PROD 3.2.1R is consistent with Recital 71 in MiFID II and Recital 15 and Article 9 in the MiFID II delegated directive. Role of the compliance oversight function
17.13 In CP16/29, PROD 3.2.35R (now 3.2.32R) required that the person who was allocated
the compliance oversight function must oversee product governance arrangements. Some respondents suggested that we ought to have used the same terminology in PROD 3.2.35R as in the MiFID II delegated directive (where it refers to product governance arrangements being ‘monitored’ rather than ‘overseen’). Our response on role of the compliance oversight function We have amended PROD 3.2.35R (now PROD 3.2.32R) accordingly.

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17.14 We did not receive any comments on PROD 2. However since consulting, the Treasury
has made an Order for the purposes of section 137D of the Financial Services and Markets Act 2000 (FSMA). This is to enable the FCA to make permanent or temporary product intervention rules to advance our market integrity objective. This objective is set out in section 1D of FSMA. We have therefore amended the guidance in PROD 2 to reflect this.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 18 Knowledge & competence Introduction
18.1 This chapter summarises the feedback we have received on the changes we proposed
to the Training and Competence (TC) and Senior Management Arrangements, Systems and Controls (SYSC) sourcebooks to implement Article 25(1) of MiFID II and arising from our decision to comply with ESMA’s MIFID II guidelines63 on knowledge and competence, and provides our response to that feedback.
18.2 Specifically, for firms undertaking MIFID or equivalent third country business which
provide investment advice and information to clients, in Chapter 14 of CP16/29 we proposed to:

reflect ESMA’s view that in order to ensure a proportionate application of knowledge
and competence requirements firms should ensure that relevant individuals have the necessary levels of knowledge and competence to fulfil their obligations, reflecting the scope and degree of the relevant services provided
update both TC and SYSC content on the FCA website, to reflect the ESMA
guidelines
introduce a maximum time period of four years during which relevant individuals
providing advice or information in a MiFID context need to acquire knowledge and competence
introduce a minimum time period of six months for such relevant individuals to be
considered eligible to have acquired appropriate experience
18.3 In CP16/43 we proposed minor consequential amendments to TC, primarily to clarify
the territorial application of that sourcebook.
ESMA guidelines on knowledge and competency
18.4 In Q53 we asked:
Do you agree with our approach to implementing the guidelines in TC and SYSC 5? If
not, please give reasons why.
18.5 All respondents agreed with our proposals.
63 https://www.esma.europa.eu/press-news/esma-news/esma-publishes-final-report-mifid-ii-guidelines-assessment-andknowledge

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18.6 In Q20 we asked:

Do you agree with our proposal to amend several sourcebooks to clarify our
responsibility as a competent authority in relation to matters falling under articles of MiFID? If not, please give reasons why.
18.7 We received no responses specific to our TC proposals.
Our response on ESMA guidelines on knowledge and competency We will proceed to make the changes to our TC sourcebook as proposed for minor consequential amendments. Whilst we have not modified our proposals to implementing the ESMA guidelines, we thought it helpful to clarify our approach in a couple of areas, and have improved the drafting to clarify a number of points raised. Supervision of staff
18.8 A few respondents asked what level of supervision we expected when supervising
staff subject to the ESMA guidelines, including a query on whether this can be outsourced. Another respondent stated that the requirement for supervisors to hold an appropriate qualification is new and should be emphasised to firms in feedback. Our response on supervision of staff Supervisors The ESMA guidelines at paragraph 20(d) provide that firms should ensure that ‘…The level and intensity of supervision should reflect the relevant qualification and experience of the staff member being supervised and this could include, where appropriate, supervision during client meetings and other forms of communication such as telephone calls and e-mails…’ Our existing rules and guidance in TC and SYSC are consistent with this. Firms should note that compliance with the ESMA guidelines require that those individuals who supervise relevant individuals should attain an appropriate qualification as defined by the ESMA guidelines and we have amended our new rule in SYSC that implements Article 25(1) of MIFID, to make this clear. Outsourcing of supervision General outsourcing requirements for firms are detailed in our SYSC sourcebook.64 The overall aim of the high-level regulatory obligations on outsourcing, and the detailed requirements that 64 https://www.handbook.fca.org.uk/handbook/SYSC/8/?view=chapter

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Markets in Financial Instruments Directive II Implementation – Policy Statement II underpin them, is to ensure that a firm appropriately identifies and manages the operational risks associated with its use of third parties, this would include undertaking due diligence before making a decision on outsourcing the supervision of staff. We would also expect that the firm carries out regular evaluation of the effectiveness of the supervision being provided. Our approach is risk-based and proportionate, taking into account the nature, scale and complexity of a firm’s operations. While the rules allow outsourcing of the activity, regulated firms retain full responsibility and accountability for discharging all of their regulatory responsibilities. Firms cannot delegate any part of this responsibility to a third party. Transitional arrangements and grandfathering
18.9 Some respondents asked about transitional and grandfathering arrangements, noting
that ESMA made no arrangements for grandfathering in the final guidelines. We also received a query about whether transitional arrangements exist for qualifications, as referred to in paragraph 14.17 and TP 1.1A of CP16/29. Our response on transitional arrangements and grandfathering The ESMA guidelines do not provide for grandfathering. Firms should ensure they are in a position to comply with the guidelines by the intended implementation date of 3 January 2018, in line with the implementation of MiFID II. This includes ensuring that those relevant individuals who are working ‘under supervision’ do so only for a maximum period of four years. There are no transitional arrangements and firms will need to ensure compliance with the guidelines with respect to those individuals. Information and advice boundaries
18.10 A few respondents asked for clarity on the difference between personal
recommendations and giving information as well as when the guidelines are considered not to apply. Our response on information and advice boundaries:
MiFID’s definition of investment advice involves the provision of a ‘personal recommendation’65 to a client. 65 https://www.handbook.fca.org.uk/handbook/glossary/G877.html?filter-title=personal

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Markets in Financial Instruments Directive II Implementation – Policy Statement II To help firms and relevant individuals understand the difference between information and a personal recommendation the guidelines provide the following reference points:

The ESMA adopted Committee of European Securities Regulators
(CESR) guidance on ‘Understanding the definition of advice under MiFID.
Examples in Annex VII of what ESMA considers constitutes relevant
individuals giving information to clients, compared to those who give investment advice.
Feedback on the CP in Annex V of the finalised guidelines, together
with a definition of ‘giving information’ in Annex VI.
The definition of ‘giving information’ in the guidelines requires an
assessment of whether the staff member directly interacts with a client and whether the staff member provides services or activities listed in sections A or B of Annex 1 of MiFID II. As such, the nature of the staff interaction and the service and activities provided are relevant. ESMA’s Final Report on the Assessment of Knowledge and Competence also confirms that ‘whenever there is a direct interaction between an employee and a client, the discriminating factor should be whether that employee is, or not, in the process of providing an investment service to the client’.66
18.11 We have previously issued guidance FG15/1: Retail investment advice: Clarifying the
boundaries and exploring the barriers to market development67, which is consistent with the CESR document referred to above. This guidance, which we plan to update following the changes announced by HMT to Article 53(1) of the Regulated Activities Order as a result of FAMR, may also be helpful to firms who give information or investment advice to professional clients.
18.12 In the UK the regulated activity of advising on investments (for the purposes of Article
53 RAO) is wider in scope than the MiFID definition of personal recommendation. From 3 January 2018, the requirements for advising on investments will change following an amendment to Article 53 of the Regulated Activities Order. The FCA has published a note explaining the changes68 and will consult on this change in the summer. Qualifications and continuous professional development
18.13 Several respondents sought clarity on the criteria and characteristics of appropriate
qualifications and the type of continuous professional development necessary to maintain knowledge and competence. 66 Page 26, paragraph 51 Final Report on MiFID II Guidelines on assessment and knowledge of competence 67 https://www.fca.org.uk/publications/finalised-guidance/fg15-1-retail-investment-advice-clarifying-boundaries-and-exploring 68 https://www.fca.org.uk/firms/financial-advice-market-review-famr/changes-regulated-activities-order

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on qualifications and continuous professional development We are not extending our list of retail qualifications in TC as a result of the guidelines and we are also not proposing to list mandatory qualifications in SYSC. Firms need to consider the ESMA requirements and ensure that the qualifications (or other test or training course) meet the ESMA guidelines criteria. We have updated our web-site setting out the characteristics required for ESMA appropriate qualifications. We have also confirmed that the review of whether a relevant individual’s qualification meets the criteria or characteristics may be carried out by the firm or an external body. SYSC already provides guidance that firms not subject to TC may nevertheless wish to take it into account in complying with the competence requirements in SYSC, including in respect of qualifications and continuous professional development (CPD). Based on the feedback received we have clarified this. Overall we consider that our expectations are consistent with MIFID’s objective of strengthening the protection of investors in a context of increasing complexity of investment products and continuous innovation in their design, as well as broader developments relevant to standards of knowledge, competence and professionalism such as the Fair and Effective Markets Review69, and the creation of the Banking Standards Board70 and the Chartered Body Alliance.71 The Senior Manager and Certification Regime (SM&CR)
18.14 We received a small number of responses querying whether firms should take
compliance with the ESMA guidelines into account when certifying relevant individuals for the purposes of the current and future Senior Manager & Certification Regime (SM&CR). Our response on the senior manager and certification regime (SM&CR) The Certification Regime applies to employees who could pose a risk of significant harm to the firm or any of its customers (for example, employees who give investment advice). Where such an employee is subject to the Certification Regime firms must carry out an assessment of that individual as described in more detail in section 63E (1) of FSMA. This includes an assessment of whether the individual has: a) obtained a qualification; b) has undergone, or is undergoing, training or; c) 69 http://www.bankofengland.co.uk/markets/Documents/femrjun15.pdf 70 http://www.bankingstandardsboard.org.uk/ 71 http://charteredbodyalliance.org/

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Markets in Financial Instruments Directive II Implementation – Policy Statement II possesses a level of competence. Firms need procedures for assessing for themselves the fitness and propriety of employees, for which they will be accountable to the regulators. Where a relevant individual is subject to the Certification Regime, for example a function requiring a qualification requirement as per SYSC 5.2.30, we would expect a firm to have regard to their employee’s compliance with the ESMA guidelines, where relevant72, when making a determination in respect of their fitness and propriety under the Certification Regime. Consistent with the ESMA guidelines firms should adopt a proportionate approach: they need to be satisfied that a person is fit and proper to perform a particular certification function, reflecting the skillset involved. Staff knowledge and experience
18.15 We received a response seeking confirmation that previous work experience is relevant
for the purposes of appropriate experience in the guidelines. Our response on staff knowledge and experience:
The guideline definition of ‘appropriate experience’ includes that a ‘member of staff has successfully demonstrated the ability to perform the relevant services through previous work’. We consider that previous employee work experience could be relevant for the purposes of the ESMA guidelines but that the work experience must be relevant to the role being performed.73
Article 3 firms
18.16 We received a response querying whether excluding Article 3 firms from complying
with the guidelines will place consumers at risk.
Our response on Article 3 firms
Article 3 firms can exercise the optional exemption provided in MiFID
II if they do not hold client funds and only perform limited activities (advice and receiving and transmitting orders). However, they are still subject to FCA authorisation and, as such, to a detailed set of 72 https://www.handbook.fca.org.uk/handbook/glossary/G3552c.html?filter-title=certification 73 TC 2.1.23 expects that continuous professional development should not be taken into account unless it is relevant to the role being performed.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II rules74 and guidance relevant to the activities being performed. This includes the SYSC ‘competent employees’ rules and our detailed professionalism requirements in TC for certain retail activities, including the need to attain an appropriate qualification where relevant. This is consistent with the proportionate application of the guidelines and our risk-based approach to regulation. 74 The Bank of England and Financial Services Act 2016 also extends the Senior Manager and Certification Regime (SMCR) to all sectors of the financial services industry. We intend that our extended regime will be clear, simple and proportionate. We expect implementation to begin from 2018.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 19 Taping Introduction
19.1 This chapter summarises our responses to feedback received in relation to our
proposals in CP16/29 and CP16/43 to implement the MiFID II taping requirements. This chapter is relevant to a wide range of firms, including firms conducting MiFID or equivalent third country business, Article 3 firms, non-MiFID investment managers, energy market participants and oil market participants, those trading in commodity and exotic derivative instruments, and consumers and consumer organisations. Recording of telephone conversations and electronic communications (taping)
19.2 MiFID II introduces, for the first time, an EU-wide harmonised requirement on firms
to record telephone conversations and electronic communications relating to (or intended to relate to) transactions concluded when dealing on own account and when providing client order services that relate to the reception, transmission and execution of orders. This will replace the FCA’s domestic taping regime that has been in place since 2009.
19.3 In CP16/29 and CP16/43, we consulted on implementing the MiFID II taping
requirements. MiFID II requires us to include certain additional activities not currently covered by the existing regime. In particular, we are required to apply a taping obligation to retail financial adviser firms (RFAs) that are investment firms, and to MiFID firms undertaking corporate finance business where that business relates to the activities captured above. MiFID II also sets out a number of more prescriptive organisational requirements for firms. We are also required to extend ‘analogous requirements’ to MiFID optionally exempt (Article 3) firms.
19.4 We consulted on applying the MiFID II taping standard to all Article 3 firms, in addition
to a wider range of activities than those required by the Directive, namely:

corporate finance business generally (where the activities are not already caught by
the Directive)
the service of portfolio management, including removing the current domestic
qualified exemption for discretionary investment managers
energy market activities and oil market activities
UK branches of non-EEA firms
commodity and exotic derivative instruments

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19.5 There was a considerable response from industry on a number of these proposals. In
our initial policy statement on MiFID II, PS17/5, we gave early clarity on our approach to taping for RFAs. This chapter now sets out the finalised rules for these firms and for the other firms that we consulted on applying the taping requirements to. It will address the proposals in relation to the firms which they impact. Extending the taping regime to all of corporate finance business
19.6 In CP16/29 we proposed to extend the MiFID II taping requirements to include all
aspects of corporate finance business, as a result of the market abuse and conduct risks that may arise during the provision of these services. We stated that this type of business broadly involves advice and arranging activities in respect of underwriting new debt or equity issuances, corporate restructuring, takeovers and acquisitions, and business strategy.
19.7 In CP16/29, we asked:

Q57: Do you agree with our approach to extend the MiFID II requirements to
corporate finance business and the service of portfolio management and to remove the exemption for discretionary investment managers?
19.8 The investment banking community raised a number of concerns with the breadth
of corporate finance business that would be caught by the proposal, how the regime would work in practice, its proportionality, and how it would impact the competitiveness of the UK. In particular, respondents noted the following.
The proposal as drafted in CP16/29 is significantly broader than the MiFID II
requirements to tape.
Issuers and corporate finance clients are likely to prefer not to conduct business
on a recorded line. Respondents believe that since no other NCA is proposing to extend taping to corporate finance business, this proposal may lead to a competitive disadvantage for the provision of corporate finance services in the UK.
Discussions between banks and clients routinely involve deliberations about
potentially difficult and nuanced interpretations of specific issues. These conversations may be misinterpreted when taken out of context or reviewed in hindsight. This may lead to increased legal scrutiny and concerns relating to legal liability or legal privilege.
Corporate finance transactions typically take place over a long period of time, and
the volume of conversations to be captured would be vast. However, few estimates of the scale of this were given within the responses. Some respondents therefore thought that the proposal could be disproportionate to the risks identified in CP16/29.
Relevant phone conversations may occur with multiple participants in multiple
jurisdictions and on many different devices. This raises data privacy concerns in countries with differing data privacy laws, as well as difficulties in implementing these proposals.

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There are already record keeping requirements that exist for many activities that
are caught by corporate finance business (for example underwriting agreements between the banks and the issuer). Respondents did not think there was a significant gap in the keeping of effective records. The wide range of services that can be characterised as corporate finance business makes interpreting the taping regime particularly complex. Firms may take a cautious interpretation of the obligation which could make it very broad.
19.9 The investment banking community noted that certain key aspects of regulated
corporate finance activities, such as ‘market soundings’, are already typically recorded. The taping of these interactions is a more manageable process as there is a discrete, specific interaction that can be recorded in a targeted way. The provision of other corporate finance services, such as advice, may not involve inside information or present material conduct risks for which a taping obligation would be appropriate.
19.10 Some concerns were also raised by representatives of the corporate issuer
community. In particular, they noted that the taping requirements may act in such a way as to slow down corporate decisions. This could make the UK’s capital markets a less attractive route to raise finance, especially since other EU jurisdictions are not extending the taping regime to the provision of corporate finance business. It was however noted by some in the corporate issuer community that taping would help to ensure that corporate finance firms were acting in the best interests of their corporate clients, rather than their own interest. This reflects our contention that taping could help to make the UK a more attractive place to do business.
19.11 General requests were also made by a number of respondents for the FCA to clarify
the scope of the proposal as currently drafted. These are addressed in the last section of this chapter. Several respondents also requested additional time or a further CP on the detail of our proposals. Our response on extending the taping regime to all corporate finance business We have carefully considered the feedback we have received on our proposal to extend the taping requirements to corporate finance business (in CP16/29). Stakeholders raised concerns about the broad scope of the proposal. We recognise that extending the taping regime to all aspects of corporate finance business may capture certain activities beyond the scope of MIFID II where conduct or market abuse risks are not as prevalent, and this may be difficult to implement. MiFID II75 requires in-scope firms to record telephone conversations and electronic communications that occur when providing client order services that relate to the reception, transmission or execution of client orders, or when dealing on own account. We are also required to impose analogous requirements on MiFID optionally exempt firms. In response to the feedback received:
75 Article 16(7)

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we will not extend the MiFID II taping regime to capture all aspects of
corporate finance business; but
communications occurring during corporate finance business
would be in-scope of the taping requirement insofar as they are automatically captured by MIFID II as set out in the above paragraph. We expect this change of policy will reduce the costs imposed on firms from those set out in our cost benefit analysis in CP16/29. The extent of cost savings will depend on the proportion of a firm’s business that is directly caught by the activities set out in Article 16(7) of MiFID II. Conversations that firms must record Firms must record telephone conversations and electronic communications that are in scope of Article 16(7). In other words only those resulting in (or that are intended to result in) transactions concluded when dealing on own account and the provision of client order services that relate to the reception, transmission and execution of client orders. Some communications that occur when firms provide corporate finance services may fall within the MiFID II taping requirements. The focus of the recording requirement is on the end of the process leading to a transaction where the transaction is agreed or there is a reasonable prospect of the transaction being agreed. For example, in a capital-raising context, there will be conversations and communications between the syndicate banks, issuer and/or investor clients about pricing and allocating securities. Firms providing underwriting and placing services76 are not within the scope of the taping requirement unless the firm is involved in providing client order services alongside these. Such client order conversations and communications will be in scope of Article 16(7). As the focus of the recording requirement is on the end of the process, in practice this is likely to be limited to communications in relation to key elements of the final intended transaction, such as price. Other communications that may fall within the MiFID II taping requirements include, but are not limited to, those between:
a bank and its corporate client and between a bank and sellers related
to purchases of securities in buy-back transactions for the corporate client
a bank and selling shareholder and between a bank and buyers
relating to the purchase of a block of securities by the bank and the subsequent resale of the securities in a block trade ‘bought deal’ transaction
a bank and buyers relating to the re-selling of shares purchased by an
underwriting bank when underwriting an issue of securities 76 As specified in Annex I, section A(6) and A(7) of MiFID II.

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a bank and its clients and the bank and a third-party broker or sellers
in relation to the purchase of securities as part of a stakebuilding exercise We would encourage firms to look at our perimeter guidance, particularly PERG 13.3 and PERG 13 Annex 2 for further detail on some of the activities which may come within scope. Please see the final section of this chapter, on ‘recurrent issues in consultation responses’ for further detail on how we have transposed the MiFID II requirements in our Handbook. Record-keeping obligations Firms must create and maintain effective records, including when they are providing corporate finance business (see SYSC 9 and COBS 11.5A for general record-keeping obligations). Taping sits within the context of these broader obligations. Taping helps to promote higher standards of conduct and reinforces our ability to supervise and enforce our wholesale conduct and market abuse regimes. Higher standards of conduct by firms when providing corporate finance services should help to enhance confidence among issuers and investors, improve the effectiveness of the UK’s primary capital markets, and ultimately make this a more effective route for issuers to raise finance. We understand from responses on behalf of the investment banking community that it is already common market practice to record conversations when a firm is gauging the level of interest in a corporate finance transaction from prospective investors (‘market sounding’). Other activities such as research services a firm provides alongside corporate finance business, and the pricing and allocation of a securities offering, are also areas where material conduct risks can, and do, arise in practice. If conversations and communications relating to these services are not already directly caught by the telephone recording requirements, we would encourage firms to consider whether, in similar vein to ‘market soundings’, they could be captured in a manageable way. Where such recordings can be captured in a manageable and proportionate way, we would regard it as good practice for firms to tape as a means of maintaining effective records. Portfolio management and proposal to remove the qualified exemption available for discretionary investment managers
19.12 In CP16/29, we proposed to extend the MiFID II taping requirements to portfolio
management activity and to remove the current qualified exemption for discretionary investment managers. Our domestic regime already requires firms to record

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19.13 In CP16/29, we asked:

Q57: Do you agree with our approach to extend the MiFID II requirements to
corporate finance business and the service of portfolio management and to remove the exemption for discretionary investment managers?
19.14 One significant difference from our current regime is that we proposed to remove the
existing qualified exemption for discretionary investment managers (DIMs) as we have faced difficulties in obtaining the relevant records where we have only had access to those records from the sell-side firms. This exemption enables them not to have to record relevant conversations if they can reasonably presume that their counterparty is subject to a taping obligation.
19.15 Respondents provided the following feedback:
Some respondents noted that many discretionary investment managers do not
tape on account of the existing taping exemptions. They thought that there was not a large enough gap in the regulatory protection to justify the imposition of the full cost of taping, as records could be accessed from the relevant sell-side counterparty. One representative industry response noted that they were not aware of the difficulties that the FCA had had in accessing the relevant tapes, and so did not think that the removal of the exemption was sufficiently justified.
The drafting of the rules is currently so broad that it covers the day-to-day
operations of certain firms. One example that was given is that the activities referred to in draft SYSC 10A.1.1R include the activity of managing an AIF, which would include a very broad range of conversations. Concerns were raised that this would require the recording of all calls relating to on-going operations, which would be a significant expansion from the current requirement which defines what a relevant conversation is.
The increased retention period of records from six months in the domestic rules
to five years based on the MiFID II rules would have significant data costs, and the benefit of the extended length of recording had not been established.
As currently drafted, the new taping regime will apply the taping obligation to
all MiFID financial instruments, both for MiFID firms and for the discretionary extensions that the FCA consulted on. This may not be appropriate in the context of private equity firms, who are not currently subject to taping and would become so through the extension of the relevant instruments. Respondents noted that the concerns of market abuse and conduct risks cannot be as prominent in these transactions, and so justification for this extension was weaker.
Some respondents representing smaller firms noted that these proposals may have
a disproportionate effect on smaller firms who previously relied on the exemption. It was argued that this would especially be the case if firms are required to actively monitor the records that they make.
Concerns were also raised that in a private equity context, communications raised
in relation to a potential transaction may take place over a long period of time and

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Markets in Financial Instruments Directive II Implementation – Policy Statement II with a number of different relevant parties. If all of these conversations were to be in scope of the taping requirement the number of conversations that needed to be taped would be vast. This could mean that the regime would be disproportionate to its benefits. Our response on portfolio management and proposal to remove the qualified exemption available for discretionary investment managers Our proposal to continue to require firms to record conversations related to portfolio management activity and to remove the current exemption for discretionary investment managers was based on our supervisory and enforcement experiences. In particular, we faced difficulties when relying on sell-side records, and this meant we had to rely on those who may not have been the subject of the investigation. We also proposed to take a unified approach to those subject to the taping requirements, by implementing the MiFID requirements to those firms who are subject to a recording obligation through our domestic regime. We stated that the taping regime under MiFID II was in line with our regulatory expectations and that for those who were already subject to the taping obligation this baseline was already fairly close to the new proposals. Removing the qualified exemption available for discretionary investment managers We consider that there is a sufficient gap in records kept to justify removing the exemption for discretionary investment managers. Where the exemption is used, we have found that it has been very difficult to access the relevant tapes from the sell-side counterparts, given that orders may be placed with multiple brokers across different venues. Additionally, our proposal will ensure that the costs of supporting FCA supervision and investigation are met by those who are often the subject of our oversight and investigations, rather than counterparties. We also stated in CP16/29 that our survey results suggest that a large proportion of discretionary investment managers already record in practice, and as such would face only limited costs in the application of the taping rules. This is particularly the case amongst larger firms, although less so for smaller ones as set out in the CP16/29 CBA. We do not therefore think that it is likely to be costly to introduce for many portfolio managers. For these reasons, we are confirming the original proposal to remove the qualified exemption available for discretionary investment managers. Differences from current regime We stated in CP16/29 that the MiFID II regime was in line with our current regulatory expectations and the differences are not unduly significant. With regards to the scope of the conversations that are captured by the proposed drafting of the rule, it is not our intention to require all conversations or other electronic communications to be caught by the taping requirement.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II We do not agree with the suggestion in responses that the implication of the proposed drafting is that it would require a firm to record nearly all of its employees’ daily telephone, videoconference and email, among other electronic communications in order to capture conversations that relate to the activity of managing an AIF. The activity of managing an AIF is defined in relation to the function of portfolio management in AIFMD. This means that the drafting relates to the performance of the particular function (ie when DIMs are actually undertaking portfolio management) rather than a more general understanding of what ‘managing’ an AIF entails. The focus of the regime is on the transactional side of portfolio management, where conversations that relate to transactions undertaken, or intended to be undertaken, are required to be recorded. This is similar to the focus of our current regime which defines a relevant conversation with reference to transactions. Further details on the scope of the requirement are provided at the end of this chapter. We do not expect this to be significantly broader than the current requirement that these firms are subject to. One of the more prescriptive organisational requirements that MiFID II introduces is the extended retention period for taped records. Some consultation responses noted that they expected this to result in considerable data storage costs. However, there was a lack of specific costs that were quantified within these responses or comparisons to the cost benefit analysis included in CP16/29. We do not believe that the increased retention period will result in significant cost increases for firms who already have a taping telephony system in place. This is because data storage costs have come down significantly since the original introduction of the UK domestic taping regime, primarily due to the advent and benefit of cloud storage. This means that any costs are likely to be incremental in nature. Responses provided little evidence that the original data storage costings as set out in the cost benefit analysis of CP16/29 were incorrect. We were also not provided with strong evidence as to why this would have a disproportionate impact on smaller firms, particularly as any policies or monitoring of records that are introduced should be risk-based and proportionate. As such, we propose to continue with the requirement to hold records for a common period of five years after the creation of the record. However, one concern that was raised was that as currently drafted the taping rules relate to all financial instruments for certain firms undertaking certain activities. This means that for non-MiFID firms also subject to the regime, where they undertake relevant transactions in certain securities (eg in the case of many private equity transactions), they will be captured by the requirement to tape where they may not
currently be. We accept that the justification for taping these conversations on the grounds of preventing market abuse or raising conduct standards is weaker than for other extensions to the taping regime and may not be appropriate. We have therefore adjusted our scope to remove financial instruments not linked to trading on a trading venue from the scope of instruments required to tape by nonMiFID firms. This will ensure that the regime is more proportionate, and the right conversations are captured. It will also likely reduce the total cost of the proposed discretionary extensions estimated at

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Markets in Financial Instruments Directive II Implementation – Policy Statement II consultation. This is because some firms who would have otherwise been brought into scope through the change to the underlying financial instrument will not have to tape their relevant phone conversations. Aside from this change in scope our finalised rules otherwise remain the same as they were consulted on in this area. Energy market participants (EMPs), oil market participants (OMPs) and firms conducting other non-MiFID commodity and exotic derivatives business
19.16 In CP16/29, we consulted on extending taping to firms undertaking energy market
activities and oil market activities. This was on the basis that these firms are already subject to the domestic taping requirements. In the fourth consultation on the implementation of MiFID II (CP16/43), we consulted on also extending taping to other non-MiFID business related to commodity or exotic derivatives. By virtue of COBS18.2.5, these firms are already required to tape relevant conversations and communications.
19.17 In CP16/43, we asked:

Q2: Do you agree with our approach to COBS 18.2? If not, please give reasons why.
19.18 A few respondents answered this question, with balanced of views between those in
favour and those not.
19.19 Some thought that these firms are currently subject to a taping requirement for these
relevant activities and that this should be carried over to the new taping regime.
19.20 Some respondents argued, however, that we did not sufficiently make the case that
it is proportionate to apply the MiFID II taping requirements to firms undertaking this business. In particular, respondents argued that there was little justification for an increase in the retention period from six months to five years to be aligned with MiFID II, and that the CP16/29 CBA discussed the benefits of taping generally rather than the benefits of moving to the MiFID II standard. Our response on energy market participants (EMPs), oil market participants (OMPs) and firms conducting other non-MiFID commodity and exotic derivatives business We will continue with our approach as set out in CP16/29 and CP16/43 and apply the MiFID II taping requirements to energy market participants (EMPs), oil market participants (OMPs) and firms conducting other nonMiFID commodity and exotic derivatives business. CP16/29 proposed applying the MiFID II taping regime to EMPs, OMPs, and firms conducting other commodity and exotic derivatives business. Under our current regime, these firms are required to already tape the same sorts of conversations. We also stated in CP16/43 that we believe the costs to meet the MiFID II organisational requirements are likely to be minimal, given that firms currently comply with our domestic regime.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II One of the respondents queried whether the arguments for moving to the longer retention period in place under MiFID II had been sufficiently justified. As well as the benefits arising from consistency of standards, discussed below, the additional retention period for calls will give a longer period of time for internal review in the event of a dispute. It will also increase the availability of records for both supervisory and enforcement purposes, which can often take place more than six months after records were created. We do not believe that this extension of the retention period from six months to five years will have significant costs attached to it. The main cost increases would come from an increase in data storage, and these are likely to be small given the falling costs of cloud-based storage. We did not receive detailed consultation responses that set out significantly different cost estimates to those included in our cost benefit analysis. We also believe that there are benefits in having consistent regulatory requirements in place for firms undertaking similar activities across different directives. As MiFID firms undertaking MiFID business will be directly captured by the five-year record retention period, it is important that other firms undertaking similar activities align with these requirements in order to ensure a consistent regulatory approach. This is especially the case where firms are undertaking mixed scope business, and as such some of their conversations are required to be recorded and kept for five years. Third country branches
19.21 In CP16/29, we asked:

Q58: Do you agree with our proposal to apply the MiFID II taping provisions to UK
branches of third country firms?
19.22 Only a few respondents answered the CP question on the extension of the taping
regime to UK branches of third country firms. The majority of respondents supported the proposals, with some noting that the taping regime proposed would be a useful source of evidence for market abuse and related regulatory breaches.
19.23 One respondent queried the extent to which this had been discussed in the
consultation paper, however agreed with the proposals nonetheless. Our response on third country branches We believe that it is important to have consistent regulatory requirements in place for the same type of firms carrying out the same activities in the same markets. Given this, and that our proposals were supported by respondents, we are confirming the application of the MiFID II taping provisions to branches of third country firms.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Retail financial advisers (RFAs)
19.24 In PS17/5, we gave early clarity on our proposed approach to applying taping to Article
3 RFAs. We concluded that additional flexibility for all Article 3 RFAs was appropriate, and that we would allow these firms to either tape their relevant phone conversations or take a note of them. This policy statement now sets out the feedback received to the consultation questions on RFAs, and the detail of our finalised rules.
19.25 In CP16/29, we asked the following questions:

Q55: Do you agree with our proposed approach for Article 3 firms including larger
financial advisers? If not, please give reasons why. In your response, please identify the size of your firms eg provide details of the number of employees who will be subject to the new taping requirements.
Q56: Do you agree with our approach for Article 3 financial advisers? If not, what
other alternatives do you suggest that may meet the analogous requirements of
Article 3.2(c) of MiFID II for smaller financial advisers? Please also provide your views
on what an appropriate level to distinguish between larger and smaller financial advisers would be.
19.26 Respondents generally did not support the proposals to apply taping to RFA firms
exempt from MiFID under Article 3. A number of concerns were raised by industry with regard to our proposal. In particular, respondents made the following arguments:
The business model of these firms is such that the primary way in which advice is
delivered to clients is through face-to-face meetings. Taping would fail to meet its objective of increased consumer protection as it would not capture the vast majority of conversations where advice is actually provided.
The proposal to differentiate between smaller and larger RFAs is unworkable in
practice. This is because there are two main business structures, large networks of appointed representatives (ARs) operating under one principal, and other directly authorised small firms. As the large networks are constituted by small ARs, it may create competitive distortions to make them tape whilst a similar sized directly authorised firm would have the choice not to.
The number of complaints arising from RFAs that go to the Financial Ombudsman
per year is very low, and so there are only minimal investor protection benefits that could be realised by introducing taping.
The cost of implementing taping is considerable and is disproportionate from a costbenefit perspective.
Access to taped records may not necessarily benefit client outcomes, because if
there is a dispute over what has been said on a phone, many firms’ approach is to settle it in the client’s favour.
Clients currently receive a substantial audit trail after formal advice has been given,
in the form of the suitability report. It is unclear whether further record keeping is necessary.

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19.27 Many respondents queried the costs of implementing the regime. Some industry
respondents argued that the likely total costs of the regime would be significant. Detailed alternative analyses were provided to support these claims.
19.28 Some respondents (notably smaller RFAs) favoured a distinction between smaller and
larger RFAs. Of those who provided a specific size, most could not provide compelling reasoning as to why this threshold was appropriate.
19.29 Some respondents were more positive about our proposals. One representative
consumer body that responded supported our proposal to apply taping to Article 3 financial advisers, noting that that it would help promote good market behaviour and enhance consumer protection. It was also argued that there was no suitable alternative to taping that would provide the same benefits.
19.30 Some respondents however did provide an alternative way of meeting the ‘analogous’
requirement for telephone recording to Article 3 MiFID optionally exempt firms (such as RFAs). Firms proposed that an analogous outcome can be achieved by requiring firms to document and retain a written record of any relevant calls. It was highlighted that this approach aligns with that set out in MiFID II for relevant faceto-face conversations, and that these should be considered as equivalent to those conversations. Our response on retail financial advisers (RFAs) In PS17/5, we concluded that additional flexibility for all Article 3 RFAs is appropriate. This was because feedback suggested the business model of many of these firms is such that a full taping obligation may not be proportionate. We do not agree that the:

Cost of the proposals would be as significant as has been suggested
by some industry respondents. This is because the alternative analyses that were submitted typically took more expansive assumptions about the cost of storing phone records and the number of telephone lines that would need to be taped. We continue to think that the assumptions set out in the CP16/29 CBA are valid.
Number of published Financial Ombudsman Service cases per year
alone is a good indicator of the likely benefits that taping would bring. This is because taping has a wider range of benefits than just in the cases of these disputes, such as those highlighted in CP16/29. We also do not think that this number would capture all relevant cases for which taping could have benefits. However, we accept that where firms only make few relevant telephone calls, and instead impart the majority of their advice in a face-toface capacity, then it could be the case that the costs of the policy outweigh the benefits. This is more likely to be the case for the fairly considerable number of smaller firms in the market, where business between the firm and the client is almost all done face-to-face. Some larger firms emphasise the relationship-based nature of their business.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II In these cases, it is our view that firms are more likely to routinely have relevant telephone conversations. We do not envision that this additional flexibility is likely to result in additional costs to the consulted on proposals as firms will choose the most cost effective approach for them. The ability for retail financial advisers to choose between: making a written record, or recording relevant conversations, should enable these firms to make cost effective decisions77 whilst preserving an appropriate level of investor protection. We expect the majority of the Article 3 population to fall within the category of retail financial advisers. We do not agree that since these large firms are often comprised of networks of appointed representatives with one central principal, they should be considered as many small firms. The AR-principal model centralises the compliance and support functions for the ARs to operate, and so the taping policy would fall within the remit of the principal. It may be the case that ARs currently operate different telephony systems, but this does not mean that the AR should be considered a separate entity for which it would be disproportionate to apply taping. Economies of scale will exist due to the centralised compliance function. However, we consider there to be no workable, non-arbitrary distinction that could be drawn between a large and a small RFA. We therefore propose to apply our policy consistently across all sizes of firms in the market. Taking into account proportionality concerns, and feedback that no fair distinction can be drawn between a large and a small RFA, we will allow
Article 3 RFAs, irrespective of size, to comply with the ‘at least analogous’
requirement by either taping all relevant conversations or taking a written note of those relevant conversations. As stated in PS17/5, firms should develop and take a consistent approach in their decision to tape or take a note of relevant conversations. This is to ensure that the system could not be gamed by individual advisers or in particular situations. In exceptional and unplanned situations where a client contacts an adviser on a non-recordable line and it would not be reasonably practical for the adviser to continue the conversation on a recorded line, a note could instead be taken. The rule would not, however, allow a call-by-call choice on whether to record or take a note of these conversations. Further detail on which conversations are in scope of this requirement can be found at the end of this chapter. Detail of an analogous note We also stated in PS17/5 that in order for the note to meet the ‘analogous’ requirement under MiFID II, it must have an analogous 77 In CP16/29 we said the following about the costs of taping: ‘As illustration of how these costs arise we can consider an example of a firm needing to record the communication of one of its staff. Initial hardware, installation and first year storage capacity would cost, between £391 and £441 per individual (£335 for telephone lines and installation and £6 for the first year’s storage capacity. If the lines are used on average 70% of an 8 hour working day and speech is recorded at between 13-16k bits per second in WAV format. On that basis each line will generate about 40 mb of data. Across a 260-day working year the total data per user is 10.4 GB. Assuming that a backup copy is kept and this information is stored in a third party cloud, we estimate cost storage per user at £6 per year. We have also included between £50-100 per user per year for maintenance and other associated miscellaneous expenses including staff costs. Based on figures from previous analysis we estimate that for every landline recorded, there will be 0.44 mobile phones recorded. We estimate costs for the second and subsequent years will reduce to between £371 and £421 per user. However, we estimate that for firms that already record conversations and communications the largest expense will arise with retaining records from at least 6 months to a minimum of 5 years. We do not expect these storage costs to be material.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II outcome in terms of advancing our consumer protection objective. We stated that this meant that firms would not be able to rely solely on their current record keeping obligations to meet the requirement. Certain details are required by the MiFID II delegated regulation (2017/565) to be recorded, as a minimum, when a firm has a relevant face-to-face conversation. The information to be recorded includes at least (i) the date and time of the meeting, (ii) the location of the meeting, (iii) the identity of the attendees, (iv) the initiator of the meetings, and (v) relevant information about the client order including the price, volume, type of order and when it shall be transmitted or executed. We would expect an analogous note taken of a relevant telephone conversation to include at least these details as a minimum. A note based just on the minimum details listed above would not provide an analogous outcome to taping telephone conversations. This is because it does not provide the same degree of consumer protection. We are therefore including further guidance in the rules that, in addition to the above details, the note should capture all the main points of the full conversation that are relevant to the order. This approach will ensure that firms do not omit relevant details from the note, providing an accurate and contemporaneous record of the conversation. We expect the note to capture any substantive points raised in the relevant conversation that provide material context and colour to the decision taken by the client. In other words, anything communicated from either the client or the adviser that could influence the client’s decision should be captured. Good practice for firms would include sharing the notes made of relevant phone conversations with clients on a regular basis in order to ensure their accuracy. Which conversations fall to be recorded (by tape or note)? Some industry respondents noted the difficulty in understanding which conversations fall within the scope of the taping regime for RFAs. Whilst more details on this are provided at the end of the chapter, see the section on 'Recurrent issues in consultation responses', there is particular difficulty in an advisory context. This is because it is not the investment advice itself that must be taped but the client order services that are provided typically in conjunction with investment advice. In order to add further clarity to the detail set out at the end of the chapter, we have included a couple of examples below which show the sorts of conversations that we understand to be within the scope of the taping regime in the context of RFAs. Firms are required to record conversations that result in a transaction being undertaken or that are intended to result in a transaction being undertaken. The investment advice is caught insofar as it relates to a specific transaction that the client wishes to
undertake. As we discuss at the end of this chapter, the ‘intention’ of the client is a clear test.78 In order for it to be the case that the client has an intention for a conversation to result in a transaction, they must not be feeling their way or reserving their decision for a later time. They must have a clear state 78 Cunliffe v Goodman [1950] 2 KB 237, at 253 (Cunliffe).

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Markets in Financial Instruments Directive II Implementation – Policy Statement II of affairs that they wish to bring about, and have a reasonable prospect of doing so. The client must have a clear idea of what order it is that they want to undertake, and be capable of conveying this to the adviser. It is not sufficient for the client to just be receiving advice, or debating between a number of different alternatives. The client must have a clear intention to undertake a particular transaction. In the case of RFAs, this could, for example, be the case where they agree with their adviser to proceed on the basis of the advice given. As such, we would not expect firms to have to record conversations where advice is imparted unless that conversation leads to or is clearly intended (in the above sense) to lead to a subsequent ‘order’ from the client. If, for example, the adviser imparts advice to the client who says that they need to go away and think about it, we would not expect this conversation to be required to be recorded for the purposes of the telephone recording regime. There may be other record keeping requirements for this first meeting, for example for suitability report purposes. If, however, the client then later phones their adviser to state that they do want to proceed on the basis of the advice imparted at the meeting, we would expect this phone conversation to be recorded, or for an analogous note to be taken of it. This is because it is clearly the intention of the client that the adviser goes away and makes the necessary arrangements to bring about the wishes of the client, which in this case constitute the client order. With regards to what details an adviser should put into this note, we would expect the things set out earlier in this section alongside any other relevant details. These other relevant details may simply be that the client thinks that the advice they received was indeed the most appropriate for them and as such they would like to continue on that basis. If, during this conversation, the client stated that they thought the advice was particularly suited to them for a given reason, it is this reason that must be included as the other relevant detail in the note of the conversation. A taped record would capture all of these details and so it is important that the note would also capture these details. They are essential aspects of consumer protection that provide an unambiguous account of the key points that led to a decision by the client. If there was a more substantive discussion over the phone that resulted in the client making a particular decision then the record created should capture those main points that were discussed prior to the decision being made by the client. This will ensure that the note would be analogous to the taped record of the conversation which would clearly be within scope of the regime. The above examples are illustrative and non-exhaustive only. Firms will have to use judgement as to
whether or not certain conversations are within scope and what details of that conversation need to be captured. Clearly, all conversations where the client passes on a decision (an ‘order’) to the adviser that the adviser must carry out are within scope of the requirement. Certain other conversations, where the client clearly intends to undertake a particular decision will also be in scope. The bar for ‘intention’ is higher than merely contemplating

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Markets in Financial Instruments Directive II Implementation – Policy Statement II a particular course of action, as explained above. Finally, firms are encouraged to look at the ESMA Q&As on taping, and the further detail included in the end of this chapter for more information. These will help firms to use their judgement regarding whether particular conversations are within scope. Costs of implementing the organisational requirements
19.31 We stated in the cost benefit analysis that the likely costs of implementing the new
organisational requirements of the taping regime are likely to be small.
19.32 In CP16/29, we asked:

Q59: Some respondents to the CBA we undertook last year indicated that the costs
for adhering to the new taping organisational requirements are likely to be minimal. Do you agree with this view? If not, please provide further empirical information as to why.
19.33 A number of respondents answered this question, with the majority disagreeing with
the view that the costs of implementing the organisational requirements of the taping regime were likely to be minimal. Most respondents answered depending on how the proposals were likely to impact certain types of firms. We have considered these firmtype specific responses in the section for which they are relevant.
19.34 One respondent who has had a taping system in place for a number of years stated
that the costs that they had experienced were significantly more than what was suggested in the CP. It was stated that the estimated volume of data generated was much more significant than the estimates that were submitted as part of the cost benefit analysis attached to CP16/29. It was stated that the average volume of data per recorded line was around eight times greater than the basis of the CBA included in CP16/29.
19.35 Several respondents expressed concerns that the active monitoring of the records
kept in accordance with this chapter would result in significant costs that had not been considered as part of the CP. Respondents were unsure of the extent that they would have to monitor these records in order to meet the organisational requirements.
19.36 Some respondents noted that for those who already have a taping system in place
the costs were unlikely to be significant; however for those without such a system the costs would be more considerable. Where the taping requirement is already applied, authorised firms would already have most of the infrastructure in place. Our response on the costs of implementing the organisational requirements CP16/29 proposed that for firms not currently subject to a taping requirement, the costs of complying with the organisational requirements will be greater than for those who are subject to the domestic regime. Where firms do not currently tape, the changes to the

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Markets in Financial Instruments Directive II Implementation – Policy Statement II organisational requirements should however be seen as an extension of other record keeping requirements that firms are already subject to. Internal policies detailing the firm’s approach to the recording of telephone conversations (as detailed in Article 76 of the MiFID II delegated regulation) should fit within a firm’s broader record keeping policies. For firms who do currently tape, these changes are incremental in nature, and we continue to think based on our cost benefit analysis that the costs of adhering to the regime are likely to be small. Whilst responses often mentioned ‘the costs’ of our proposals, we did not receive many examples of alternative expected costs. One disagreed with the assumption made about the amount of data that one recorded line would generate. We still think that our assumption in CP16/29 remains representative of likely data generation across impacted firms, as this was based on evidence from industry suppliers. We do not believe that the additional organisational costs would be as significant. Whilst there will be certain additional costs from the more prescriptive organisational requirements of MiFID II, we still think these requirements are already in line with our existing regulatory expectations. The monitoring of records, for example, should be done on a risk-based and proportionate basis, taking into account the scale, nature and complexity of a firm’s business and the corresponding materiality of the conduct risks its activities may give rise to. Further details on this are provided in the last section of this chapter . For firms who already tape, it is within our regulatory expectations that some monitoring of these calls already occurs and as such this should not result in a significant increase in the cost for firms. We do not therefore agree with the respondent who argued that there were significant additional costs related to processing and monitoring of records that were not considered as part of the cost benefit analysis of CP16/29. As a result of this, we are confirming our proposals to have a single set of organisational requirements that are consistent with MiFID II and apply to all firms subject to the taping regime. Recurrent issues in consultation responses
19.37 There were a number of recurrent issues that were raised by industry respondents in
relation to various questions on the implementation of the taping regime. Some of the issues raised were generally applicable across the taping regime.
19.38 A common theme running through a number of the responses to the taping chapters
in CP16/29 and CP16/43 was queries over the scope of the new taping regime. In particular, it was noted that the drafting in SYSC 10A.1.6R requires firms to record telephone conversations that “relate to the activities referred to in SYSC 10A.1.1R”. Respondents queried how broad this requirement was and how much would therefore be in scope.

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19.39 Respondents had concerns around how the activities set out in SYSC10A.1.1R(2)
mapped to the MiFID II activities of client order services that relate to the reception, transmission and execution of client orders, and transactions concluded when dealing on own account. This was of particular relevance to firms responding to the extension of the taping regime to corporate finance business, to help determine which activities are required to be captured by MiFID II and which were discretionary extensions.
19.40 Respondents also queried the extent to which firms will be required to record internal
calls, about which conversations should be considered to fall within scope of the taping requirement, and the extent to which firms have to engage in internal monitoring of records created in accordance with this requirement. Our response on the recurrent issues in consultation responses SYSC 10A.1.1R(2) begins the list of activities with a statement that firms need to tape when they carry out “any of the following activities, in investments that are financial instruments”. The taping requirement thus relates to when a firm undertakes transactions in financial instruments during the provision of these services or activities. In-scope conversations are those either directly related to the conclusion of the transaction or intended to result in a transaction. This means that the scope of the regime is similar to the domestic regime currently in place, which defines a relevant conversation in relation to an agreement to carry out a given activity. This understanding is closely linked and relevant to the extent to which firms are required to record calls. Insofar as those calls are linked to a reasonable prospect of the firm bringing about a transaction by its own volition they are in scope of the taping requirement.79 Where calls fall into this category, they are subject to the taping requirement. Calls will not fall into this category where the firm is merely feeling its way and reserving its decision.80 For corporate finance business, we have only implemented the minimum scope of the telephone recording requirement as required by MiFID II. Concerns were however raised during the consultation process that, as currently drafted, the SYSC 10A.1.1R(2)(a) activity of ‘arranging (bringing about) deals in investments’ would capture a wider range of activities than those caught by the MiFID II requirements to tape the activity of ‘the reception and transmission’ of client orders. This would result in more activities being captured than fall under MiFID. We believe that the current scope of the rules accurately reflects the MiFID II provisions. This activity only applies to arrangements that bring about or would bring about the transaction in question.81 This element is the same as the scope of the reception and transmission of a client order, extended by the meaning of Recital 44 in MiFID II to include situations where reception and transmission of an order includes arrangements between two or more investors which “thereby brings about a transaction between those investors”. 79 Cunliffe v Goodman [1950] 2 KB 237, at 253 (Cunliffe). 80 Cunliffe, at 254. 81 See PERG 8.32.2.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II In the context of corporate finance business and Recital 44 MiFID noted in PERG 13 Q13D, reception and transmission could, subject to our comments at the top of this response section above, include negotiating terms for the acquisition or disposal of investments on behalf of a corporate client with a potential buyer or seller, for example as part of a merger or acquisition. Although we would not expect the recording obligation to relate to an investment firm’s internal discussions at board meetings, the MiFID delegated regulation specifically refers to the recording of certain internal telephone conversations. This is likely in our view to include discussions, for example, in relation to key elements of the final intended transaction, notably price, when these discussions take place over the telephone and the same applies to similar discussions with the client. As regards negotiations with other investors for the purposes of Recital 44, an issuer is not an investor for these purposes. By contrast, in the case of negotiations on behalf of a corporate client with a potential buyer or seller, as part of a merger or acquisition, we would expect there to be a record of telephone conversations in relation to key elements of the final intended transaction, notably price. A key purpose of the recording obligation is to help ensure that there is evidence to prove the terms of any orders given by clients and, as such, the record is beneficial to investors and firms alike, in ensuring that there is clarity and confirmation about the orders received and transmitted. Firms must also comply with the MiFID II delegated regulation, which states that firms should ‘periodically monitor the records of transactions and orders subject to these requirements’. The ESMA Q&As82 again give further detail to this, and highlight that this means that monitoring of records should be done regularly, and when necessary on an ad-hoc basis in order to ensure compliance with the recording procedures in place, the adequacy of those procedures, whether the records are readily accessible and whether they are sufficient to reconstruct accurately the audit trail of a transaction. We note in particular that such monitoring should be risk based and proportionate. We also note that the recording obligation concerns the provision of client order services that relate to the reception and transmission and execution of client orders, as opposed to ancillary services. These are explicitly excluded in our current drafting. Ancillary services in Annex 1
Section B MiFID II include:

advice to undertakings on capital structure, industrial strategy and
related matters and advice and services relating to mergers and purchase of undertakings
investment research and financial analysis or other forms of general
recommendations relating to transactions in financial instruments 82 https://www.esma.europa.eu/sites/default/files/library/esma35-43-349_mifid_ii_qas_on_investor_protection_topics.pdf

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Markets in Financial Instruments Directive II Implementation – Policy Statement II We have been careful in ensuring that the scope of the taping regime reflects the scope of the MiFID requirements, taking into account, in particular, the scope of the relevant investment services and longstanding perimeter guidance.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 20 Specialist regimes (COBS 18) Introduction
20.1 This chapter summarises our responses to feedback received in relation to our
proposals in CP16/43 to implement the MiFID II specialist conduct of business regime requirements in COBS 18, which include:

Trustee firms (COBS 18.1)
Energy market participants (EMPs) and oil market participants (OMPs) (COBS
18.2)
Corporate finance business (COBS 18.3)
Stock lending activity (COBS 18.4)
Residual CIS operators, UCITS management companies and AIFMs (COBS 18.5)
Lloyd’s (COBS 18.6)
ICVCs (COBS 18.9)
Authorised professional firms (COBS 18.11)
20.2 OPS firms were consulted on separately, as such we will provide our response on the
application of MiFID II to OPS firms – non scope business (COBS 18.8) in due course once we have considered the responses. Trustee firms (COBS 18.1)
20.3 In Chapter 2 of CP16/43 we consulted on changes to COBS 18.1, which applies to
trustee firms when they conduct MiFID business.
20.4 The proposed changes were not substantive and amounted to an update of the table
indicating which COBS rules do not apply, or are unlikely to apply, to these firms.
20.5 In Q1 we asked:
Do you agree with our approach to COBS 18.1? If not, please give reasons why.
20.6 We did not receive any responses to this question.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on trustee firms (COBS 18.1) We will change COBS 18.1 as proposed. EMPs and OMPs (COBS 18.2)
20.7 In CP16/43 we consulted on changes to COBS 18.2, which applies to energy market
participants (EMPs) and oil market participants (OMPs). We also consulted in CP16/29 on OMPs and EMPs conducting non-MiFID business regarding the application of the rules on taping and investment research. The proposed changes were dealt with in
Chapter 2 of CP16/43 and our final approach is set out in the taping chapter.
Our response on EMPs and OMPs (COBS 18.2) Our final approach in relation to the proposals in CP16/43 in relation to applying the MiFID II taping requirements to non-MiFID business related to commodity or exotic derivative instruments is also set out in
Chapter 19 of this PS on taping.
Corporate finance business (COBS 18.3)
20.8 In Chapter 2 of CP16/43, we consulted on updating the existing tables in COBS 18.3
that identify the provisions that will apply to corporate finance business that undertake optional exempt business.
20.9 In Q3 we asked:

Do you agree with our proposed changes to COBS 18.3? If not, please give reasons
why.
20.10 Respondents agreed with our proposal to insert a new table in COBS 18.3 for optional
exempt corporate finance business.
Our response on corporate finance business (COBS 18.3) We will make the changes to COBS 18.3 as proposed. Stock lending activity (COBS 18.4)
20.11 In Chapter 2 of CP16/43, we consulted on updating specific Handbook references
following the proposals we made in CP16/29.

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20.12 In Q4 we asked:

Do you agree with our proposals to update COBS 18.4? If not, please give reasons
why.
20.13 Respondents agreed with our proposal to update the table in COBS 18.4.
Our response on stock lending activity (COBS 18.4) We will make the changes to COBS 18.4 as proposed. Specialist regime for collective portfolio managers (COBS 18.5)
20.14 In CP16/29 we consulted on proposals to restructure COBS 18.5 in order to improve
its accessibility to CPM firms without changing the substantive requirements. MiFID II does not apply directly to firms when they carry out the activity of CPMs but, as explained elsewhere in this paper, we consulted on extending certain MiFID II provisions to CPM business to maintain a consistent standard of investor protection. Because COBS 18.5 sets out the parts of COBS that apply to CPM activity, a number of consequential changes became necessary and we decided to take the opportunity to restructure this section to make it more accessible.
20.15 We proposed to move the material applicable to full-scope UK AIFMs and UCITS
management companies to two new sections (18.5A and 18.5B respectively), retaining the original 18.5 for small authorised UK AIFMs and residual CIS operators.
20.16 In Q49 in CP16/29 we asked:
Do you agree with our proposed approach to restructure and amend COBS 18.5
to make it clearer for firms carrying out CPM activity? If not, why not and what alternative approach would you propose?
20.17 All respondents to this question supported the proposal. One respondent commented
that implementation should be subject to more detailed consultation with CPM firms. Our response on the specialist regime for collective portfolio managers (COBS 18.5) We have made the structural changes we consulted on together with some further consequential changes to reflect the outcome of the consultation. In particular, we have modified the draft versions of COBS 18.5A and 5B to reflect the final decisions about the application of MiFID II rules on best execution and investment research. Since any new or changed substantive obligations on firms carrying out CPM activity have been consulted on in CP16/29 and 16/43, there is no need for further consultation on the implementation of these rules.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Applying investment research rules to CPM firms (COBS 18.5, 18.5A and 18.5B)
20.18 In Chapter 2 of CP16/43 we consulted on making further changes to COBS 18.5,
18.5A and 18.5B and introducing a new COBS 18 Annex, to ensure the MiFID II rules on investment research (COBS 2.3B) can be applied effectively to firms carrying out CPM activity as proposed in CP16/29.
20.19 We proposed introducing an adaptation of the rules that will require firms to engage
with their clients on the use of investment research and to disclose certain information to them. This adaptation takes account of the different needs of investors in a fund, who do not have the ability to influence the fund manager’s use of research.
20.20 In Q5 we asked:

Do you agree with our proposals to update COBS 18 Annex 1? If not, please give
reasons why. In particular, are there any issues affecting internally-managed AIFs that we should consider?
20.21 We received several responses to this question. One respondent agreed with the
proposals as drafted. The others reiterated general concerns about the justification for applying MiFID II standards to CPM activity and the resulting inconsistency with the rest of the EU, although one of them accepted the aim of ensuring sufficient transparency to investors about the use of research.
20.22 Some respondents raised specific concerns about the proposal to provide a
periodic breakdown, in annual fund reports and accounts, of payments made to research providers during the previous year using a RPA. They suggested this is a disproportionate measure that gold-plates MiFID II rules and could harm the commercial relationships between fund managers and research providers, by revealing information that could be exploited in price negotiations between the parties. They also thought that the information was too detailed to be of interest or use to investors in funds, and suggested that a disclosure of the aggregate levels of research spending, to be made available at the investor’s request, would be sufficient.
20.23 One respondent raised broader concerns about the application of the research rules
to fund managers operating venture capital and private equity funds. They argued that consistency of approach is not a sufficient argument to justify imposing significant extra costs, especially as many firms managing these types of fund do not carry on MiFID business.
20.24 The same respondent stated that due diligence research carried out by venture capital
or private equity fund managers or received by them, prior to acquiring a controlling stake in a company, should be treated as outside the scope of the COBS 2.3B requirements as it does not ‘inform an investment strategy’. They also said such firms might use standard research when executing trades only a handful of times during the year if at all, so applying the RPA rules to them in full would result in disproportionate administrative costs.
20.25 Another respondent said funds that have a board of directors should not be required to
agree a charge with the fund manager, as proposed.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on applying investment research rules to CPM firms (COBS 18.5, 18.5A and 18.5B) In response to stakeholders’ feedback, we have aligned the periodic disclosure requirement for RPAs for residual CIS operators, UCITS management companies and AIFMs to those applicable to MiFID scope business. A firm using an RPA must, for each fund it manages, provide periodic information to investors on the total costs the fund has incurred for third-party research during the accounting period. However, firms will only have to make available on request to an existing investor a summary of the providers paid from an RPA, the amount each of them was paid, the benefits received by the firm, and how the total amount spent from the account compares to the budget set by the firm for that period, detailing any rebate or carry-over if residual monies are held in the RPA. We also confirm that when a fund has its own governing body which is independent of the firm it will have to explicitly agree the research charge and the frequency with which this will be deducted from the fund into the RPA. We have also provided a limited easement to firms carrying on private equity and venture capital business (see Chapter 7 for more details). Lloyd’s (COBS 18.6)
20.26 In CP16/43 we proposed that no changes be made to our existing COBS 18.6 rules for
firms carrying on Lloyd’s market activities. We received one response which agreed that no changes were necessary. Our response on Lloyd’s (COBS 18.6) We will make no changes to COBS 18.6 as proposed. Depositaries (COBS 18.7)
20.27 In CP16/43 we said that we do not intend to make any changes to COBS 18.7, for
depositaries conducting non-MiFID business. Respondents agreed with our approach, Our response on depositaries (COBS 18.7) We will make no changes to COBS 18.7 as proposed.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Investment companies with variable capital (ICVCs), UCITS qualifiers, AIFM qualifiers and service companies (COBS 18.9 and 18.10)
20.28 In CP16/29 and Chapter 2 of CP16/43 we consulted on:

changes to COBS 18.9 which applies certain COBS rules, such as the financial
promotion rules, to an investment company with variable capital (ICVC) when it undertakes scheme management activity
retaining COBS 18.10 unchanged, while noting that there are some slight
enhancements to the client communications rule in COBS 4 that will apply to UCITS qualifiers, AIFM qualifiers and service companies
20.29 The proposed changes to COBS 18.9 were not substantive. They reflect the proposed
restructuring of COBS 18.5 and some minor enhancements to the financial promotion rules applicable to non-MIFID firms.
20.30 We asked in Q8 and Q9:
Do you agree with our proposal to make no further changes to COBS 18.9? If not,
please give reasons why.
Do you agree with our proposal for COBS 18.10? If not, please give reasons why.
20.31 We did not receive any responses to either of these questions.
Our response on investment companies with variable capital (ICVCs), UCITS qualifiers, AIFM qualifiers and service companies (COBS 18.9 and 18.10) We will make the changes to COBS 18.9 as proposed, leaving COBS
18.10 unchanged.
Authorised professional firms (COBS 18.11)
20.32 In CP16/43, we proposed to make a small amendment to the specialist regime for APFs
in COBS 18.11.
20.33 Specifically, we proposed inserting guidance to make it clear that the application of
COBS to an APF will be determined by the firm’s status as a MiFID investment firm, a MiFID optional exemption firm or a firm to which MiFID does not apply. Our response on authorised professional firms (COBS 18.11) The response received supported our proposal and we will implement the rules as consulted on.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 21 Small and medium-sized enterprise (SME) growth markets Introduction
21.1 This chapter summarises our responses to feedback received in relation to our
proposals in CP16/43 to implement the MiFID II Small and Medium-sized Enterprise (SME) growth markets requirements.
21.2 MiFID II introduces a new sub-category of multilateral trading facility (MTF) called SME
growth markets, with the intention of raising the visibility and profile of growth markets or junior markets across the EU. SME growth market regime
21.3 On CP16/43 we consulted on the changes we propose to make to MAR 5 to include a
sub-chapter, MAR 5.10 with the provisions related to SME growth markets. We asked:

Q17: Do you agree with our proposal to include SME growth markets as part of MAR

If not, please give reasons why?
21.4 Only two respondents answered the question, and both agreed with our proposal.
Our response on the SME growth market regime Given the positive feedback from respondents on our approach we have decided to keep our proposal and include SME growth markets as
part of MAR 5.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 22 Supervision manual (SUP) Introduction
22.1 In this chapter we provide our responses to the feedback received on our proposed
changes to the supervision manual as set out in CP16/43 and in CP17/8. Changes in CP16/43
22.2 We proposed various amendments in CP16/43 including categorisation for reporting
purposes of OTF operators and changes to reflect the removal of the MiFID exemption for locals (proprietary trading firms covered by the exemption from authorisation as an investment firm in Article 2(1)(l) of MiFID). We have also updated SUP 13A and SUP Appendix 3 to deal with miscellaneous issues relating to passporting, including the application of the Handbook to EEA firms, home/host competent authority (CA) responsibilities and the mapping of MiFID scope elements to UK regulated activities and mechanical amendments to reflect that some passporting issues in relation to PRA-authorised firms are addressed in the PRA rulebook.
22.3 The responses received were supportive of our proposals.
Our response on changes in CP16/43
We will implement the SUP changes as proposed.
Changes in CP17/8
22.4 In CP17/08 we proposed that operators of trading venues and investment firms
sending instrument reference data to our MDP can use third parties to send us the information. We also clarified that we expect Systematic Internalisers (SIs) that will be supplying us with financial reference data to establish a technology connection with our system.
22.5 We asked in Q11:

Do you agree with our proposed guidance in SUP 17 on reporting of financial
instrument reference data? If not, please give reasons why.
22.6 The only response received was supportive of our proposals.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on changes in CP17/8 We received one supportive response in respect of our SUP 17A outsourcing provisions. We will allow operators of trading venues and investment firms to use third party technology providers when submitting financial instrument reference data to the FCA. Irrespective of whether a third party technology provider is involved in the submission of the instrument reference data, the FCA MDP on-boarding application form should be for the entity to which the obligation applies. If the third party is an entity that is authorised as an ARM, we would not regard the outsourced activity as being within the scope of the ARM’s authorisation, the third party would be performing the outsourced activity as a technology provider rather than as an ARM. We confirm that an SI has to arrange for a technology connection with the FCA’s system to submit financial instrument reference data to the FCA. As explained in the previous paragraph, the SI can use a third party technology provider in order to submit that information. PS17/5
22.7 In Chapter 9 of PS17/5 we referred to the transitional arrangements we are putting
in place between 31 July 2017 and 3 January 2018 to help firms bring their passports into line with the changes of scope resulting from MiFID II. We are tweaking those transitional arrangements we outlined in PS17/5 which allowed firms to start submitting MiFID II passporting notifications from 31 July 2017. Our amendments will bring forward the date on which we will start accepting MiFID II passporting notifications via the FCA CONNECT system to 4 December 2017. Firms who will not be able to submit MiFID II passporting notifications via CONNECT will continue to be able to do so by email until 2 January 2018. We will stop receiving MiFID passporting notifications from 4 December 2017. All of these changes are reflected in the the final version of the rules published in near final form in PS17/5, which is published in the
appendix to this Policy Statement.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 23 Structured deposits Introduction
23.1 In this chapter we provide our response to the feedback received to our proposals on
structured deposits set out in CP16/29 and in CP16/43.
23.2 In CP16/29, we consulted on proposals for applying individual COBS rules to firms
selling or advising on structured deposits. We proposed transposing MiFID II’s requirements in relation to structured deposits into COBS, because we considered that it would make BCOBS unnecessarily complicated if we also copied out the MiFID II provisions relevant to structured deposits into BCOBS.
23.3 In CP16/43, we set out proposals for making consequential changes to the Handbook
arising from the proposed amendments described in CP16/29. In this regard, we proposed amending the application of BCOBS through a new Annex applicable to firms which accept deposits when selling structured deposits (although certain BCOBS provisions will continue to apply to structured deposits). In effect, firms selling structured deposits which are within the scope of BCOBS will not, in future, be subject also to those BCOBS requirements which achieve similar outcomes to applicable COBS requirements.
23.4 In CP16/43, we asked at Q21:

Do you agree with our proposal to amend BCOBS? If not, please give reasons why.
23.5 One respondent commented directly on this topic, and that respondent agreed with
our proposal. None of the remaining respondents commented on this point. Our response on structured deposits We will make the changes to the application of COBS proposed in CP16/29, and the consequential changes to BCOBS proposed in CP16/43, in relation to structured deposits.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 24 General provisions (GEN) Introduction
24.1 In CP16/43, we consulted on making technical transitional changes to the GEN
Handbook to assist firms with the practical steps they need to take when readying themselves for MiFID II regulation. We made a proposal for a transitional to enable firms to make changes related to MiFID II ahead of 3 January 2018. We also asked whether it would be helpful to make rules to support firms applying a single set of conduct standards across MiFID and non-MiFID business.
24.2 We asked the following question:

Q24: Do you agree with our proposal for a transitional provision in GEN to enable
firms to make changes related to MiFID II ahead of 3 January 2018? If not, please give reasons why.
24.3 There was a varied response. The responses ranged from strong agreement to
concern that a transitional measure allowing firms to make changes in respect of client categorisation, prior to the finalising of rules relating to the treatment of local authority categorisation, might lead to mis-categorisation with adverse consequences notably in the case of local authority pension funds. Our response on a transitional on early implementation The proposal, amongst other things, offers firms the opportunity to opt up clients before 3 January 2018 rather than wait until then to go through the opt-up process. We will make the rules given the flexibility to firms that they provide and note that this Policy Statement at
chapter 7 also contains the outcome of our proposals relating to local
authority client categorisation.
24.4 We asked the following question:
Q24: Do you think it would be helpful to have rules to support firms applying a single
set of conduct standards across MiFID and non-MiFID business once MiFID II is implemented? If not, please give reasons why.
24.5 There was a single substantive response to this question. The respondent was strongly
opposed to having such a rule, expressing concern that it could create confusion of what the FCA expected of firms and lead to over-implementation of EU legislation.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Our response on a rule to support a common approach to implementing conduct rules The consultation indicated that there was no interest in having a rule that would support firms who wanted to have a common set of conduct standards across their MiFID and non-MiFID business. We will therefore not introduce such a rule. It was never our intention to suggest that firms should have a common set of conduct standards.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 25 Decision Procedure and Penalties Manual (DEPP) Introduction
25.1 In CP17/8 we consulted on changes to DEPP and the Enforcement Guide (EG) setting
out our approach to the exercise of our powers under the MiFID II implementing regulations, including the application of our penalty policy where relevant. We also consulted on how our decision making procedures would apply to decisions under those regulations. Our proposals were based on draft implementing regulations published by the Treasury in February 2017.
25.2 The final implementing regulations have now been published. These differ from the
draft regulations published in February. We have therefore decided to consult again in CP17/19 on our proposals to update DEPP and EG in light of the final regulations.
25.3 However, as the provisions dealing with the authorisation and verification of persons
carrying out a Data Reporting Service (DRS) activity, and the cancellation of any such authorisation or verification, have not materially changed, we are publishing our final statement of procedure for decision making by the FCA under these provisions. Proposed amendments to DEPP in relation to decision making – DRSP authorisation and verification
25.4 In CP17/8 we set out our proposed decision making procedure for refusing an
application for authorisation or verification to carry out a DRS activity, refusing a request to vary or cancel an authorisation or verification, imposing a restriction on an applicant for authorisation, and for cancelling an authorisation or verification on our own initiative.
25.5 We received one response in relation to our proposals in CP17/8. This response
related to our proposed amendment to EG, which is subject to further consultation in CP VI. We will therefore address this response when we publish the remainder of our amendments to DEPP and EG following CP17/19. Our response on DEPP in relation to decision making – DRSP authorisation and verification We did not receive any responses relating to our proposed changes to DEPP in relation to authorisation and verification decision making. We will therefore make our amendments to DEPP as proposed, with

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Markets in Financial Instruments Directive II Implementation – Policy Statement II 26 Consequentials Introduction
26.1 This section covers consequential changes proposed in CP16/29, CP16/43, and
CP17/8.
Consequential changes in CP16/29
26.2 In CP16/29 Q64 we discussed our proposed consequential changes. We received 7
respondents, with unanimous agreement to our proposed approach to consequential changes. No respondent offered any further comments. Our response on consequential changes in CP16/29 We were pleased to see that respondents unanimously supported our proposals and that there were no further comments for us to consider. We therefore intend to move ahead with our proposals with a minor amendment to SUP 10A to clarify the wording of the consequential change. Consequential changes in CP16/43 Changes to transparency waivers and deferrals
26.3 In CP16/43 we consulted on consequential changes to enable us to process RIE
applications for waivers and deferrals using the same process proposed for MTFs and OTFs.
26.4 All respondents agreed with our proposal.
Our response on transparency waivers and deferrals Given the positive feedback from respondents on our approach we have decided to keep our proposals for RIE transparency waivers and deferrals.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II Changes to tied agents
26.5 On CP16/43 we consulted on consequential changes to SUP 12 to enable us to
implement the tied agent regime.
26.6 The majority of respondents agreed with our proposal, one was concerned about
other member states readiness and ability to implement on time. Our response on tied agents Given the positive feedback from respondents on our approach we have decided to keep our proposals for tied agents. Consequential changes in CP17/8 Reporting commodity derivative and emission allowance positions
26.7 In CP16/43 we consulted on guidance concerning the use of third party
interconnection with transaction reporting by investment firms and trading venues. In CP 17/8 we proposed guidance on related issues in SUP 17A (see Chapter 22) and in MAR 10 respectively.
26.8 In respect of MAR 10, one respondent commented on the cost of connection to the
FCA reporting platform and how the substantial proposed cost of submitting such reports may act as a disincentive for firms who seek to undertake commodity trading.
26.9 The FCA consulted on the £10,000 connectivity fee in CP 16/19. In this consultation
we clarified that the fee is intended to recover the costs associated with establishing connectivity with the MDP for secure file transfer, compatibility of systems, testing of data conformance and related matters.
26.10 In PS 17/5 we disclosed the responses to this consultation on fees. We did not receive
any specific objections to the pricing structure.
Our response on reporting financial instrument reference data We will implement our proposals as consulted, and we will include guidance in MAR 10 of our Handbook to clarify that there are a number of options available for persons that do not wish to undertake their own reporting.

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Markets in Financial Instruments Directive II Implementation – Policy Statement II
Annex 1
Abbreviations used in this document
AIF Alternative Investment Fund
AIFM Alternative Investment Fund Manager APF Authorised professional firm ARM Approved Reporting Mechanism
Article 3 firms Under Article 3 of MiFID II, Member States can exempt from authorisation
as MiFID investment firms, firms (Article 3 firms providing investment advice and/or receiving and transmitting orders) that:
• do not hold client funds or securities
• only receive and transmit client orders in relation to transferable
securities and collective investment schemes (CIS) units and/or provide related investment advice, and only be allowed to transmit such orders to identified firms or funds
• do not do business outside of their home Member State
BoE Bank of England
CA Competent Authority
CASS Client Assets Sourcebook
CBA Cost benefit analysis
CCP Central Counterparty Clearing House
CIS Collective Investment Scheme
COBS Conduct of Business Sourcebook the Commission European Commission CRD Capital Requirements Directive CSA Commission Sharing Agreement CP Consultation Paper CPM Collective Portfolio Management

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Markets in Financial Instruments Directive II Implementation – Policy Statement II CSA Commission Sharing Agreement CSD Central Securities Depositary DEA Direct Electronic Access DEPP Decision Procedure and Penalties Manual DIM Discretionary Investment Manager DP Discussion Paper DRS Data Reporting Service DRSP Data Reporting Services Provider EEA European Economic Area ECP Eligible Counterparty EG Enforcement Guide EMIR European Markets and Infrastructure Regulation EMP Energy Market Participant ESA European Supervisory Authority ESMA European Securities and Markets Authority EU European Union ETF Exchange Traded Fund FAMR Financial Advice Market Review FCA Financial Conduct Authority FSA Financial Services Authority (predecessor to the FCA) FSMA Financial Services and Markets Act 2000 FX Foreign Exchange GEN General Provisions – FCA Handbook IDD Insurance Distribution Directive IFPRU Prudential sourcebook for Investment Firms

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Markets in Financial Instruments Directive II Implementation – Policy Statement II ITS Implementing Technical Standard IPM Individual Portfolio Management KID PRIIPs Key Information Document MAR Market Conduct Sourcebook MDP Market Data Processor MiFID Markets in Financial Instruments Directive MiFID II Markets in Financial Instruments Directive II (includes MiFIR, where the context indicates) MiFIR Markets in Financial Instruments Regulation MTF Multilateral Trading Facility NCA National Competent Authority NDA Non-disclosure agreement NURS Non-UCITS Retail Scheme OMP Oil Market Participant OTC Over–the-Counter OTF Organised Trading Facility Parliament European Parliament PERG Perimeter Guidance PRA Prudential Regulation Authority PRIIPs Packaged Retail and Insurance-based Investment Products PRIN Principles for Businesses Sourcebook PROF The Professional Firms sourcebook QMMF Qualifying Money Market Fund RAO Regulated Activities Order RDR Retail Distribution Review REC Recognised Investment Exchange Sourcebook

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Annex 1
Financial Conduct Authority
Markets in Financial Instruments Directive II Implementation – Policy Statement II RFA Retail Financial Adviser RIE Recognised Investment Exchange RIP Retail Investment Product RM Regulated Market RPA Research Payment Account RPPD Responsibilities of Providers and Distributors for the Fair Treatment of Customers RTS Regulatory Technical Standard SI Systematic Internaliser SME Small and Medium-sized Enterprise SUP Supervision Manual SYSC Senior Management Arrangements, Systems and Controls – FCA Handbook TC Training and Competence – FCA Handbook the Treasury Her Majesty’s Treasury UCITS Undertakings for collective investment in transferable securities We have developed the policy in this Policy Statement in the context of the existing UK and EU regulatory framework. The Government has made clear that it will continue to implement and apply EU law until the UK has left the EU. We will keep the proposals under review to assess whether any amendments may be required in the event of changes in the UK regulatory framework in the future. All our publications are available to download from www.fca.org.uk. If you would like to receive this paper in an alternative format, please call 020 7066 9644 or email: publications_graphics@fca.org.uk or write to: Editorial and Digital team, Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS

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PS17/14
Appendix 1
Financial Conduct Authority
Markets in Financial Instruments Directive II Implementation – Policy Statement II
Appendix 1
Handbook text

Appendix
Legal instruments
This appendix comprises four instruments:

Glossary (MiFID 2) Instrument 2017
MiFID 2 Fees (Data Reporting Applications) Instrument 2017
Markets and Organisational Requirements (MiFID 2) Instrument 2017
Conduct, Perimeter Guidance and Miscellaneous Provisions (MiFID 2) Instrument
2017
These instruments have been made in this order. The instruments come into force on the date(s) specified in the coversheet of each instrument.

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GLOSSARY (MiFID 2) INSTRUMENT 2017
Powers exercised
A. The Financial Conduct Authority makes this instrument in the exercise of:
(1) the following powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):
(a) section 64A (Rules of conduct);
(b) section 69 (Statement of policy);
(c) section 73A (Part 6 Rules);
(d) section 84 (Matters which may be dealt with by prospectus rules); (e) section 89A (Transparency rules); (f) section 96 (Obligations of issuers of listed securities); (g) section 137A (The FCA’s general rules); (h) section 137B (FCA general rules: clients’ money, right to rescind etc); (i) section 137H (General rules about remuneration); (j) section 137R (Financial promotion rules); (k) section 137T (General supplementary powers); (l) section 138C (Evidential provisions); (m) section 138D (Action for damages); (n) section 138N (Temporary product intervention rules: statement of policy); (o) section 139A (Power of the FCA to give guidance); (p) section 226 (Compulsory jurisdiction); (q) section 247 (Trust scheme rules); (r) section 248 (Scheme particulars rules); (s) section 261I (Contractual scheme rules); (t) section 261J (Contractual scheme particulars rules); (u) section 293 (Power to make notification rules in respect of recognised bodies); (v) paragraph 23 (Fees) of Part 3 (Penalties and Fees) of Schedule 1ZA (The Financial Conduct Authority); (w) paragraph 19 (Establishment) of Schedule 3 (EEA Passport Rights); (x) paragraph 20 (Services) of Schedule 3 (EEA Passport Rights); and (y) paragraph 13(1), (3) and (4) (FCA’s rules) of Schedule 17 (The Ombudsman Scheme); (2) regulation 6(1) of the Open-Ended Investment Companies Regulations 2001, (SI 2001/1228); (3) paragraph 15 (Record-keeping and reporting requirements relating to relevant complaints) of the Financial Services and Markets Act 2000 (Transitional Provisions) (Ombudsman Scheme and Complaints Scheme) Order 2001, (SI 2001/2326); (4) paragraph 9 (Record-keeping and reporting requirements relating to relevant transitional complaints) of the Financial Services and Markets Act 2000

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(Transitional Provisions) (Complaints relating to General Insurance and Mortgages) Order 2004, (SI 2004/454); (5) regulation 11 of the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001, as inserted by the Financial Services and Markets Act (Markets in Financial Instruments) Regulations 2017, (SI 2017/701); (6) the powers of direction, guidance and related provisions in or under the following provisions of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017, (SI 2017/701):
(a) regulation 16 (Position limits)
(b) regulation 17 ( Exemption for non-financial entities) (c) regulation 27 (Power to require information); (d) paragraph 7 of Schedule 1 (Guidance); and (e) paragraph 8 of Schedule 1 (Reporting requirements); (7) the powers of direction, guidance and related provisions in or under the following provisions of the Financial Services and Markets Act 2000 (Data Reporting Services) Regulations 2017, (SI 2017/699):
(a) regulation 7 (Application for authorisation); (b) regulation 8 (Application for verification of compliance); (c) regulation 11 (Cancellation of authorisation); (d) regulation 12 (Variation of authorisation); (e) regulation 20 (Guidance); (f) regulation 21 (Reporting requirements); and (g) regulation 40 (FCA: penalties, fees and exemption from liability in damages ); and (8) the other rule and guidance making powers listed in Schedule 4 (Powers exercised) to the General Provisions of the FCA’s Handbook. B. The rule-making powers referred to above are specified for the purpose of section 138G(2) (Rule-making instruments) of the Act. Commencement
C. Part 1 of this instrument comes into force on 3 July 2017.
D. Part 2 of this instrument comes into force on 3 January 2018. Amendments to the Handbook E. The Glossary of definitions is amended in accordance with the Annex to this instrument. Notes

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F. In the Annex to this instrument, the notes (indicated by “Note:”) are included for the convenience of readers but do not form part of the legislative text. Citation G. This instrument may be cited as the Glossary (MiFID 2) Instrument 2017. By order of the Board 30 June 2017

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Annex A
Amendments to the Glossary of definitions In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated.
Part 1: Comes into force on 3 July 2017
Insert the following new definitions in the appropriate alphabetical position. The text is not underlined. data reporting service (in accordance with regulation 2(1) of the DRS Regulations) the operation of an APA, an ARM or a CTP when carried out as a regular occupation or business activity. data reporting services provider a person operating one or more data reporting service. DRS Regulations the Data Reporting Services Regulations 2017 (SI 2017/699). FCA MDP onboarding application form a form for approval to connect to the FCA’s market data processor system. incoming data reporting services provider a data reporting services provider authorised or applying for authorisation under Title V of MiFID II in an EEA State, other than the UK, to provide a data reporting service in the UK. market data processor system the IT system set up and maintained by the FCA to receive data under MiFID II and MiFIR. markets data (other than transaction reports) (in relation to FEES 3) data that must be reported to the FCA under:
(a) articles 22 and 27 of MiFIR; and
(b) article 58 of MiFID II. market interface specification a document setting out the technical details required to format and submit market data to the FCA using the market data processor system. MiFI Regulations the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (SI 2017/701). MIS market interface specification. MIS confidentiality an agreement between the FCA and a party receiving information regarding the market data processor system market interface

FCA 2017/36 agreement specification.
Amend the following as shown. transaction report (1) a report of a transaction which meets the requirements of SUP 17.4.1EU.1R 17.4.1EU and SUP 17.4.2R (Information to appear in transaction reports). (2) (in relation to FEES 3) a report which meets the requirements imposed by and under article 26 of MiFIR.
Part 2: Comes into force on 3 January 2018
Insert the following new definitions in the appropriate alphabetical position. The text is not underlined. algorithmic trading trading in financial instruments which meets the following conditions:
(a) where a computer algorithm automatically determines individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission; and (b) there is limited or no human intervention; but does not include any system that is only used for the purpose of routing orders to one or more trading venues or the processing of orders involving no determination of any trading parameters or for the confirmation of orders or the post-trade processing of executed transactions. [Note: article 4(1)(39) of MiFID] APA approved publication arrangement. approved publication arrangement a person permitted under regulation 5 of the DRS Regulations to provide services to an investment firm for the investment firm to meet its obligations under articles 20 and 21 of MiFIR. ARM approved reporting mechanism. binary bet a derivative contract of a binary nature.

FCA 2017/36 branch passport notification a notification made in accordance with article 35(2) of MiFID and MiFID ITS 4A Annex VI. central competent authority (in MAR 10) in respect of a particular commodity derivative traded in significant volumes on trading venues in more than one EEA jurisdiction, the competent authority of the trading venue where the largest volume of trading in the commodity derivative takes place in the EEA. certificates (as defined in article 2(1)(27) of MiFIR), those securities which are negotiable on the capital market and which in case of a repayment of investment by the issuer are ranked above shares but below unsecured bond instruments and other similar instruments. commodity derivative those financial instruments defined in:
(a) point (44)(c) of article 4(1) of MiFID which relate to a commodity; or an underlying referred to in Section C(10) of
Annex I of MiFID; or
(b) in points (5), (6), (7) and (10) of Section C of Annex I to MiFID. [Note: article 2(1)(30) of MiFIR] consolidated tape provider a person permitted under regulation 5 of the DRS Regulations to provide the service of:
(a) collecting trade reports for financial instruments made in accordance with articles 6, 7, 10, 12, 13, 20 and 21 of MiFIR from regulated markets, MTFs, OTFs and APAs; and (b) consolidating them into a continuous electronic live data stream providing price and volume data per financial instrument. CSDR Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the EU and on central securities depositories and amending the Settlement Finality Directive, MiFID and the short selling regulation. CTP consolidated tape provider. DEA direct electronic access. direct electronic access an arrangement where a member or participant or client of a trading venue permits a person to use its trading code so the person can electronically transmit orders relating to a financial instrument directly to the trading venue and includes arrangements which involve the use by a person of the infrastructure of the member or participant or client, or any connecting system provided by the member or participant or client, to transmit the orders (direct market access) and arrangements where such an infrastructure is not used by a person (sponsored access).

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[Note: article 4(1)(41) of MiFID] distribute offering, recommending or selling an investment or providing an investment service to a client. [Note: recital 15 to the MiFID Delegated Directive] distributor a firm which offers, recommends or sells investments or provides investment services to clients. [Note: recital 15 to the MiFID Delegated Directive] economically equivalent OTC contract (1) in respect of a commodity derivative traded on a trading venue, an OTC derivative which has identical contractual specifications and terms and conditions, excluding the following, to those of that commodity derivative:
(a) different lot size specifications;
(b) delivery dates diverging by less than one calendar day; and (c) different post-trade risk management arrangements; and (2) in respect of an emission allowance traded on a trading venue, a contract which has identical contractual specifications and terms and conditions, excluding the following, to those of that emission allowance:
(a) different lot size specifications;
(b) delivery dates diverging by less than one calendar day; and (c) different post-trade risk management arrangements. [Note: article 6 of MiFID RTS 21] Emission Allowance Trading Directive Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community, and amending Council Directive 96/61/EC. end client the person or group of persons at the end of the supply chain. ETF exchange-traded fund. EU regulation a regulation made pursuant to article 288 of the Treaty. exchange-traded fund a fund of which at least one unit or share class is traded throughout the day on at least one trading venue and with at least one market maker which takes action to ensure that the price of its units or shares on the

FCA 2017/36 trading venue does not vary significantly from its net asset value and, where applicable, from its indicative net asset value. [Note: article 4(1)(46) of MiFID] investment advice the provision of personal recommendations to a client, either upon the client’s request or at the initiative of the firm, in respect of one or more transactions relating to designated investments. [Note: article 4(1)(4) of MiFID] investment services and activities passport notification a notification made in accordance with article 34(2) of MiFID and MiFID ITS 4 Annex I. manufacture creating, developing, issuing and/or designing an investment, including when advising corporate issuers on the launch of new investments. [Note: recital 15 to the MiFID Delegated Directive] manufacturer a firm which creates, develops, issues, and/or designs investments, including when advising corporate issuers on the launch of new investments. [Note: recital 15 to the MiFID Delegated Directive] market making strategy a strategy undertaken by a person where:
(a) the person is a member or participant of one or more trading venues; (b) the person’s strategy, when dealing on own account, involves posting firm, simultaneous two-way quotes of comparable size and at competitive prices relating to one or more financial instruments on a trading venue, or across different trading venues; and (c) the result provides liquidity on a regular and frequent basis to the overall market. markets data (other than transaction reports) data that must be reported to the FCA under:
(a) articles 22 and 27 of MiFIR; and
(b) article 58 of MiFID II. matched principal trading a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is never itself exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a

FCA 2017/36 previously disclosed commission, fee or charge for the transaction. [Note: article 4 (1)(38) of MiFID] member of the management body (in relation to a UK recognised body) any one of the following:
(a) its chairman or president; or
(b) its chief executive; or
(c) a member of its governing body; or
(d) a person who, alone or jointly with one or more others, is responsible under the immediate authority of a person in (a), (b) or (c) or a committee of the governing body for the conduct of any relevant function. MiFID complaint any oral or written expression of dissatisfaction, whether justified or not, from, or on behalf of, a person about the provision of, or failure to provide, a financial service or a redress determination:
(a) which alleges that the complainant has suffered (or may suffer) financial loss, material distress or material inconvenience; and (b) either:
(i) to which article 26 of the MiFID Org Regulation applies; or (ii) which concerns the equivalent business of a third country investment firm. [Note: For the application of article 26 of the MiFID Org Regulation, see articles 1(1), 1(3), 1(4), 39 and 41 of MiFID,
article 1 of the MiFID Org Regulation, DISP 1.1A.3G and DISP
1.1A.4G]
[Note: a MiFID complaint which falls within the jurisdiction of the Financial Ombudsman Service is a complaint] MiFID Delegated Directive Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing MiFID of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or nonmonetary benefits. MiFID, equivalent third country or optional exemption business business which is:
(1) MiFID business; or
(2) the equivalent business of a third country investment firm; or

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(3) MiFID optional exemption business.
MiFID ITS 2 Commission Implementing Regulation (EU) No 2017/1005 of 15 June 2017 laying down implementing technical standards with regard to the format and timing of the communication and publication of the suspension and removal of financial instruments from trading on a regulated market, an MTF or an OTF according to MiFID. MiFID ITS 3 Commission Implementing Regulation (EU) No 2017/1110 of 22 June 2017 laying down implementing technical standards with regard to the standard forms, templates and procedures for the authorisation of data reporting services providers and related notifications according to MiFID. MiFID ITS 4 Commission Implementing Regulation (EU) No 2017/1093 of 20 June laying down implementing technical standards with regard to the format of position reports by investment firms and market operators. MiFID ITS 4A Commission Implementing Regulation (EU) No [xxxx/xxx] laying down implementing technical standards with regard to standard forms, templates and procedures for the transmission of information in accordance with MiFID. MiFID ITS 5 Commission Implementing Regulation (EU) No 2017/953 of 6 June 2017 laying down implementing technical standards with regard to the format and the timing of position reports by investment firms and market operators of trading venues according to MiFID of the European Parliament and of the Council on markets in financial instruments. MiFID ITS 19 Commission Implementing Regulation (EU) 2016/824 of 25 May 2016 laying down implementing technical standards with regard to the content and format of the description of the functioning of MTFs and OTFs and the notification to ESMA according to MiFID. MiFID/MiFIR requirements any of the requirements applicable to an RIE or an applicant to become an RIE imposed by MiFIR and any directly applicable regulation made under MiFID or MiFIR. MiFID/MiFIR Systems Regulations MiFID RTS 7 to MiFID RTS 12 inclusive, MiFID RTS 25 and MiFID RTS 26. MiFID optional exemption appointed representative an appointed representative that acts under the full and unconditional responsibility of a MiFID optional exemption firm and that would be a tied agent if its principal were a MiFID investment firm. MiFID optional exemption business investment services and/or activities and, where relevant, ancillary services carried on by a MiFID optional exemption firm. MiFID optional a firm that is an exempt investment firm for the purpose of regulation

FCA 2017/36 exemption firm 8 of the MiFI Regulations.
MiFID Org
Regulation
Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing MiFID of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive. MiFID Org Regulation firm a firm to which the MiFID Org Regulation is directly applicable. MiFID RTS 1 Commission Delegated Regulation (EU) 2017/587 of 14 July 2016 supplementing MiFIR with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and the obligation for investment firms to execute transactions in certain shares on a trading venue or a systematic internaliser. MiFID RTS 2 Commission Delegated Regulation (EU) No 2017/583 of 14 July 2016 supplementing MiFIR with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives. MiFID RTS 3 Commission Delegated Regulation (EU) No 2017/577 of 13 June 2016 supplementing MiFIR with regard to regulatory technical standards on the volume cap mechanism and the provision of information for the purposes of transparency and other calculations. MiFID RTS 3A Commission Delegated Regulation (EU) No 2017/1018 of 29 June 2016 supplementing MiFID with regard to regulatory technical standards specifying information to be notified by investment firms, market operators and credit institutions. MiFID RTS 6 Commission Delegated Regulation (EU) No 2017/589 of 19 July 2016 supplementing MiFID with regard to regulatory technical standards specifying the organisational requirements of investment firms engaged in algorithmic trading. MiFID RTS 7 Commission Delegated Regulation (EU) No 2017/584 of 14 July 2016 supplementing MiFID with regard to regulatory technical standards specifying organisational requirements of trading venues. MiFID RTS 8 Commission Delegated Regulation (EU) 2017/578 of 13 June 2016 supplementing MiFID with regard to regulatory technical standards specifying the requirements on market making agreements and schemes. MiFID RTS 9 Commission Delegated Regulation (EU) No 2017/566 of 18 May 2016 supplementing MiFID with regard to regulatory technical standards on the ratio of unexecuted orders to transactions in order to prevent disorderly trading conditions.

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MiFID RTS 10 Commission Delegated Regulation (EU) 2017/573 of 6 June 2016 supplementing MiFID with regard to regulatory technical standards on requirements to ensure fair and non-discriminatory co-location and fee structures. MiFID RTS 11 Commission Delegated Regulation (EU) 2017/588 of 14 July 2016 supplementing MiFID with regard to regulatory technical standards on the tick size regime for shares, depositary receipts and exchange traded funds. MiFID RTS 12 Commission Delegated Regulation (EU) No 2017/570 of 26 May 2016 supplementing MiFID with regard to regulatory technical standards on the determination of a material market in terms of liquidity relating to notifications of a temporary halt in trading. MiFID RTS 13 Commission Delegated Regulation (EU) No 2017/571 of 2 June 2016 supplementing MiFID with regard to regulatory technical standards on the authorisation, organisational requirements and the publication of transactions for data reporting services providers. MiFID RTS 14 Commission Delegated Regulation (EU) No 2017/572 of 2 June 2016 supplementing MiFIR with regard to regulatory technical standards on the specification of the offering of pre-trade and post-trade data and the level of disaggregation. MiFID RTS 17 Commission Delegated Regulation (EU) No 2017/568 of 24 May 2016 supplementing MiFID with regard to regulatory technical standards for the admission of financial instruments to trading on regulated markets. MiFID RTS 18 Commission Delegated Regulation (EU) No 2017/569 of 24 May 2016 supplementing MiFID with regard to regulatory technical standards for the suspension and removal of financial instruments from trading. MiFID RTS 21 Commission Delegated Regulation (EU) No 2017/591 of 1 December 2016 supplementing MiFID with regard to regulatory technical standards for the application of position limits to commodity derivatives. MiFID RTS 22 Commission Delegated Regulation (EU) 2017/590 of 28 July 2016 supplementing MiFIR with regard to regulatory technical standards for the reporting of transactions to competent authorities. MiFID RTS 23 Commission Delegated Regulation (EU) No 2017/585 of 14 July 2016 supplementing MiFIR with regard to regulatory technical standards for the data standards and formats for financial instrument reference data and technical measures in relation to arrangements to be made by the European Securities and Markets Authority and competent authorities. MiFID RTS 25 Commission Delegated Regulation (EU) 2017/574 of 7 June 2016 supplementing MiFID with regard to regulatory technical standards for the level of accuracy of business clocks.

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MiFID RTS 26 Commission Delegated Regulation (EU) 2017/582 of 29 June 2016 supplementing MiFIR with regard to regulatory technical standards specifying the obligation to clear derivatives traded on regulated markets and timing of acceptance for clearing. MiFID RTS 27 Commission Delegated Regulation (EU) 2017/575 of 8 June 2016 supplementing MiFID with regard to regulatory technical standards for the data to be published by execution venues on the quality of execution of transactions. MiFID RTS 28 Commission Delegated Regulation (EU) 2017/576 of 8 June 2016 supplementing MiFID with regard to regulatory technical standards for the annual publication by investment firms of information on the identity of execution venues and on the quality of execution. MiFIR Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012. MiFIR Delegated Regulation Commission Delegated Regulation (EU) 2017/567 of 18 May 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions. market interface specification a document setting out the technical details required to format and submit market data to the FCA using the market data processor system. multilateral system any system or facility in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system. [Note: article 4(1)(19) of MiFID] non-financial entity a natural or legal person other than:
(a) an investment firm authorised in accordance with MIFID; (b) a CRD credit institution; (c) an insurance undertaking authorised in accordance with Directive 73/239/EEC; (d) an assurance undertaking authorised in accordance with Directive 2002/83/EC of the European Parliament and of the Council; (e) a reinsurance undertaking authorised in accordance with Directive 2005/68/EC of the European Parliament and of the Council;

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(f) a UCITS and, where relevant, its management company, authorised in accordance with the UCITS Directive; (g) an institution for occupational retirement provision within the meaning of article 6(a) of Directive 2003/41/EC of the European Parliament and of the Council; (h) an alternative investment fund managed by AIFMs authorised or registered in accordance with the AIFMD; (i) a CCP authorised in accordance with EMIR; and (j) a central securities depositary authorised in accordance with CDSR. [Note: article 2 of MiFID RTS 21] reportable financial instrument in SUP 17A, those financial instruments in article 26(2) of MiFIR, namely:
(a) financial instruments which are admitted to trading or are traded on a trading venue for which a request for admission to trading has been made; (b) financial instruments where the underlying is a financial instrument traded on a trading venue; and (c) financial instruments where the underlying is an index or a basket composed of financial instruments traded on a trading venue. research research material or services:
(1) concerning one or several financial instruments or other assets; or (2) concerning the issuers or potential issuers of financial instruments; or (3) closely related to a specific industry or market such that it informs views on financial instruments, assets or issuers within that sector, and which explicitly or implicitly recommends or suggests an investment strategy and provides a substantiated opinion as to the present or future value or price of such instruments or assets, or otherwise contains analysis and original insights and reaches conclusions based on new or existing information that could be used to inform an investment strategy or be capable of adding value to a firm’s decisions on behalf of clients. [Note: recital 28 to the MiFID Delegated Directive] Securities Regulation (EU) 2015/2365 of the European Parliament and of the

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Financing
Transactions
Regulation
Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012. SME growth market a multilateral trading facility that is registered as an SME growth market in accordance with article 33 of MiFID. [Note: article 4(1)(12) of MiFID] sovereign debt a debt instrument issued by a sovereign issuer. [Note: article 4 (1)(61) of MiFID] structured deposit appointed representative an appointed representative that is a party to a contract with a MiFID investment firm that permits or requires it to carry on only the business of selling, or advising clients in relation to, structured deposits in accordance with the Appointed Representatives Regulations. structured deposits regulated activities any of the following activities, specified in Part II of the Regulated Activities Order (Specified Activities), which is carried on by way of business in relation to structured deposits:
(a) dealing in investments as agent;
(b) arranging (bringing about) deals in investments; (c) making arrangements with a view to transactions in investments; (d) managing investments; and (e) advising on investments (except P2P agreements). structured finance products (as defined in article 2(1)(28) of MiFIR) those securities created to securitise and transfer credit risk associated with a pool of financial assets entitling the security holder to receive regular payments that depend on the cash flow from the underlying assets. [Note: article 4(1)(48) of MiFID] temporary product intervention rule a rule made under sections 137D and 138M of the Act. third country firm (in SYSC) either:
(a) a third country investment firm; or
(b) the UK branch of a non-EEA bank. tied agent passport notification a notification made in accordance with article 35(2) of MiFID and MiFID ITS 4 Annex VII. title transfer (1) (in CASS 6) an arrangement by which a client transfers full

FCA 2017/36 collateral arrangement ownership of a safe custody asset (or an asset which would be a safe custody asset but for the arrangement) to a firm for the purpose of securing or otherwise covering present or future, actual, contingent or prospective obligations. (2) (in CASS 7) an arrangement by which a client transfers full ownership of money to a firm for the purpose of securing or otherwise covering present or future, actual, contingent or prospective obligations. [Note: recital 52 to MiFID] TTCA a title transfer collateral arrangement. Amend the following as shown. advising on investments (except P2P agreements) the regulated activity, specified in article 53(1) of the Regulated Activities Order (Advising on investments), which is in summary:
advising a person if the advice is:
…
(2) advice on the merits of their doing any of the following (whether as principal or agent):
(a) buying, selling, subscribing for or underwriting a particular investment which is a security, structured deposit or relevant investment (that is, any designated investment (other than a P2P agreement), funeral plan contract, pure protection contract, general insurance contract or, right to or interests in a funeral plan contract or structured deposit); or … ancillary service (1) (except in CONC) any of the services listed in Section B of
Annex I to MiFID, that is:
(a) safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management but excluding maintaining securities accounts at the top tier level, (‘central maintenance service’) referred to in point 2 of
Section A of the Annex to CSDR;
… approved reporting a trade-matching or reporting system approved by the FCA in accordance with Section 412A of the Act a person permitted under

FCA 2017/36 mechanism regulation 5 of the DRS Regulations to provide services to an investment firm in order for it to meet its obligations under article 26 of MiFIR. arranging (bringing about) deals in investments the regulated activity, specified in article 25(1) of the Regulated Activities Order, which is in summary: making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment which is:
…
(e) rights to or interests in investments in (b), (c) or (d) ; or (f) a structured deposit. auction regulation bidding the regulated activity of bidding in emissions auctions where it is carried on by :
(a) a firm that is exempt from MiFID under article 2(1)(i); or (j) (b) a MiFID investment firm (other than a UCITS investment firm) on behalf of its clients in relation to a two-day emissions spot . branch … (b) (in relation to an investment firm):
(i) a place of business other than the head office which is a
part of an investment firm, which has no legal personality
and which provides investment services and/or activities and which may also perform ancillary services for which the firm has been authorized authorised; (ii) all the places of business set up in the same EEA State by an investment firm with headquarters in another EEA State are regarded as a single branch; [Note: article 4(1)(26) 4(1)(30) of MiFID] CAD investment firm a firm that is subject to the requirements imposed by MiFID (or which would be subject to that Directive if its head office were in an EEA State) but excluding a bank, a building society, a credit institution, a local firm and an exempt CAD firm that meets the following conditions:
… close links (1) (in relation to MiFID business or in FUND) a situation in which two or more persons are linked by:
(a) participation which means the in the form of ownership, direct or by way of control, of 20% or more of the voting rights or capital of an undertaking;

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(b) control which means the relationship between a parent undertaking and a subsidiary, in all the cases referred to in
Article 1 article 22(1) and (2) of Directive 83/349/EEC the
Accounting Directive, or a similar relationship between any person and an undertaking, any subsidiary undertaking of a subsidiary undertaking also being considered to be a subsidiary of the parent undertaking which is at the head of those undertakings. (c) a permanent link of both or all of them to the same person by a control relationship. A situation in which two or more persons are permanently linked to one and the same person by a control relationship is also to be regarded as constituting a close link between such persons. [Note: article 4(1)(31) (35) of MIFID MiFID and article 4(1)(e) of AIFMD] … commodity (1) (except for (2) and (3)) a physical asset (other than a financial instrument or cash) which is capable of delivery. (2) (for the purpose of calculating position risk requirements) any of the following (but excluding gold):
(a) a commodity within the meaning of paragraph (1); and (b) any:
(i) physical or energy product; or
(ii) of the items referred to in paragraph 10 of Section C of Annex 1 of the MiFID as an underlying with respect to the derivatives mentioned in that paragraph; which is, or can be, traded on a secondary market. (3) (in relation to the MiFID Regulation, including the definitions of a financial instrument and an ancillary service) (in relation to MiFID or MiFIR) any goods of a fungible nature that are capable of being delivered, including metals and their ores and alloys, agricultural products, and energy such as electricity, not including services or other items that are not goods, such as currencies or rights in real estate, or that are entirely intangible. [Note: article 2(1) of the MiFID Org Regulation article 2(6) of the MiFID Org Regulation]

FCA 2017/36 common platform firm
…
(c) a UK MiFID investment firm which falls within the definition of ‘local firm’ in Article 3.1P of the Capital Adequacy Directive
article 4(1)(4) of the EU CRR; or
… common platform organisational requirements (1) SYSC 4 to SYSC 9; and (2) those articles of the MiFID Org Regulation as applied in accordance with SYSC 1 Annex 1 2.8AR, SYSC 1 Annex 1 3.2- AR, SYSC 1 Annex 1 3.2-BR, SYSC 1 Annex 1 3.2CR and SYSC 1 Annex 1 3.3R. common platform record-keeping requirements the record-keeping requirements applicable to common platform firms set out in (in relation to common platform firms) the following:
(1) SYSC 9; and
(2) those articles of the MiFID Org Regulation as applied in accordance with SYSC 1 Annex 1 2.8AR, SYSC 1 Annex 1 3.2- AR, SYSC 1 Annex 1 3.2-BR, SYSC 1 Annex 1 3.2CR and SYSC 1 Annex 1 3.3R. common platform requirements (1) SYSC 4 to SYSC 10; and (2) those articles of the MiFID Org Regulation as applied in accordance with SYSC 1 Annex 1 2.8AR, SYSC 1 Annex 1 3.2- AR, SYSC 1 Annex 1 3.2-BR, SYSC 1 Annex 1 3.2CR and SYSC 1 Annex 1 3.3R. competent authority … (4) the authority, designated by each EEA State in accordance with
Article 48 article 67 of MiFID, unless otherwise specified in
MiFID.
[Note: article 4(1)(22) article 4(1)(26) of MiFID] … [Note: This definition is based on the definition contained in the CRD (Consequential Amendments) Instrument 2006 which was consulted on in the consultation paper Strengthening Capital Standards 2 (CP 06/3)] competent employees rule (a) for an insurer, a managing agent and the Society, SYSC 3.1.6R; (b) for a common platform firm, SYSC 5.1.1R article 21(1)(d) of the MiFID Org Regulation that applies in accordance with SYSC 1
Annex 1 2.8R and SYSC 1 Annex 1 2.8AR;

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(ba) for a MiFID optional exemption firm and a third country firm,
article 21(1)(d) of the MiFID Org Regulation that applies in
accordance with SYSC 1 Annex 1 2.8R, SYSC 1 Annex 1 2.8AR and SYSC 1 Annex 1 3.2CR; and (c) for every other firm, SYSC 5.1.1R (where it applies). complaint … (2) (in SUP 10 and DISP, except DISP 1.1 and the complaints handling rules and the complaints record rule in relation to MiFID business (in relation to collective portfolio management) in the consumer awareness rules, the complaints handling rules and the complaints record rule, and in CREDS 9) any oral or written expression of dissatisfaction, whether justified or not, from, or on behalf of, a person about the provision of, or failure to provide, a financial service or a redress determination, which:
…
(3) (in DISP 1.1, the complaints awareness rules only and (in relation to collective portfolio management) and in the consumer awareness rules, the complaints handling rules and the complaints record rule only in relation to MiFID business and collective portfolio management) any oral or written expression of dissatisfaction, whether justified or not, from, or on behalf of, a person about the provision of, or failure to provide, a financial service or a redress determination, which alleges that the complainant has suffered (or may suffer) financial loss, material distress or material inconvenience. conflicts of interest policy (1) (except in MAR 8) the policy established and maintained in accordance with SYSC 10.1.10R; and (2) (in MAR 8) the policy established and maintained in accordance with MAR 8.2.8G which:
(a) identifies circumstances that constitute, or may give rise to, a conflict of interest arising from benchmark submissions and the process of gathering information in order to make benchmark submissions,; and (b) sets out the process to manage such conflicts. control (1) (except in (2) and (2A)) (in relation to the acquisition, increase or reduction of control of a firm) the relationship between a person and the firm or other undertaking of which the person is a controller. (2) (in SYSC 8 and SYSC 10) control as defined in Article 1 of the Seventh Council Directive 83/349/EEC (The Seventh Company

FCA 2017/36
Law Directive) :
(a) the relationship between a parent undertaking and a subsidiary, in all cases referred to in articles 22(1) and (2) of the Accounting Directive; or (b) a similar relationship between any natural or legal person and an undertaking. [Note: article 4 (1)(30) 4(1)(35)(b) of MiFID] … controller … (4) shares and voting power that a person holds in a firm (“B”) or in a parent undertaking of B (“P”) are disregarded for the purposes of determining control in the following circumstances:
…
(c) shares representing no more than 5% of the total voting power in B or P held by an investment firm, provided that:
(i) it holds the shares in the capacity of a market maker (as defined in article 4.1(8) of MIFID
article 4(1)(7) of MiFID);
(ii) it is authorised by its Home State regulator under MIFID MiFID; and … … (e) shares held by a credit institution or an investment firm are disregarded, provided that:
(i) the shares are held as a result of performing the investment services and activities of:
…
(B) placing shares on a firm commitment basis in accordance with Annex I, section A.6 of MIFID MiFID; and … consumer …

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(7) (in the definitions of cross-border dispute, domestic dispute, sales contract and service contract, and in DISP 1.1A.42R, DISP 2.7.3R and DISP 2.7.9AR) has the meaning in regulation 3 of the ADR Regulations, which is an individual acting for purposes which are wholly or mainly outside that individual’s trade, business, craft, or profession. [Note: article 4(1) of the ADR Directive] … customer (A) … (B) in the FCA Handbook:
(1) (except in relation to ICOBS, a credit-related regulated activity, MCOB 3A, an MCD credit agreement and , CASS 5 and PRIN in relation to MiFID or equivalent third country business) a client who is not an eligible counterparty for the relevant purposes. … (6) (for the purposes of PRIN in relation to MiFID or equivalent third county business) has the meaning given in COBS 3.2. dealing in investments as agent the regulated activity, specified in article 21 of the Regulated Activities Order (Dealing in investments as agent), which is in summary: buying, selling, subscribing for or underwriting designated investments (other than P2P agreements), pure protection contracts or, general insurance contracts or structured deposits as agent. derivative (1) (other than in REC, MAR 5 and MAR 5A) a contract for differences, a future or an option (see also securitised derivative). (2) (in REC, MAR 5 and MAR 5A) has the meaning in article 2(1)(29) of MiFIR. designated investment (1) a security or a contractually-based investment contractually based investment (other than a funeral plan contract and a right to or interest in a funeral plan contract), that is, any of the following investments, specified in Part III of the Regulated Activities Order (Specified Investments):
…
(ha) …
(hb) emissions auction product (article 82A) where it is a financial instrument;

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(hc) emission allowance (article 82B);
…
… designated investment business any of the following activities, specified in Part II of the Regulated Activities Order (Specified Activities), which is carried on by way of business:
…
(da) …
(daa) operating an organised trading facility (article 25DA); … distribution channels a channel through which information is, or is likely to become, publicly available. Information which is “likely to become publicly available” means information to which a large number of persons have access. [Note: article 2(1) of the MiFID implementing Directive] durable medium (a) paper; or (b) any instrument which enables the recipient to store information addressed personally to him or her in a way accessible for future reference and for a period of time adequate for the purposes of the information, and which allows the unchanged reproduction of the information stored. In particular, durable medium covers floppy disks, CD-ROMs, DVDs and hard drives of personal computers on which electronic mail is stored, but it excludes Internet internet sites, unless such sites meet the criteria specified in the first sentence of this paragraph. (in In relation to MiFID or equivalent third country business the equivalent business of a third country investment firm, MiFID optional exemption business or collective portfolio management, if the relevant rule derives from the MiFID Org Regulation or implements the MiFID implementing Directive, the UCITS Directive, the UCITS implementing Directive or the UCITS implementing Directive No 2) the instrument used must be:
(i) appropriate to the context in which the business is to be carried on; and (ii) specifically chosen by the recipient when offered the choice between that instrument and paper. For the purposes of this definition, the provision of information by means of electronic communications shall be treated as

FCA 2017/36 appropriate to the context in which the business between the firm and the client is, or is to be, carried on if there is evidence that the client has regular access to the internet. The provision by the client of an e-mail address for the purposes of the carrying on of that business is sufficient. [Note: article 2(f) of, and Recital 20 of to, the Distance Marketing Directive, article 2(12) of the Insurance Mediation Directive, articles 2(2), 3(1) and 3(3) of the MiFID implementing Directive, article 4(1)(62) of MiFID and article 3(1) of the MiFID Org Regulation, articles 75(2) and 81(1) of the UCITS Directive, article 20(3) of the UCITS implementing Directive and
article 7 of the UCITS implementing Directive No 2]
EEA registered tied agent a tied agent of a UK MiFID investment firm that is not an appointed representative and would have been is not an FCA registered tied agent but for the fact that it does business in an EEA State that permits investment firms authorised by the competent authority of that state to appoint tied agents because it is established in an EEA State other than the United Kingdom. emissions emission allowance (1) an ‘allowance’, within the meaning of article 3(a) of Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC the Emission Allowance Trading Directive; (2) (in relation to MiFID business other than in MAR 10 (Commodity derivative position limits and controls and position reporting)) the investment, specified in article 82B of the Regulated Activities Order (‘Emission Allowances’), which is in summary emission allowances:
(a) consisting of any units recognised for compliance with the Emission Allowance Trading Directive; and (b) to which article 82B of the Regulated Activities Order applies; and (3) (in MAR 10 (Commodity derivative position limits and controls and position reporting)):
(a) an allowance consisting of any units recognised for compliance with Directive 2003/87/EC (Emission Trading Scheme), as specified in paragraph (11) of Section C of
Annex I of MiFID; or
(b) any derivative of such an allowance, whether falling under paragraph (4) or (10) of Section C of Annex I of MiFID. employee …

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(2) (for the purposes of:
(a) COBS 11.7 and COBS 11.7A (Personal account dealing); … … execution of orders on behalf of clients acting to conclude agreements to buy or sell one or more financial instruments on behalf of clients including the conclusion of agreements to sell financial instruments issued by an investment firm or a credit institution at the moment of their issuance. [Note: article 4(1)(5) of MiFID] execution criteria the criteria set out in COBS 11.2.6R, that is:
…
(c) the characteristics of financial instruments that are the subject of that order; and (d) the characteristics of the execution venues to which that order can be directed.; and (e) for a management company, the objectives, investment policy and risks specific to the UCITS scheme or EEA UCITS scheme, as indicated in its prospectus or instrument constituting the fund. [deleted] execution venue for the purposes of the provisions relating to best execution in COBS 11.2, COBS 11.2A, COBS 11.2B and in COLL, execution venue means a regulated market, an MTF, an OTF, a systematic internaliser, or a market maker or other liquidity provider or an entity that performs a similar function in a third country to the functions performed by any of the foregoing. [Note: article 44(1) of the MiFID implementing Directive] exempt CAD firm (1) (except in SYSC and IPRU(INV)) a firm as defined in article 4(1)(2)(c) of the EU CRR that is authorised to provide only one or more of the following investment services:
(a) investment advice;
(b) receive and transmit orders from investors as referred to in
Section A of Annex I of MiFID).
(2) (in SYSC and IPRU(INV)) a firm in (1) whose head office (or, if it has a registered office, that office) is in the United Kingdom

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United Kingdom. final response …
(3) (in DISP) either:
(a) in relation to a MiFID complaint, a response in accordance with DISP 1.1A.29EU, DISP 1.1A.30EU and DISP 1.1A.31R; or (b) in relation to all other complaints, has the meaning given in DISP 1.6.2R(1). financial analyst … [Note: article 2(4) of the MiFID implementing Directive 2(1) of the MiFID Org Regulation] financial instrument (1) (other than in (2) and (3) and (4)) instruments specified in Section C of Annex I of MiFID, that is:
…
(d) options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances, or other derivative instruments, financial indices or financial measures which may be settled physically or in cash; (da) (in relation to derivative contracts relating to a currency) has the meaning in article 10 of the MiFID Org Regulation) (in summary):
(i) an instrument which is not a contract within the meaning of paragraph 2 of that article; or (ii) a means of payment as described in paragraph 1(b) of that article; (e) options, futures, swaps, forward rate agreements forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise other than by reason of a default or other termination event); (f) options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or , an MTF, or an OTF, except for wholesale energy products (having regard to article 6 of the MiFID Org Regulation) traded on an OTF that must be physically settled where the conditions of article 5 of the MiFID Org

FCA 2017/36
Regulation are met;
(g) options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in (f) and :
(i) not being for commercial purposes , having regard to article 7(4) of the MiFID Org Regulation; (ii) which have the characteristics of other derivative financial instruments , having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls (see articles 38(1), (2) and (4) of the MiFID Regulation) having regard to article 7(1) of the MiFID Org Regulation; and (iii) not being spot contracts having regard to articles 7 (1) and (2) of the MiFID Org Regulation; … (j) options, futures, swaps, forward rate agreements and any other derivative contracts relating to:
…
(xii) a derivative contract to which article 8 of the MiFID Org Regulation applies; where the conditions in Articles 38 articles 7(3) and (4) of the MiFID Regulation MiFID Org Regulation are met . ; [Note: article 4(1)(17) 4(1)(15) and section C of Annex I to MiFID and articles 38 and 39 of the MiFID Regulation articles 7 and 8 of the MiFID Org Regulation] (k) emission allowances consisting of any units recognised for compliance with the Emission Allowance Trading Directive; … (4) (for a UCITS custodial asset) an instrument specified in Section C of Annex I to MiFID II. financial promotion (1) … (2) (in relation to COBS 3.2.1R(3), and COBS 4.3.1R, COBS 4.5.8R and COBS 4.7.1R) (in addition to (1)) a marketing communication

FCA 2017/36 within the meaning of MiFID made by a firm in connection with its MiFID or equivalent third country business MiFID, equivalent third country or optional exemption business. (3) … firm … (8) (in SYSC 18 with the exception of the guidance guidance in SYSC 18.3.9G):
…
(9) (in FEES 4) includes a recognised investment exchange and a data reporting services provider (other than an incoming data reporting services provider) in accordance with FEES 4.1.1AR. Home State … (2) (in relation to an investment firm):
…
[Note: article 4(1)(20) 4(1)(55)(a) of MiFID] … (16) (for a data reporting services provider):
(a) the EEA State in which its head office is situated, for a natural person; (b) the EEA State in which its registered office is situated, for a legal person; (c) if the data reporting services provider has, under its national law, no registered office, the EEA State in which its head office is situated. [Note: article 4(1)(55)(c) of MiFID] Home State regulator … (4) (in REC) the competent authority (within the meaning of Article (4)(1)(22) article 4(1)(26) of MiFID) of the EEA State which is the Home State in relation to the EEA market operator concerned. … (6) (for a data reporting services provider) the competent authority (within the meaning of article 4(1)(26) of MiFID) of the EEA State

FCA 2017/36 which is the Home State for that data reporting services provider. Host State … (3) (in relation to MiFID investment firms) the EEA State, other than the Home State, in which an investment firm has a branch or performs provides investment services and/or activities, or the EEA State in which a regulated market provides appropriate arrangements so as to facilitate access to trading on its system by remote members or participants established in that same EEA State. [Note: article 4(1)(21) (56) of MiFID] … IFPRU 125K firm has the meaning in IFPRU 1.1.9R (Types of investment firm: IFPRU 125K firm), which in summary is an IFPRU investment firm that satisfies the following conditions:
…
(e) it does not operate a multilateral trading facility or an organised trading facility. IFPRU 50K firm has the meaning in IFPRU 1.1.10R (Types of investment firm: IFPRU 50K firm) which in summary is an IFPRU investment firm that satisfies the following conditions:
…
(d) it does not operate a multilateral trading facility or an organised trading facility. incoming data reporting services provider a data reporting services provider authorised or applying for authorisation under Title V of MiFID II in an EEA State, other than the UK, to provide a data reporting service in the UK. independent advice a personal recommendation to a retail client in relation to a retail investment product client where the personal recommendation provided meets the requirements of the rule on independent advice (COBS 6.2A.3R 6.2B.11R). investment firm (1) any person person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis. [Note: article 4(1)(1) of MiFID] … investment research research or other information recommending or suggesting an investment

FCA 2017/36 strategy, explicitly or implicitly, concerning one or several financial instruments or the issuers of financial instruments, including any opinion as to the present or future value or price of such instruments, intended for distribution channels or for the public, and in relation to which the following conditions are met:
(a) it is labelled or described as investment research or in similar terms, or is otherwise presented as an objective or independent explanation of the matters contained in the recommendation; (b) if the recommendation in question were to be made by an investment firm to a client, it would not constitute the provision of a personal recommendation. has the meaning in article 36(1) of the MiFID Org Regulation. [Note: article 24(1) 36(1) of the MiFID implementing Directive Org Regulation] investment service any of the following involving the provision of a service in relation to a financial instrument:
…
(h) operation of multilateral trading facilities an MTF; and (i) operation of an OTF. … investment services and/or activities any of the services and activities listed in Section A of Annex I to MiFID relating to any financial instrument, that is:
…
(h) operation of multilateral trading facilities; and (i) operation of an OTF. … investment services or activities any of the services and activities listed in Section A of Annex I to MiFID relating to any financial instrument, that is:
…
(h) operation of multilateral trading facilities an MTF; and (i) operation of an OTF. … issuer …

FCA 2017/36
[Note: article 2(2) of the MiFID Regulation] … limit order an order to buy or sell a financial instrument at its specified price limit or better and for a specified size. [Note: article 4(1)(16) 4(1)(14) of MiFID] local firm a firm which falls within the definition of “local firm” in Article 3.1P of CAD, that is a firm dealing for its own account on markets in financial futures or options or other derivatives and on cash markets for the sole purpose of hedging positions on derivatives markets, or dealing for the accounts of other members of those markets and being guaranteed by clearing members of the same markets, where responsibility for ensuring the performance of contracts entered into by such a firm is assumed by clearing members of the same markets has the meaning in article 4(1)(4) of the EU CRR. making arrangements with a view to transactions in investments the regulated activity, specified in article 25(2) of the Regulated Activities Order (Arranging deals in investments), which is in summary:
making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting any of the following investments (whether as principal or agent):
…
(g) general insurance contract; or
(h) a structured deposit. management body (1) (other than in (2)) (in accordance with article 3(7) of CRD and
article 4.1(36) of MiFID) the governing body and senior personnel
of a CRR firm who are empowered to set the firm’s person’s strategy, objectives and overall direction, and which oversee and monitor management decision-making in the following:
(a) a common platform firm (in relation to the requirements imposed by or under MiFID or MiFIR); or (b) a recognised investment exchange; or (c) a data reporting services provider. … managing investments the regulated activity specified in article 37 of the Regulated Activities Order (Managing investments), which is in summary: managing assets belonging to another person in circumstances which involve the exercise of discretion, if:

FCA 2017/36
(a) the assets consist of or include any security, structured deposit or contractually based investment (that is, any designated investment (other than a P2P agreement), funeral plan contract, structured deposit or right to or interest in a funeral plan contract); or … market data processor system the IT system set up and maintained by the FCA to receive data under MiFID II and MiFIR. market maker … [Note: article 4(1)(8) 4(1)(7) of MiFID] … market operator a person who manages and/or operates the business of a regulated market. The market operator and who may be the regulated market itself. [Note: article 4(1)(13) (4)(1)(18) of MiFID] material interest (in COBS) (in relation to a transaction) any interest of a material nature, other than :
(a) disclosable commission on the transaction ; (b) goods or services which can reasonably be expected to assist in carrying on designated investment business with or for clients and which are provided or to be provided in compliance with COBS 11.6.3R. MiFID The European Parliament and Council Directive on markets in financial instruments (No. 2004/39/EC). See also MiFID Regulation and MIFID implementing Directive Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending the Insurance Mediation Directive and AIFMD. MiFID client money (minimum implementing) rules CASS 7.11.1R, CASS 7.11.4AR, CASS 7.12.1R, CASS 7.12.2R, CASS 7.13.3R, CASS 7.13.8R, CASS 7.13.10R, CASS 7.13.12R, CASS 7.13.20R, CASS 7.13.21R, CASS 7.13.21AR, CASS 7.13.21CR, CASS 7.13.22R, CASS 7.13.26R, CASS 7.13.28R, CASS 7.15.2R, CASS 7.15.3R, CASS 7.15.20R. MiFID investment firm (1) (in summary) (except in SUP 13, SUP 13A and SUP 14 in relation to notification of passported activity) a firm to which MiFID applies including, for some purposes only, a credit institution and collective portfolio management investment firm. (2) (in full) a firm (except in SUP 13, SUP 13A and SUP 14 in relation to notification of passported activity) which is:

FCA 2017/36
(1)
(a) an investment firm with its head office in the EEA (or, if it has a registered office, that office); (2) (b) a CRD credit institution (only when providing an investment service or activity or when selling, or advising clients in relation to, structured deposits in relation to for the purposes of:
(i) the rules implementing the Articles articles referred to in article 1(2) article 1(3) and article 1(4) of MiFID ; (ii) the requirements imposed upon it by and under MiFIR; and (iii) the requirements imposed upon it by EU regulations made under MiFID); (3) (c) a collective portfolio management investment firm (only when providing the services referred to in article 6(4) AIFMD or Article article 6(3) of the UCITS Directive in relation to the rules implementing the articles of MiFID referred to in article 6(6) of AIFMD or article 6(4) of the UCITS Directive and for a full-scope UK AIFM or the rules implementing article 12(2)(b) of AIFMD); unless, and to the extent that, MiFID does not apply to it as a result of Article article 2 (Exemptions) or Article article 3 (Optional exemptions) of MiFID. (3) (in SUP 13, SUP 13A and SUP 14 in relation to notification of passported activity) an investment firm with its head office in the EEA (or, if it has a registered office, that office) unless, and to the extent that, MiFID does not apply to it as a result of article 2 (Exemptions) or article 3 (Optional exemptions) of MiFID. money-market instrument … (2) those classes of financial instruments which are normally dealt in on the money market, such as treasury bills, certificates of deposit and commercial papers and excluding instruments of payment. [Note: article 4(1)(19) (17) of MiFID and article 11 of the MiFID Org Regulation] multilateral trading facility a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments – in the system and in accordance with non-discretionary rules – in a way that results in a contract in accordance with the provisions of Title II of MiFID.

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(in accordance with article 3(1) of the Regulated Activities Order):
(a) a multilateral trading facility (within the meaning of article 4(1)(22) of MiFID) operated by an investment firm, a credit institution or a market operator; or (b) a facility which:
(i) is operated by an investment firm, a credit institution or a market operator which does not have a Home State; and (ii) if its operator had a Home State, would be a multilateral trading facility within the meaning of article 4(1)(22) of MiFID. [Note: article 4(1)(15) 4(1)(22) of MiFID] non-independent research an investment recommendation which:
(a) relates to financial instruments (as specified in Section C of Annex 1 of MiFID, whether or not they are admitted to trading on a regulated market); and (b) does not constitute investment research. an investment recommendation that does not meet the conditions set out in article 36(1) of the MiFID Org Regulation. [Note: article 24(2) 36(1) of the MiFID implementing Directive MiFID Org Regulation] operating a multilateral trading facility … In this definition “MiFID instrument” means any investment:
(a) of the kind specified by articles 76, 77, 78, 79, 80, 81, 82B, 83, 84 or 85 of the Regulated Activities Order; or (b) of the kind specified by article 89 of the Regulated Activities Order, so far as relevant to an investment falling within (a),; that is a financial instrument. operating an organised trading facility (in relation to FEES 3), the regulated activity in article 25DA of the Regulated Activities Order, which is in summary, the operation of an organised trading facility on which non-equity MiFID instruments are traded. In this definition “non-equity MiFID instrument” means any investment:
(a) of the kind specified by articles 77, 77A, 78, 79, 80, 81, 82B, 83, 84 or 85; or

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(b) of the kind specified by article 89 of the Regulated Activities Order, so far as relevant to an investment falling within (a); that is a bond, a structured finance product (within the meaning of
article 2(1)(28) of MiFIR), an emissions emission allowance, or a
derivative (within the meaning of article 2(1)(29) of MiFIR). option the investment, specified in article 83 of the Regulated Activities Order (Options), which is in summary an option to acquire or dispose of:
… organised trading facility
(in relation to FEES 3), (in accordance with article 3(1) of the Regulated Activities Order):
(a) an organised trading facility (within the meaning of article 4(1)(23) of MiFID II) operated by an investment firm, a credit institution or a market operator; or (b) a facility which:
(i) is operated by an investment firm, a credit institution or a market operator which does not have a Home State; and (ii) if its operator had a Home State, would be an organised trading facility within the meaning of article 4(1)(23) of MiFID II. [Note: article 4(1)(23) of MiFID II] OTF (in relation to FEES 3), organised trading facility. outsourcing … (2) (in SYSC 8, COBS 11.7, SYSC 3 and SYSC 13 to the extent applicable to the Solvency II firm, and the definition of relevant person) an arrangement of any form between a firm and a service provider by which that service provider performs a process, a service or an activity which would otherwise be undertaken by the firm itself. [Note: article 2(6) of the MiFID implementing Directive article 2(3) of the MiFID Org Regulation and article 13(28) of the Solvency II Directive] overseas firm (1) (in relation to MAR 5 and MAR 5A) a firm which has its registered office (or, if it has no registered office, its head office) outside the United Kingdom excluding an incoming EEA firm. …

FCA 2017/36 periodic statement a report which a firm is required to provide to a client under pursuant to:
(a) COBS 16.3 (Periodic reporting) where the firm is carrying on designated investment business other than MiFID, equivalent third country or optional exemption business; (b) article 60(1) of the MiFID Org Regulation where the firm is carrying on MiFID business; (c) GEN 2.2.22AR and COBS 16A.4.1EU where the firm is carrying on the equivalent business of a third country investment firm; (d) COBS 16A.1.2R and COBS 16A.4.1EU where the firm is carrying on optional exemption business. [Note: see COBS 16A.4.1EU where article 60(1) of the MiFID Org Regulation is reproduced] personal recommendation (1) (except in CONRED) a recommendation that is advice on investments, advice on conversion or transfer of pension benefits, or advice on a home finance transaction and is presented as suitable for the person to whom it is made, or is based on a consideration of the circumstances of that person. A recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public. For the purposes of this definition, references in the Handbook to making personal recommendations on, or in relation to, P2P agreements should be understood as referring to making personal recommendations involving advice on P2P agreements. [Note: article 52 9 of the MiFID implementing Directive MiFID Org Regulation] (2) (in CONRED) a recommendation which that is advice on investments and:
… personal transaction
…
[Note: article 2(7) and article 11 of the MiFID implementing Directive
article 16(2) of MiFID and article 28 of the MiFID Org Regulation]
portfolio management managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments. [Note: article 4(1)(9) 4(1)(8) of MiFID] professional client a client that is either a per se professional client or an elective professional client (see COBS 3.5.1R).

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[Note: article 4(1)(12) (10) of MiFID] . qualifying holding … (2) (otherwise) any a direct or indirect holding in an investment firm which represents 10% or more of the capital or of the voting rights, as set out in Article 92 articles 9 and 10 of the European Parliament and Council Directive on the admission of securities to official stock exchange listing and on information to be published on those securities (No. 2001/34/EC) Transparency Directive, taking into account the conditions regarding aggregation in article 12(4) and (5) of that Directive, or which makes it possible to exercise a significant influence over the management of the investment firm in which that holding subsists. [Note: article 4(1)(27) 4(1)(31) of MiFID] qualifying money market fund (1) (in COLL, CASS 7 and BSOCS) a collective investment scheme collective investment undertaking authorised under the UCITS Directive, or which is subject to supervision and, if applicable, authorised by an authority under the national law of an EEA State the authorising Member State, and which satisfies the following conditions:
…
(2) For the purposes of (1)(b), a money market instrument is to may be considered to be of high quality if it has been awarded the highest available credit rating by each competent rating agency which has rated that instrument. An instrument that is not rated by any competent rating agency is not to be considered to be of high quality the AIFM or UCITS management company of the collective investment undertaking performs its own documented assessment of the credit quality of money market instruments that allows it to consider a money market instrument as high quality subject to the conditions below:
(a) where one or more credit rating agencies registered and supervised by ESMA have provided a rating of the instrument, the AIFM’s or UCITS management company’s internal assessment must have regard to, inter alia, those credit ratings; and (b) while there can be no mechanistic reliance on such external ratings, a downgrade below the two highest short-term credit ratings by any agency registered and supervised by ESMA that has rated the instrument will lead the AIFM or UCITS management company to undertake a new assessment of the credit quality of the money market instrument to ensure it continues to be of high quality.

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(3) For the purposes of (2), a rating agency is to be considered to be competent if it issues credit ratings in respect of money market funds regularly and on a professional basis and is an eligible ECAI within the meaning of Article 81(1) of the BCD. [deleted] [Note: article 18(2) of the MiFID implementing Directive] [Note: article 1(4) of, and recital 4 to, the MiFID Delegated Directive] RAP recognition requirements (1) (in relation to an RAP) any of the requirements applicable to an RAP under the RAP regulations, the auction regulation or the MiFID Regulation MiFIR and any EU regulation adopted under MiFID or MiFIR. (2) (in relation to a UK RIE applying for recognition as an RAP) any of the requirements under the RAP regulations, the auction regulation or the MiFID Regulation MiFIR and any EU regulation adopted under MiFID or MiFIR which, if its application were successful, would apply to it. recognised body requirements … (2) (in relation to a UK RIE) the MiFID implementing requirements MiFID/MiFIR requirements; … regulated activity in the FCA Handbook: (in accordance with section 22 of the Act (Regulated activities) the activities specified in Part II of the Regulated Activities Order (Specified Activities) which are, in summary:
…
(gg) …
(gga) operating an organised trading facility (article 25DA); (gh) … regulated market (1) a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments – in the system and in accordance with its nondiscretionary rules – in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title III of MiFID. [Note: article 4(1)(14) 4(1)(21) of MiFID] …

FCA 2017/36 regulatory system the arrangements for regulating a firm or other person in or under the Act, including the threshold conditions, the Principles and other rules, the Statements of Principle, codes and guidance, or in or under the CCA, and including any relevant directly applicable provisions of a Directive or Regulation such as those contained in the MiFID implementing Directive, the MiFID Regulation, MiFID Org Regulation and the EU CRR. relevant person any of the following:
(1) (in COMP) a person for claims against whom the compensation scheme provides cover, as defined in COMP 6.2.1R.; (2) (otherwise) any of the following:
…
[Note: article 2(3) of the MiFID implementing Directive article 2(1) of the MiFID Org Regulation and article 3(3) of the UCITS implementing Directive] remuneration (1) (except where (2) applies) any form of remuneration, including salaries, discretionary pension benefits and benefits of any kind. [Note: article 92(2) of the CRD] (2) (in relation to those articles of the MiFID Org Regulation as applied in accordance with SYSC 1 Annex 1 2.8AR, SYSC 1
Annex 1 3.2-AR, SYSC 1 Annex 1 3.2-BR, SYSC 1 Annex 1
3.2CR, SYSC 1 Annex 1 3.3R; SYSC 19F.1.3R; SYSC 19F.1.4R and SYSC 19F.1.5R) all forms of payments or financial or nonfinancial benefits provided directly or indirectly by a firm to relevant persons in the provision of one or more of designated investment business, ancillary activities and ancillary services to clients. [Note: article 2(5) of the MiFID Org Regulation] restricted advice (a) a personal recommendation to a retail client in relation to a retail investment product client which is not independent advice; or (b) basic advice. retail client (1) (other than in relation to the provision of basic advice on stakeholder products or to credit-related regulated activities) in accordance with COBS 3.4.1R, a client who is neither a professional client or an eligible counterparty; or [Note: article 4(1)(12) (11) of MiFID] …

FCA 2017/36 retail investment product
…
[Note: Section 238 of the Act and COBS 4.12.3R set out restrictions on the promotion of non-mainstream pooled investments to retail clients. See also COBS 9.3.5G and COBS 9A.2.22G (Non-mainstream pooled investments).] RRD early intervention condition the requirements of:
…
(c) the laws, regulations and administrative provisions necessary to comply with title II of MiFID II; or … securities and futures firm … (h) a firm that is exempt from MiFID under article 2(1) (i) (j) whose permitted activities include bidding in emissions auctions. securities financing transaction (1) (in COBS, in CASS) an instance of stock lending or stock borrowing or the lending or borrowing of other financial instruments, a repurchase or reverse repurchase transaction, or a buy-sell back or sell-buy back transaction. [Note: article 2(10) of the MiFID Regulation] … (1B) (in CASS) a securities financing transaction as defined in article 3(11) of the SFTR. [Note: article 1(3) of the MiFID Delegated Directive] (2) (in any other case) any of the following:
… security (1) (except in LR and CONC) (in accordance with article 3(1) of the Regulated Activities Order (Interpretation)) any of the following investments specified in that Order:
…
(gb) emission allowance (article 82B); and … … senior management (1) …

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(2) (in SYSC (except SYSC 4.3A) and IFPRU and in accordance with
article 3(9) of CRD) those persons who are a natural person and
who exercise executive functions in an institution and who are responsible and accountable to the management body for the dayto-day management of the institution. (3) (in SYSC 4.3A and COBS 2.3B and in accordance with article 4.1(37) of MiFID) those persons who are a natural person, who exercise executive functions in common platform firms and who are responsible and accountable to the management body for the day-to-day management of the firm, including for the implementation of the policies concerning the distribution of services and products to clients by it and its personnel. senior personnel (1) those persons who effectively direct the business of the firm, or CBTL firm, recognised investment exchange or data reporting services provider which could include a firm’s or CBTL firm’s or the membership of the governing body and other persons individuals who effectively direct the business of the person firm or CBTL firm. (2) (in relation to a management company) and in accordance with
article 3(4) of the UCITS implementing Directive) the person or
persons who effectively conduct the business of the management company. small and mediumsized enterprise (1) (in MAR 5) companies that had an average market capitalisation of less than €200,000,000 based on end-year quotes for the previous three calendar years. [Note: article 4(1)(13) of MiFID] (2) (in PR) (as defined in Article article 2.1(f) of the prospectus directive) companies, which, according to their last annual or consolidated accounts, meet at least two of the following three criteria: an average number of employees during the financial year of less than 250, a total balance sheet not exceeding €43,000,000 and an annual net turnover not exceeding €50,000,000. structured deposit a deposit paid on terms under which any interest or premium will be paid, or is at risk, according to a formula which involves the performance of:
(a) an index (or combination of indices) (other than money market indices); (b) a stock (or combination of stocks); or (c) a commodity (or combination of commodities).

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(in accordance with article 3 of the Regulated Activities Order) a deposit which is fully repayable at maturity on terms under which interest or a premium will be paid or is at risk, according to a formula involving factors such as:
(a) an index or combination of indices, excluding variable rate deposits whose return is directly linked to an interest rate index such as EURIBOR or LIBOR; or (b) a financial instrument or combination of financial instruments; or (c) a commodity or combination of commodities or other physical or non-physical non-fungible assets; or (d) a foreign exchange rate or combination of foreign exchange rates. [Note: article 4(1)(43) of MiFID] subsidiary … (2) (in relation to MiFID business) a subsidiary undertaking as defined in Articles 1 and 2 of Seventh Council Directive on consolidated accounts (No. 83/349/EEC) within the meaning of
article 2(10) and article 22 of the Accounting Directive, including
any subsidiary of a subsidiary undertaking of an ultimate parent undertaking. (3) (for the purpose of IFPRU) has the meaning in article 4(1)(16) of the EU CRR. [Note: article 4 (1)(29)(33) of MiFID] suitability report a report which a firm must provide to its client under COBS 9.4 (suitability reports) which, among other things, explains why the firm has concluded that a recommended transaction is suitable for the client and which is provided pursuant to:
(a) COBS 9.4 (Suitability reports) where the firm is carrying on designated investment business other than any MiFID, equivalent third country or optional exemption business; (b) article 54(12) of the MiFID Org Regulation where the firm is carrying on MiFID business; (c) GEN 2.2.22AR and COBS 9A.3.3EU where the firm is carrying on the equivalent business of a third country investment firm; (d) COBS 9A.1.2R and COBS 9A.3.3EU where the firm is carrying on MiFID optional exemption business.

FCA 2017/36 summary resolution communication either:
(1) in relation to a MiFID complaint, a response in accordance with DISP 1.1A.24EU, DISP 1.1A.25EU and DISP 1.1A.26R; or (2) in relation to all other complaints, has the meaning given in DISP 1.5.4R. systematic internaliser (has the meaning in article 4(1)(20) of MiFID) (in summary) an investment firm which, on an organised, frequent and, systematic and substantial basis, deals on own account by executing client client orders outside a regulated market or, an MTF or an OTF without operating a multilateral system. [Note: article 4(1)(7) 4(1)(20) of MiFID] third country investment firm a firm which would be a MiFID investment firm if it had its head office or registered office in the EEA. third party prospectus a communication made by a firm if the communication is a prospectus that has been drawn up and published in accordance with the Prospectus Directive and the firm is not responsible under that directive for the information given in the prospectus. [Note: recital 52 73 to the MiFID implementing Directive MiFID Org Regulation] tied agent a person who, under the full and unconditional responsibility of only one MiFID investment firm or third country investment firm on whose behalf it acts, promotes investment services and/or ancillary services to clients or prospective clients, receives and transmits instructions or orders from the client in respect of investment services or financial instruments, places financial instruments and/or provides advice to clients or prospective clients in respect of those financial instruments or investment services. [Note: article 4(1)(25) 4(1)(29) of MiFID] trading day (1) (in MAR 7 (Disclosure of information on certain trades undertaken outside a regulated market or MTF) and SUP 17 (Transaction reporting)) in relation to post-trade information to be made public about a share under MAR 7.2.10EU, any day of normal trading in a share on a trading venue in the relevant liquid market for this share. [Note: article 4(2) of the MiFID Regulation] [deleted] … (3) (in FINMAR) as defined in article 2(1)(p) of the short selling regulation, a trading day as referred to in article 4 of Regulation

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(EC) No 1287/2006. trading venue (1) (except in FINMAR and MAR) a regulated market, an MTF or systematic internaliser acting in its capacity as such, and, where appropriate, a system outside the EU with similar functions to a regulated market or MTF an OTF. [Note: article 2(8) of the MIFID Regulation article 4(1)(24) of MiFID] (2) (in FINMAR) (as defined in article 2(1)(l) of the short selling regulation) a regulated market or an MTF. [Note: article 4(1)(24) of MiFID] transaction (1) (except in CONC App 1.1 and SUP 17A) only the purchase and sale of a financial instrument. For the purposes of the MiFID Regulation, excluding Chapter II, this does not include:
(a) securities financing transactions; or (b) the exercise of options or covered warrants; or (c) primary market transactions (such as issuance allotment or subscription) in financial instruments falling within Article 4(1)(18(a) and (b) of MiFID). (2) (in CONC App 1.3, except in CONC App 1.1.6R(1)(c)) a credit agreement, any transaction which is a linked transaction, any contract for the provision of security relating to the credit agreement, any credit broking contract relating to the credit agreement and any other contract to which the borrower or a relative of his the borrower is a party and which the lender requires to be made or maintained as a condition of the making of the credit agreement. (3) (in SUP 17A), a concluded acquisition or disposal of a reportable financial instrument, including those in articles 2(2) to 2(4) of MiFID RTS 22, but excluding those in article 2(5) of that EU regulation. [Note: article 5 of the MiFID Regulation] transaction report (1) a report of a transaction which meets the requirements of SUP 17.4.1EU.1R and SUP 17.4.2R (Information to appear in transaction reports). (2) in relation to FEES 3, a report which meets the requirements imposed by and under article 26 of MiFIR. a report of a transaction:

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(a) for the purposes of SUP TP 9; or
(b) which meets the requirements imposed by and under
article 26 of MiFIR.
transferable security
…
[Note: article 4(1)(18) 4(1)(44) of MiFID] UCITS management company … (2) (in relation to MiFID business) a management company as defined in the UCITS Directive. [Note: article 4 (1)(24) article 4(1)(28) of MiFID] UK designated investment firm (in BIPRU 12 and in SYSC 19D) a designated investment firm which is a body corporate or partnership formed under the law of any part of the UK. website conditions the following conditions:
…
[Note: article 3 of the MiFID implementing Directive MiFID Org Regulation and article 38(2) of the KII Regulation] Delete the following definitions. The text is not struck through. common platform outsourcing rules SYSC 8.1.1R to SYSC 8.1.12G. key individual (in relation to a UK recognised body):
(a) its chairman or president;
(b) its chief executive;
(c) a member of its governing body;
(d) a person who, alone or jointly with one or more others, is responsible under the immediate authority of a person in (a), (b) or (c) or a committee of the governing body for the conduct of any relevant function. local (1) (except in IFPRU 1.1 (Application and purpose)) a firm which is a member of a futures and options exchange and whose permission includes a requirement that:

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(a) the firm will not conduct designated investment business other than:
(i) dealing for its own account on that futures or options exchange; or (ii) dealing for the accounts of other members of the same futures and options exchange; or (iii) making a price to other members of the same futures and options exchange; and (iv) dealing for its own account in financial futures and options or other derivatives in the capacity of a customer; and (b) the performance of the firm’s contracts must be guaranteed by and must be the responsibility of one or more of the clearing members of the same futures and options exchange. (2) [deleted] (3) (in IFPRU 1.1 (Application and purpose) has the meaning given in the definition of “local firm” in article 4(1)(4) of the EU CRR. MiFID II Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending the insurance mediation directive and AIFMD (http://eurlex.europa.eu/legalcontent/EN/TXT/PDF/?url=OJ:JOL_2014_173_R_0009&from=EN). MiFID implementing Directive Commission Directive No. 2006/73/EC implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive. MiFID implementing requirement (1) (in relation to a UK RIE) any of the requirements applicable to that body under the MiFID Regulation. (2) (in relation to a body applying for recognition as a UK RIE) any of the requirements under the MiFID Regulation which, if its application were successful, would apply to it. MiFID outsourcing rules SYSC 8.1.1R to SYSC 8.1.11R. normal trading hours (in relation to a trading venue or an investment firm) those hours which the trading venue or investment firm establishes in advance and makes public as its trading hours. [Note: article 2(5) of the MiFID Regulation]

FCA 2017/36 person with whom a relevant person has a family relationship any of the following:
(a) the spouse of the relevant person or any partner of that person considered by national law as equivalent to a spouse; (b) a child or stepchild of the relevant person; (c) any other relative of the relevant person who has shared the same household as that person for at least one year on the date of the personal transaction concerned. [Note: article 2(7) of the MiFID implementing Directive] portfolio trade a transaction in more than one security where those securities are grouped and traded as a single lot against a specific reference price. [Note: article 2(6) of the MiFID Regulation] related financial instrument means a financial instrument, the price of which is closely affected by price movements in another financial instrument which is the subject of investment research, and includes a derivative on that other financial instrument. [Note: article 25(2) of the MiFID implementing Directive] relevant competent authority (in relation to a financial instrument) means the competent authority of the most relevant market in terms of liquidity for that financial instrument. [Note: article 2(7) of MiFID Regulation] relevant liquid market a market for a share determined in accordance with paragraph 2 and 8 of
Article 9 of the MiFID Regulation, in many cases this will be the
Member State where the share or the unit was first admitted to trading on a regulated market. [Note: article 9 of the MiFID Regulation] rule on use of dealing commission COBS 11.6.3R. turnover (in relation to a financial instrument) means the sum of the results of multiplying the number of units of that instrument exchanged between buyers and sellers in a defined period of time, pursuant to transactions taking place on a trading venue or otherwise, by the unit price applicable to each such transaction. [Note: article 2(9) of the MiFID Regulation]

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FCA 2017/37
FEES (DATA REPORTING APPLICATIONS) INSTRUMENT 2017 Powers exercised A. The Financial Conduct Authority makes this instrument in the exercise of:
(1) the following powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):
(a) section 137A (The FCA’s general rules); (b) section 137T (General supplementary powers); (c) section 139A (Power of the FCA to give guidance); and (d) paragraph 23 (Fees) in Part 3 (Penalties and Fees) of Schedule 1ZA (The Financial Conduct Authority); and (2) the powers of direction, guidance and related provisions in or under the following provisions of the Data Reporting Services Regulations 2017 (SI 2017/699):
(a) regulation 20 (Guidance); and
(b) regulation 40 (FCA: penalties, fees and exemption from liability in damages). B. The rule-making powers listed above are specified for the purpose of section 138G (Rule-making instruments) of the Act. Commencement
C. This instrument comes into force on 3 July 2017.
Amendments to the Handbook
D. The Fees manual (FEES) is amended in accordance with the Annex to this instrument. Citation F. This instrument may be cited as the Fees (Data Reporting Applications) Instrument 2017. By order of the Board 30 June 2017

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Annex
Amendments to the Fees manual (FEES)
In this Annex, underlining indicates new text and striking through indicates deleted text. 1 Fees Manual
1.1 Application and Purpose
1.1.1 G (1) …
…
(3) FEES 3 (Application, Notification and Vetting Fees) covers one-off fees payable on a particular event for example:
(a) various application fees (including those in relation to authorisation, variation of Part 4A permission, registration as a CBTL firm, authorisation of a data reporting services provider, listing and the Basel Capital Accord); and … … … 2 General Provisions …
2.2 Late Payments and Recovery of Unpaid Fees
…
Recovery of Fees
2.2.3 G (1) Paragraph 23(8) of Schedule 1ZA of to the Act permits the FCA to
recover fees (including fees relating to payment services, the issuance of electronic money, fees relating to CBTL firms, data reporting services providers, designated credit reference agencies, designated finance platforms and, where relevant, FOS levies and CFEB levies). … … 3 Application, Notification and Vetting Fees

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3.1 Introduction
…
3.1.1A R A reference to firm in this chapter includes a reference to a fee-paying payment service provider, a CBTL firm, a fee-paying electronic money issuer, a designated finance platform and , a designated credit reference agency and a data reporting services provider. … 3.1.6D G … 3.1.6E G (1) Application fees for authorisation under regulation 7 of the DRS Regulations, and for operators of trading venues seeking verification of their compliance with Title V of MiFID II under regulation 8 of the DRS Regulations and for variation of an authorisation under regulation 12 of the DRS Regulations are set out in the table at FEES 3.2.7R. (2) The fee depends on the number of data reporting services for which the firm is making an application. …
3.2 Obligation to pay fees
…
Method of payment
…
3.2.5 G (1) (a) The appropriate authorisation or registration fee is an integral
part of an application for, or an application for a variation of, a
Part 4A permission, authorisation, registration or variation
under the Payment Services Regulations or the Electronic Money Regulations, registration under article 8(1) of the MCD Order, authorisation under regulation 7 of the DRS Regulations or verification under regulation 8 of the DRS Regulations or notification or registration under the AIFMD UK regulation. (b) Any application or notification received by the FCA without the accompanying appropriate fee, in full and without deduction (see FEES 3.2.1R), will not be treated as an application or notification made, incomplete or otherwise, in accordance with
section 55U(4), or 55H of the Act or regulation 5(3) or 12(3) of
the Payment Services Regulations or regulation 5 or 12 of the Electronic Money Regulations or regulation 11(1) and 60(a) of the AIFMD UK regulation, regulation 7(2) of the DRS Regulations or article 9 of the MCD Order.

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…
…
…
3.2.7 R Table of application, notification, vetting and other fees payable to the FCA
Part 1: Application, notification and vetting fees
(1) Fee payer (2) Fee payable (£) Due date … (zw) An applicant for authorisation under regulation 7 of the DRS Regulations, or the operator of a trading venue seeking verification of their compliance with Title V of MiFID II under regulation 8 of the DRS Regulations or an applicant for variation of an authorisation under regulation 12 of the DRS Regulations. Either (1), (2), or (3) applies as set out below:
(1) If the applicant is applying for permission to operate one data reporting service, 5,000. (2) If the applicant is applying for permission to operate more than one data reporting services, 50% of the fee at (1) for each additional service plus the fee at (1). (3) If the applicant is applying for variation of an authorisation, 50% of the fee at (1) for each additional service. On the date the application is made.

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MARKETS AND ORGANISATIONAL REQUIREMENTS
(MiFID 2) INSTRUMENT 2017
Powers exercised
A. The Financial Conduct Authority makes this instrument in the exercise of:
(1) the following powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):
(a) section 64A (Rules of conduct);
(b) section 137A (The FCA’s general rules); (c) section 137H (General rules about remuneration); (d) section 137T (General supplementary powers); (e) section 139A (Power of the FCA to give guidance); (f) section 293 (Power to make notification rules in respect of recognised bodies); (g) paragraph 23 (Fees) of Part 3 (Penalties and Fees) of Schedule 1ZA (The Financial Conduct Authority); (h) paragraph 19 (Establishment) of Schedule 3 (EEA Passport Rights); and (i) paragraph 20 (Services) of Schedule 3 (EEA Passport Rights); (2) the power in regulation 11 of the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001, (SI 2001/995), as inserted by the Financial Services and Markets Act (Markets in Financial Instruments) Regulations 2017, (SI 2017/701); (3) the powers of direction, guidance and related provisions in or under the following provisions of the Data Reporting Services Regulations 2017, (SI 2017/699):
(a) regulation 7 (Application for authorisation); (b) regulation 8 (Application for verification of compliance); (c) regulation 11 (Cancellation of authorisation); (d) regulation 12 (Variation of authorisation); (e) regulation 20 (Guidance); (f) regulation 21 (Reporting requirements); and (g) regulation 40 (FCA: penalties, fees and exemption from liability in damages); (4) the powers of direction, guidance and related provisions in or under the following provisions of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017, (SI 2017/701):
(a) regulation 16 (FCA duty to establish position limits) (b) regulation 17 (Exemption for non-financial entities); (c) regulation 27 (FCA power to require information);

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(d) paragraph 7 of Schedule 1 (Guidance); and (e) paragraph 8 of Schedule 1 (Reporting requirements); and (5) the other rule and guidance making powers listed in Schedule 4 (Powers exercised) to the General Provisions of the FCA’s Handbook. B. The rule-making powers referred to above are specified for the purpose of section 138G(2) (Rule-making instruments) of the Act. Commencement
C. This instrument comes into force on 3 January 2018 except as indicated in:
(1) paragraph D Commencement 3 July 2017; (2) paragraph E Commencement 31 July 2017; (3) paragraph F Commencement 4 December 2017 (4) paragraph G Commencement 31 March 2018; (5) paragraph H Commencement 3 March 2019; and (6) paragraph I Commencement 3 September 2019. Commencement 3 July 2017 D. The following provisions come into force on 3 July 2017:
(1) FEES 2, FEES 3.1.2G, FEES 3.2.7R Part 1 (1) (zx),FEES 3.2.7R Part 1 (1)(zy) concerning fees for data reporting services providers establishing a technology connection to the FCA and FEES TP 16R, which sets out a transitional provision in relation to the payment of onboarding fees, and any related definitions in Part 2 of the Glossary (MiFID 2) Instrument 2017; (2) MAR 5.7.1AD, MAR 5.7.1CD, MAR 5 Annex 1D, MAR 5A.10.1D, MAR 5A.11.1D and MAR 5A Annex 1D concerning applications for transparency w aivers and deferrals and any related definitions in Part 2 of the Glossary (MiFID 2) Instrument 2017; (3) MAR 9.1, MAR 9.2 (except for MAR 9.2.3D, MAR 9.2.4G and MAR 9.2.5D); MAR 9.3 (except for MAR 9.3.1D, MAR 9.3.2D, MAR 9.3.3G, MAR 9.3.7D, MAR 9.3.8D and MAR 9.3.9G); MAR 9.5; MAR 9 Annexes (except for MAR 9 Annex 3D, MAR 9 Annex 4D, MAR 9 Annex 5D, MAR 9
Annex 6D, MAR 9 Annex 8D and MAR 9 Annex 9D) concerning applications
for authorisation and verification and data reporting services providers establishing a technology connection to the FCA and any related definitions in
Part 2 of the Glossary (MiFID 2) Instrument 2017;

FCA 2017/38
(4) MAR 10.2.2D relating to the application of position limits, MAR 10.2.4D and MAR 10 Annex 1D concerning the application process for non-financial entities for the exemption from position limit obligations and any related definitions in Part 2 of the Glossary (MiFID 2) Instrument 2017; (5) SUP 17A for the purpose of facilitating a technology connection to the FCA and any related definitions in Part 2 of the Glossary (MiFID 2) Instrument 2017; and (6) REC 3.14A.7AD and REC 3.14A.7CD concerning applications for transparency waivers and deferrals and any related definitions in Part 2 of the Glossary (MiFID 2) Instrument 2017. Commencement 31 July 2017 E. SUP TP 1.2 which sets out transitional provisions in relation to the exercise of passport rights by UK firms and any related definitions in Part 2 of the Glossary (MiFID 2) Instrument 2017 comes into force on 31 July 2017. Commencement 4 December 2017 F. SUP 13 concerning the exercise of passport rights by UK firms and any related definitions in Part 2 of the Glossary (MiFID 2) Instrument 2017 comes into force on 4 December 2017. Commencement 31 March 2018 G. Amendments made to FEES 1.1.2R(2)(o), FEES 4 Annex 3AR and the part of FEES 4.2.11R concerning the payment of fees for transaction reporting under SUP 17 come into force on 31 March 2018. Commencement 3 March 2019 H. Until 3 March 2019, every direct and indirect reference to the term CTP in MAR 9.1; MAR 9.2 (except for MAR 9.2.3D, MAR 9.2.4G and MAR 9.2.5D); MAR 9.3 (except for MAR 9.3.1D, MAR 9.3.2D, MAR 9.3.3G, MAR 9.3.7D, MAR 9.3.8D and MAR 9.3.9G); MAR 9.5; MAR 9 Annexes (except for MAR 9 Annex 3D, MAR 9
Annex 4D, MAR 9 Annex 5D, MAR 9 Annex 6D, MAR 9 Annex 8D and MAR 9
Annex 9D) concerning applications for authorisation and verification and data
reporting services providers establishing a technology connection to the FCA is not to be read as including reference to the operation of a CTP in relation to bonds, structured finance products, emission allowances and derivatives traded on a trading venue. Commencement 3 September 2019
I. Until 3 September 2019, every direct and indirect reference to the term CTP in MAR
9.2.3D, MAR 9.2.4G, MAR 9.2.5D; MAR 9.3.1D, MAR 9.3.2D, MAR 9.3.3G; MAR 9.3.7D, MAR 9.3.8D, MAR 9.3.9G; MAR 9.4; MAR 9 Annex 3D; MAR 9 Annex 4D; MAR 9 Annex 5D; MAR 9 Annex 6D; MAR 9 Annex 8D and MAR 9 Annex 9D

FCA 2017/38 is not to be read as including reference to the operation of a CTP in relation to bonds, structured finance products, emission allowances and derivatives traded on a trading venue. Amendments to the Handbook J. The modules of the FCA’s Handbook of rules and guidance listed in column (1) below are amended in accordance with the Annexes in this instrument listed in column (2) below. (1) (2) Principles for Businesses (PRIN) Annex A Senior Management Arrangements, Systems and Controls sourcebook (SYSC)
Annex B
Statements of Principle and Code of Practice for Approved Persons (APER)
Annex C
Fit and Proper test for Approved Persons (FIT) Annex D General Provisions (GEN) Annex E Fees manual (FEES) Annex F Prudential sourcebook for Investment Firms (IFPRU) Annex G Interim Prudential sourcebook for Investment Businesses (IPRU (INV))
Annex H
Conduct of Business sourcebook (COBS) Annex I Insurance: Conduct of Business sourcebook (ICOBS) Annex J Market Conduct sourcebook (MAR) Annex K Supervision manual (SUP) Annex L Decision Procedure and Penalties manual (DEPP) Annex M Consumer Credit sourcebook (CONC) Annex N Recognised Investment Exchanges sourcebook (REC) Annex O Amendments to material outside the Handbook K. The Service Companies Handbook Guide (SERV) is amended in accordance with
Annex P to this instrument.
L. The Enforcement Guide (EG) is amended in accordance with Annex Q to this
instrument.
Notes
M. In the Annex to this instrument, the notes (indicated by “Note:”) are included for the convenience of readers but do not form part of the legislative text. European Union Legislation

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N. Although European Union legislation is reproduced in this instrument, only European Union legislation reproduced in the electronic Official Journal of the European Union is deemed authentic. Citation O. This instrument may be cited as the Markets and Organisational Requirements (MiFID 2) Instrument 2017. By order of the Board 30 June 2017

FCA 2017/38
Annex A
Amendments to the Principles for Businesses (PRIN) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. 1 Introduction
1.1 Application and purpose
…
Purpose
1.1.2 G The Principles are a general statement of the fundamental obligations of
firms under the regulatory system. This includes provisions which implement the Single Market Directives. They derive their authority from the appropriate regulator's FCA’s rule-making powers as set out in the Act and reflect the statutory objectives. … Taking group activities into account
1.1.5 G Principles 3 (Management and control), 4 (Financial prudence) and (in so
far as it relates to disclosing to the appropriate regulator FCA) 11 (Relations with regulators) take into account the activities of members of a firm's group. … Standards in markets outside the United Kingdom
1.1.6 G As set out in PRIN 3.3 (Where?), Principles 1 (Integrity), 2 (Skill, care
and diligence) and 3 (Management and control) apply to world-wide activities in a prudential context. Principle 5 (Market conduct) applies to world-wide activities which might have a negative effect on confidence in the UK financial system. In considering whether to take regulatory action under these Principles in relation to activities carried on outside the United Kingdom, the appropriate regulator FCA will take into account the standards expected in the market in which the firm is operating. Principle 11 (Relations with regulators) applies to world-wide activities; in considering whether to take regulatory action under Principle 11 in relation to cooperation with an overseas regulator, the appropriate regulator FCA will have regard to the extent of, and limits to, the duties owed by the firm to that regulator. (Principle 4 (Financial prudence) also applies to world-wide activities.) …

FCA 2017/38
Consequences of breaching the Principles
1.1.7 G … Under each of the Principles the onus will be on the appropriate
regulator FCA to show that a firm has been at fault in some way. What constitutes "fault" varies between different Principles. Under Principle 1 (Integrity), for example, the appropriate regulator FCA would need to demonstrate a lack of integrity in the conduct of a firm's business … …
1.1.9 G Some of the other rules and guidance in the Handbook deal with the
bearing of the Principles upon particular circumstances. However, since the Principles are also designed as a general statement of regulatory requirements applicable in new or unforeseen situations, and in situations in which there is no need for guidance, the appropriate regulator's FCA’s other rules and guidance or EU regulations should not be viewed as exhausting the implications of the Principles themselves. …
1.2 Clients and the Principles
…
Approach to client categorisation
1.2.2 G Principles 6, 8 and 9 and parts of Principle 7, as qualified by PRIN
3.4.1R, apply only in relation to customers (that is, clients which are not eligible counterparties). The approach that a firm (other than for creditrelated regulated activities in relation to which client categorisation does not apply) needs to take regarding categorisation of clients into customers and eligible counterparties will depend on whether the firm is carrying on designated investment business or other activities, as described in PRIN 1.2.3G. … 1 Annex 1R Non-designated investment business - clients that a firm may treat as an eligible counterparty for the purposes of PRIN
1.1 A firm may categorise the following types of client as an eligible
counterparty for the purposes of PRIN:
…
(4) a State investment body, or a body charged with, or intervening in, the management of the public debt at national level; … …

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2 The Principles
2.1 The Principles
2.1.1 R The Principles
…
11 Relations with regulators
A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice. … 3 Rules about application
3.1 Who?
…
3.1.2 G COBS 1 Annex 1 and the territorial guidance in PERG 13.6 all contain
contains guidance that is relevant to the reservation of responsibility to a Home State regulator referred to in PRIN 3.1.1R(1). …
3.2 What?
…
3.2.3 R Principles 3, 4 and (in so far as it relates to disclosing to the appropriate
regulator FCA) 11 (and this chapter) also:
(1) apply with respect to the carrying on of unregulated activities (for Principle 3 this is only in a prudential context); and (2) take into account any activity of other members of a group of which the firm is a member.
3.3 Where?
3.3.1 R Territorial application of the Principles
Principle Territorial application

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Principles
1, 2 and 3 in a prudential context, apply with respect to activities wherever they are carried on; otherwise, apply with respect to activities carried on from an establishment maintained by the firm (or its appointed representative) in the United Kingdom unless another applicable rule or EU regulation which is relevant to the activity has a wider territorial scope, in which case the Principle applies with that wider scope in relation to the activity described in that rule or EU regulation. … Principles 6, 7, 8, 9 and 10 Principle 8, in a prudential context, applies with respect to activities wherever they are carried on; otherwise apply with respect to activities carried on from an establishment maintained by the firm (or its appointed representative) in the United Kingdom unless another applicable rule or EU regulation which is relevant to the activity has a wider territorial scope, in which case the Principle applies with that wider scope in relation to the activity described in that rule or EU regulation. …
3.4 General
Clients and the Principles
3.4.1 R Although Principle 7 refers to clients, For business other than MiFID or
equivalent third country business, the only requirement of Principle 7 relating to eligible counterparties is that a firm must communicate information to eligible counterparties in a way that is not misleading. 3.4.1A G Principle 7 applies in full to MiFID or equivalent third country business. … Reference to “regulators” in Principle 11
3.4.5 R Where Principle 11 refers to regulators, this means, in addition to the
appropriate regulator FCA, other regulators with recognised jurisdiction in relation to regulated activities, whether in the United Kingdom or abroad.
4.1 Principles: MiFID business
4.1.1 G PRIN 3.1.6R ensures that the Principles do not impose obligations upon firms
which are inconsistent with an EU instrument. If a Principles Principle does purport to impose such an obligation PRIN 3.1.6R disapplies that Principle

FCA 2017/38 but only to the extent necessary to ensure compliance with European law. This disapplication has practical effect only for certain matters covered by MiFID, which are explained in this section. Where?
4.1.2 G Under PRIN 3.3.1R, the territorial application of a number of Principles to a
UK MiFID investment firm is extended to the extent that another applicable rule or EU regulation which is relevant to an activity has a wider territorial scope. … … What? …
4.1.5 G Although Principle 8 does not apply to eligible counterparty business, a firm
will owe obligations in respect of conflicts of interest set out in SYSC 10 which are wider than those contained in Principle 8 in that they apply to eligible counterparty business. [deleted]

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Annex B
Amendments to the Senior Management Arrangements, Systems and Controls sourcebook (SYSC) In this Annex, underlining indicates new text and striking through indicates deleted text, unless indicated otherwise. 1 Application and purpose 1.1A Application … 1.1A.1A G The application of this sourcebook to firms that are not PRA-authorised persons is summarised at a high level in the following table. The detailed application is cut back in SYSC 1 Annex 1 and in the text of each chapter. Type of firm Applicable chapters Full-scope UK AIFM Chapters 4 to 10, 12, 18, 19B, 21, 22 … … … 1 Annex 1 Detailed application of SYSC …
Part 2 Application of the common platform requirements (SYSC 4 to
10)
…
2.6C R The common platform requirements apply to an AIFM investment firm which is a full-scope UK AIFM in respect of its MiFID business in line with Column A in Table A of Part 3. 2.6D R The common platform requirements apply to a full-scope UK AIFM of an authorised AIF in line with column Column A++ in
Table A of Part 3.
2.6E G The common platform requirements apply to a small authorised UK AIFM in line with Column B in Table A of Part 3 (unless such a firm is also a common platform firm, in which case they must comply with Column A). …

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2.7A G EEA UCITS management companies are also reminded that they must comply with:
(1) the common platform requirements indicated in Column A+ (Application to a management company) in Table A in Part 3 of this Annex; … What?
2.8 R …
2.8A R (1) Subject to (2) and (3), in SYSC 1 Annex 1 2.8R, articles 1(2), 21 to 25, 30 to 32 and 72 of the MiFID Org Regulation (including any relevant definitions in MiFID, MiFIR and the MiFID Org Regulation) apply to a firm’s business other than MiFID business or structured deposits regulated activities as if they were rules or guidance in accordance with Part 3 (Tables summarising the application of the common platform requirements to different types of firm). (2) References in Column (1) to a word or phrase used in the MiFID Org Regulation for the purpose of (1) have the meaning indicated in Column (2) of the table below:
(1) (2)
“ancillary services” ancillary services or ancillary activities associated with the firm’s regulated activities “client” and “potential client” client “competent authority” FCA “investment firm” and “firm” firm “investment service” and “investment services and activities” designated investment business “portfolio management” and “portfolio management service” managing investments

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“Directive 2014/65/EU”;
“Regulation (EU) No
600/2014”; “Directive
2014/57/EU” and
“Regulation (EU) No
596/2014” and their implementing measures regulatory system, except where the reference is to a specific provision of a Directive or Regulation in Column (1) in which case the reference must be read as referring to such specific provision “shall” must (3) Any references within the MiFID Org Regulation for the purpose of (1) to other provisions of EU law must be interpreted in light of this rule. (4) This rule does not apply to a collective portfolio management investment firm in relation to the firm’s business other than its MiFID business. [Note: The MiFID Org Regulation can be found at: http://eurlex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32017R0565&from=EN.] 2.8B G The purpose of SYSC 1 Annex 1 2.8R and SYSC 1 Annex 1 2.8AR is that the common platform organisational requirements also apply when carrying on any of the activities listed in SYSC 1
Annex 1 2.8R even where they do not involve investment services
and/or activities and, where relevant, ancillary services (unless provided otherwise within a specific rule). 2.8C G SYSC 1 Annex 1 2.8AR(3) has the effect that, where the requirement in the MiFID Org Regulation that is a common platform organisational requirement includes a reference or cross reference to another part of the MiFID Org Regulation, that reference or cross reference is given the same meaning as for the purposes of SYSC 1 Annex 1 2.8AR. 2.8D G For the purpose of SYSC 1 Annex 1 2.8AR, a firm should apply any guidance published by the FCA that assists with interpreting the definitions in MiFID, MiFIR and the MiFID Org Regulation.
2.9 G The application of the provisions on the conflicts of interest in
SYSC 10 is set out in SYSC 10.1.1R 10.1.-2G to SYSC 10.1.1AR and SYSC 10.2.1R.
2.10 R The provisions on record-keeping in SYSC 9 and articles 21 and
72 of the MiFID Org Regulation apply as set out in SYSC 1 Annex 1.2.8R and SYSC 1 Annex 1.2.8AR, except that they only apply to the carrying on of ancillary activities that are performed in relation to:

FCA 2017/38
…
…
2.14 G …
2.14A G The systems and control requirements in article 17 of MiFID for the following are in chapter 7A of the Market Conduct sourcebook (MAR):
(1) algorithmic trading;
(2) direct electronic access to a trading venue; and (3) acting as a general clearing member of a trading venue. 2.14B G Firms should refer to articles 38 to 42 of the MiFID Org Regulation and COBS 11A for additional organisational requirements for underwriting and placing. Where? … 2.16A R (1) The common platform requirements referred to in Column A+ in Table A of Part 3 (below) apply to a UK UCITS management company in relation to passported activities carried on by it from a branch in another EEA State. … …
2.17 R The common platform record-keeping requirements apply to
activities carried on by a firm from an establishment maintained in the United Kingdom, unless another applicable rule which is relevant to the activity has a wider territorial scope, in which case the common platform record-keeping requirements apply with that wider scope in relation to the activity described in that rule. [Note: article 13(9) 16(11) first paragraph of MiFID] … 2.18A G SYSC 6.1.1R on systems and controls for countering the risk that a firm might be used to further financial crime is:
(1) a common platform organisational requirement, not a common platform requirement on financial crime; and (2) subject to the application, amongst other provisions, of SYSC

FCA 2017/38
1 Annex 1 2.13R, SYSC 1 Annex 1 2.16R and SYSC 1 Annex 1 2.18R. …
Part 3 Tables summarising the application of the common platform
requirements to different types of firm
3.1 G The common platform requirements apply in the following four
ways as described in the following table (subject to the provisions in Part 2 of this Annex (Application of the common platform requirements)). Type of firm Common platform requirements Common platform firm SYSC 1 Annex 1 3.2G, SYSC 1
Annex 1 3.2-AR and SYSC 1
Annex 1 3.2-BR
Management company SYSC 1 Annex 1 3.2AG
Full-scope UK AIFM of an authorised AIF
SYSC 1 Annex 1 3.2BR
MiFID optional exemption firm SYSC 1 Annex 1 3.2CR Third country firm SYSC 1 Annex 1 3.2CR All other firms (apart from insurers, managing agents, the Society, full-scope UK AIFMs of unauthorised AIFs, MiFID optional exemption firms and third country firms) SYSC 1 Annex 1.3.3R Common platform firm
3.2 G For a common platform firm , (other than a dormant account fund
operator not subject to MiFID):
(1) SYSC 4 to SYSC 10 they apply in accordance with Column A in the table Table A below ; and (2) articles 1(2), 21 to 25, 30 to 32 and 72 of the MiFID Org Regulation are directly applicable to the firm. 3.2-A R For a common platform firm (other than a dormant account fund operator not subject to MiFID), articles 1(2), 21 to 25, 30 to 32 and 72 of the MiFID Org Regulation apply to the firm’s business other than MiFID business or structured deposits regulated

FCA 2017/38 activities as if the MiFID Org Regulation applied to the firm as rules in accordance with SYSC 1 Annex 1 2.8R and SYSC 1 Annex 1 2.8AR. 3.2-B R For a common platform firm that is a dormant account fund operator and is not subject to MiFID:
(1) SYSC 4 to SYSC 10 apply in accordance with Column A in
Table A below; and
(2) articles 1(2), 21 to 25, 30 to 32 and 72 of the MiFID Org Regulation apply as if the MiFID Org Regulation applied to the firm as rules in accordance with SYSC 1 Annex 1 2.8R and SYSC 1 Annex 1 2.8AR. Management company 3.2A G For a management company, they the common platform requirements in SYSC 4 to SYSC 10 apply in accordance with Column A+ in the table Table A below. Full-scope UK AIFM of an authorised AIF 3.2B R For a full-scope UK AIFM of an authorised AIF, they the common platform requirements in SYSC 4 to SYSC 10 apply in line accordance with Column A++ in the table Table A below. MiFID optional exemption firm and a third country firm 3.2C R For a MiFID optional exemption firm and a third country firm:
(1) SYSC 4 to SYSC 10 apply as rules or as guidance in accordance with Table B below in the following way:
(a) where a rule is shown modified as 'Guidance', it should be read as guidance (as if "should" appeared in that rule instead of "must"); and (b) the provision should be applied in a proportionate manner, taking into account the nature, scale and complexity of the firm’s business; and (2) articles 1(2), 21 to 25, 30 to 32 and 72 of the MiFID Org Regulation apply as if the MiFID Org Regulation applied to the firm as rules (in accordance with SYSC 1 Annex 1 2.8R and SYSC 1 Annex 1 2.8AR) or as guidance in accordance with Part 1 of Table C below. Part 2 of Table C sets out those articles of the MiFID Org Regulation. 3.2D R (1) Subject to (2), SYSC 4.3A.6R, SYSC 4.3A.8R and SYSC 7.1.18R apply to a MiFID optional exemption firm that is

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‘significant’ as a rule or as guidance in accordance with SYSC 1 Annex 1 3.2CR. (2) In (1), ‘significant’ means a MiFID optional exemption firm that meets one of more of the conditions in paragraphs (1) to (5) of IFPRU 1.2.3R and related rules and guidance. Other firms 3.3E R SYSC 1 Annex 1 3.3R does not apply to the following:
(1) insurers;
(2) managing agents;
(3) the Society;
(4) full-scope UK AIFMs of unauthorised AIFs; (5) MiFID optional exemption firms; and (6) third country firms.
3.3 G
R
For all other firms apart from insurers, managing agents, the Society and full-scope UK AIFMs of unauthorised AIFs, they :
(1) SYSC 4 to SYSC 10 apply as rules or as guidance in accordance with Column B in the table Table A below in the following way:
(a) For these firms, where a rule is shown modified in Column B as 'Guidance', it should be read as guidance (as if "should" appeared in that rule rule instead of "must") ; and (b) the provision should be applied in a proportionate manner, taking into account the nature, scale and complexity of the firm's firm’s business; and (2) articles 1(2), 21 to 25, 30 to 32 and 72 of the MiFID Org Regulation do not apply. 3.3A R SYSC 1 Annex 1 3.3R(1)(b) does not apply to a firm in relation to the requirements in SYSC 4.5 (Management responsibilities maps for UK relevant authorised persons), SYSC 4.6 (Management responsibilities maps for non-UK relevant authorised persons), SYSC 4.7 (Senior management responsibilities for UK relevant authorised persons: allocation of responsibilities), SYSC 4.8 (Senior management responsibilities for third country relevant authorised persons: allocation of responsibilities), SYSC 4.9 (Handover procedures and material) and SYSC 5.2 (Certification

FCA 2017/38 regime).
[Editor’s note: The rows in Table A below relating to SYSC 10.1.4R, SYSC 10.1.6R, SYSC 10.1.10R and SYSC 10.1.11R are provisional, as they depend on possible changes to COBS 12 consulted on in CP16/29. The final content of these rows will be confirmed at the time of making the final rules.]
Table A: Application of the common platform requirements in SYSC 4 to SYSC
10
Provision
SYSC 4
COLUMN A
Application to a common platform firm other than to a UCITS investment firm COLUMN A+ Application to a UCITS management company COLUMN A++ Application to a fullscope UK AIFM of an authorised AIF COLUMN B Application to all other firms apart from insurers, managing agents the Society, and full-scope UK AIFMs of unauthorised AIFs, MiFID optional exemption firms and third country firms SYSC 4.1.- 2G Guidance Not applicable save in relation to a UCITS investment firm and its MiFID business Not applicable Not applicable SYSC 4.1.- 1G Not applicable Not applicable Not applicable Not applicable … SYSC 4.1.1CR Rule for a BIPRU firm Rule for a BIPRU firm that is a UCITS investment firm Not applicable Third country BIPRU firms:
Rule
Other firms:
Not applicable
…

FCA 2017/38
SYSC
4.1.4R
Rule Not applicable
Rule Not applicable
(1) and (3) :
Guidance ; (2)
: Rule
…
SYSC
4.1.5R
Rule applies only to a
MiFID investment firm
Not applicable
Rule Not applicable
Not applicable
…
SYSC
4.1.7R
Rule for a CRR firm only
Rule Not applicable
Guidance
…
SYSC
4.1.9R
Rule Not applicable
Rule Not applicable
Not applicable
SYSC
4.1.10R
Rule Not applicable
Rule Not applicable
Guidance - except reference to
SYSC 4.1.9R which does not apply to these firms … SYSC 4.2.1R Rule - UK branch of non-EEA bank

rule applies.
Other firmsGuidance
…
SYSC
4.2.2R
Rule - UK branch of a non-EEA bank - Rule applies
Other firms -
this provision does not apply

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Not applicable
SYSC
4.2.3G -
4.2.5G
Guidance - UK branch of a non-EEA bank - Guidance

Other firms -
these provisions do not apply
Not applicable
SYSC
4.2.6R
Rule Rule for a
UCITS investment firm; otherwise not applicable Not applicable
UK branch of
a non-EEA bank - Rule applies
Other firms -
this provision does not apply
Not applicable
…
SYSC
4.3.1R
Rule Not applicable
Rule Not applicable
Rule (but not applicable to incoming EEA firms, incoming Treaty firms or UCITS qualifiers) SYSC 4.3.2R Rule Not applicable Rule Not applicable Guidance (but not applicable to incoming EEA firms, incoming Treaty firms or UCITS qualifiers) … SYSC 4.3A.-1R Rule applicable to CRR firms Rule for a CRR firm that is a UCITS investment firm Not applicable Not applicable SYSC Rule applicable Rule for a CRR Not Not applicable

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4.3A.1R to CRR firms firm that is a
UCITS investment firm applicable
SYSC
4.3A.1AR
Rule Rule for a CRR firm that is a
UCITS investment firm
Not applicable
Not applicable
SYSC
4.3A.2R
Rule applicable to CRR firms
Rule for a CRR firm that is a
UCITS investment firm
Not applicable
Not applicable
SYSC
4.3A.2AG
Guidance Guidance for a
CRR firm that is a UCITS investment firm Not applicable Not applicable SYSC 4.3A.3R Rule applicable to CRR firms Rule for a CRR firm that is a UCITS investment firm Not applicable Not applicable SYSC 4.3A.4R Rule applicable to CRR firms Rule for a CRR firm that is a UCITS investment firm Not applicable Not applicable SYSC 4.3A.5R Rule applicable to CRR firms Rule for a CRR firm that is a UCITS investment firm Not applicable Not applicable SYSC 4.3A.6R Rule applicable to CRR firms Rule for a CRR firm that is a UCITS investment firm Not applicable Not applicable SYSC 4.3A.7R Rule applicable to CRR firms Rule for a CRR firm that is a UCITS investment firm Not applicable Not applicable SYSC 4.3A.8R Rule applicable to CRR firms Rule for a CRR firm that is a UCITS investment firm Not applicable Not applicable SYSC 4.3A.9R Rule applicable to CRR firms Rule for a CRR firm that is a Not applicable Not applicable

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UCITS investment firm
SYSC
4.3A.10R
Rule applicable to CRR firms
Rule for a CRR firm that is a
UCITS investment firm
Not applicable
Not applicable
…
SYSC 4.5 Whole section applies to UK relevant authorised persons only Not applicable Not applicable Not applicable Whole section applies to relevant authorised persons only. All rules apply as rules and not as guidance. SYSC 4.6 Applies to EEA relevant authorised persons and third country relevant authorised persons in accordance with the rules in SYSC 4.6 Not applicable Not applicable Not applicable Whole section applies to relevant authorised persons only. All rules apply as rules and not as guidance. SYSC 4.7 Whole section applies to UK relevant authorised persons only Not applicable Not applicable Not applicable Whole section applies to relevant authorised persons only. All rules apply as rules and not as guidance. SYSC 4.8 Applies to third country relevant authorised persons only Not applicable Not applicable Not applicable Whole section applies to relevant authorised

FCA 2017/38 persons only.
All rules apply as rules and not as guidance.
SYSC 4.9 Whole section applies to third country relevant authorised persons and UK relevant authorised persons only Not applicable Not applicable Not applicable Whole section applies to relevant authorised persons only. All rules apply as rules and not as guidance. Provision SYSC 5 COLUMN A Application to a common platform firm other than to a UCITS investment firm COLUMN A+ Application to a UCITS management company COLUMN A++ Application to a fullscope UK AIFM of an authorised AIF COLUMN B Application to all other firms apart from insurers, managing agents, the Society, and full-scope UK AIFMs of unauthorised AIFs, MiFID optional exemption firms and third country firms SYSC 5.1.- 2G Guidance Not applicable save in relation to a UCITS investment firm and its MiFID business Not applicable Not applicable SYSC 5.1.- 1G Not applicable Not applicable Not applicable Not applicable SYSC 5.1.1R Rule Not applicable Rule Not applicable Rule

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…
SYSC
5.1.6R
Rule Not applicable
Rule Guidance Guidance
…
SYSC
5.1.12R
Rule Not applicable
Rule Not applicable
Guidance
…
SYSC
5.1.13R
Rule Not applicable
Rule Not applicable
Rule
SYSC
5.1.14R
Rule Not applicable
Rule Not applicable
Guidance
…
Provision
SYSC 6
COLUMN A
Application to a common platform firm other than to a UCITS investment firm COLUMN A+ Application to a UCITS management company COLUMN A++ Application to a fullscope UK AIFM of an authorised AIF COLUMN B Application to all other firms apart from insurers, managing agents, the Society and , full-scope UK AIFMs of unauthorised AIFs, MiFID optional exemption firms and third country firms SYSC 6.1.-2G Guidance Not applicable save in relation to a UCITS investment firm and its MiFID business Not applicable Not applicable

FCA 2017/38
SYSC
6.1.-1G
Not applicable Not applicable Not applicable Not applicable … SYSC 6.1.2R Rule Not applicable Rule Not applicable Guidance … SYSC 6.1.3R Rule Not applicable Rule Not applicable

Guidance
This provision shall be read with the following additional sentence at the start. "Depending on the nature, scale and complexity of its business, it may be appropriate for a firm to have a separate compliance function. Where a firm has a separate compliance function, the firm should also take into account SYSC 6.1.3R and SYSC 6.1.4R as guidance." … SYSC 6.1.4R Rule Not applicable Rule Not applicable (1) , (3) and (4) : Guidance ; (2) :
Rule for firms
which carry on designated

FCA 2017/38 investment business with or for retail clients or professional clients.

Guidance for
all other firms.
SYSC
6.1.4-AG
Not applicable
Guidance
Not applicable Rule Guidance
…
SYSC
6.1.4-CG
Guidance applies to relevant authorised persons only Not applicable Not applicable Not applicable … SYSC 6.1.5R Not applicable Rule Not applicable
Guidance
"investment
services and/or activities" shall be read as "financial services and activities" … SYSC 6.2.1R Rule Not applicable Rule Not applicable Guidance … SYSC 6.2.1BG Guidance applies to relevant authorised persons only Not applicable Not applicable Not applicable … Provision COLUMN A Application to a COLUMN A+ Application to COLUMN A++ COLUMN B Application to

FCA 2017/38
SYSC 7 common platform firm other than to a UCITS investment firm a UCITS management company Application to a fullscope UK AIFM of an authorised AIF all other firms apart from insurers, managing agents, the Society, and full-scope UK AIFMs of unauthorised AIFs, MiFID optional exemption firms and third country firms SYSC 7.1.-2G Guidance Not applicable save in relation to a UCITS investment firm and its MiFID business Not applicable Not applicable SYSC 7.1.-1G Not applicable Not applicable Not applicable Not applicable … SYSC 7.1.2R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance … SYSC 7.1.3R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance … SYSC 7.1.4AG Not applicable Rule for a UCITS Not Guidance

FCA 2017/38
Guidance investment firm; otherwise guidance applicable … SYSC 7.1.5R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance SYSC 7.1.6R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance SYSC 7.1.7R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance … SYSC 7.1.8G [deleted] Guidance [deleted] Guidance [deleted] Guidance [deleted] Guidance … SYSC 7.1.16AG Guidance applies to a BIPRU firm [deleted] Guidance for a UCITS investment firm otherwise not applicable [deleted] Not applicable [deleted] Not applicable [deleted] SYSC 7.1.16BG Guidance applies to a BIPRU firm Guidance for a UCITS investment firm Not applicable Not applicable [deleted]

FCA 2017/38
[deleted] otherwise not applicable
[deleted]
[deleted]
…
SYSC
7.1.18AG
7.1.18AA
G
Guide Guidance applies to a CRR firm
Guidance for a
UCITS investment firm that is a CRR firm, otherwise not applicable Not applicable Not applicable … SYSC 7.1.23G Guidance applies to UK relevant authorised persons and third country relevant authorised persons only Not applicable Not applicable Not applicable Provision SYSC 8 COLUMN A Application to a common platform firm other than to a UCITS investment firm COLUMN A+ Application to a UCITS management company COLUMN A++ Application to a full-scope UK AIFM of an authorised AIF COLUMN B Application to all other firms apart from insurers, managing agents, the Society, and full-scope UK AIFMs of unauthorised AIFs, MiFID optional exemption firms and third country firms SYSC 8.1.-2G Guidance Not applicable save in relation to a UCITS investment firm and its Not applicable Not applicable

FCA 2017/38
MiFID business
SYSC
8.1.-1G
Not applicable Not applicable
Not applicable Not applicable
…
SYSC
8.1.4R
Rule Not applicable
Rule for a
UCITS investment firm; otherwise guidance Not applicable Guidance SYSC 8.1.5R Rule Not applicable Rule for a UCITS investment firm; otherwise guidance Not applicable Guidance … SYSC 8.1.6R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Rule SYSC 8.1.6AG Guidance for a UCITS investment firm in relation to its MiFID business Not applicable Not applicable Not applicable SYSC 8.1.7R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance

FCA 2017/38
SYSC
8.1.8R
Rule Not applicable
Rule for a
UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance SYSC 8.1.9R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance SYSC 8.1.10R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance SYSC 8.1.11R Rule Not applicable Rule for a UCITS investment firm in relation to its non-MiFID business; otherwise guidance Not applicable Guidance … SYSC 8.2 MiFID investment firms only [deleted] UCITS investment firms only [deleted] Not applicable [deleted] Not applicable [deleted] SYSC 8.3 MiFID investment firms only [deleted] UCITS investment firms only Not applicable [deleted] Not applicable [deleted]

FCA 2017/38
[deleted]
Provision
SYSC 9
COLUMN A
Application to a common platform firm other than to a UCITS investment firm COLUMN A+ Application to a UCITS management company COLUMN A++ Application to a fullscope UK AIFM of an authorised AIF COLUMN B Application to all other firms apart from insurers, managing agents, the Society, and full-scope UK AIFMs of unauthorised AIFs, MiFID optional exemption firms and third country firms SYSC 9.1.-2G Guidance Not applicable save in relation to a UCITS investment firm and its MiFID business Not applicable Not applicable SYSC 9.1.-1G Not applicable Not applicable Not applicable Not applicable SYSC 9.1.1R Rule Not applicable Rule Rule but only for the requirement to arrange for orderly records to be kept of its business and internal organisation which do not relate to portfolio transactions and subscription and redemptions orders Rule

FCA 2017/38
SYSC
9.1.1AR
Rule Not applicable Not applicable
Not applicable
SYSC
9.1.2R
Rule applies only in relation to MiFID business Rule applies only in relation to MiFID business of a UCITS investment firm Rule but only for records specified by the modified application of SYSC 9.1.1R Not applicable SYSC 9.1.3R Rule applies only in relation to MiFID business [deleted] Rule applies only in relation to MiFID business of a UCITS investment firm [deleted] Not applicable [deleted] Not applicable [deleted] … SYSC 9.1.7G Guidance applies only in relation to MiFID business [deleted] Guidance applies only in relation to MiFID business of a UCITS investment firm [deleted] Not applicable [deleted] Not applicable [deleted] Provision SYSC 10 Column A Application to a common platform firm other than to a UCITS investment firm COLUMN A+ Application to a UCITS management company COLUMN A++ Application to a fullscope UK AIFM of an authorised AIF COLUMN B Application to all other firms apart from insurers, managing agents, the Society, and full-scope UK AIFMs of unauthorised AIFs, MiFID optional exemption firms and third country firms

FCA 2017/38
SYSC
10.1.-2G
Guidance Guidance in relation to relation to a UCITS investment firm in relation to its MiFID business; otherwise not applicable Not applicable Not applicable SYSC 10.1.-1G Not applicable Not applicable Not applicable Not applicable … SYSC 10.1.4R Rule Not applicable Rule Not applicable Guidance – but applies as a rule in relation to the production or arrangement of investment research in accordance with COBS 12.2, or the production or dissemination of nonindependent research in accordance with COBS 12.3 … SYSC 10.1.6R Rule Not applicable Rule Not applicable Guidance – but applies as a rule in relation to the production or arrangement of investment research in accordance with COBS 12.2, or the production or dissemination of nonindependent

FCA 2017/38 research in accordance with
COBS 12.3
SYSC
10.1.6AG
Not applicable Not applicable Not applicable Guidance Guidance SYSC 10.1.6BG Not applicable Guidance … SYSC 10.1.8R Rule Not applicable Rule Not applicable Rule SYSC 10.1.8AR Rule Not applicable Rule Not applicable Rule SYSC 10.1.9G Guidance Not applicable Guidance Not applicable Guidance SYSC 10.1.9AR Not applicable Not applicable Not applicable Rule SYSC 10.1.10R Rule Not applicable Rule Not applicable Guidance – but applies as a rule in relation to the production or arrangement of investment research in accordance with COBS 12.2, or the production or dissemination of nonindependent research in accordance with COBS 12.3 SYSC 10.1.11R Rule Not applicable Rule Not applicable [Guidance – but applies as a rule in relation to the production or arrangement of investment research in accordance with

FCA 2017/38
COBS 12.2, or the production or dissemination of nonindependent research in accordance with COBS 12.3] SYSC 10.1.11A G Not applicable Not applicable Not applicable Guidance Guidance SYSC 10.1.11B G Not applicable Guidance … SYSC 10.1.12G - 10.1.15G Guidance Not applicable Guidance for SYSC 10.1.12G; not applicable for SYSC 10.1.13G – SYSC 10.1.15G Guidance for SYSC 10.1.12G; not applicable for SYSC 10.1.13G to SYSC 10.1.15G Guidance SYSC 10.1.13- 10.1.15G [deleted] [deleted] [deleted] [deleted] … Insert the following new Tables B and C after Table A. All the text is new and is not underlined.
Table B: Application of the common platform requirements in SYSC 4 to 10 to MiFID
optional exemption firms and third country firms Provision COLUMN A MiFID optional exemption firms COLUMN B Third country firms SYSC 4

FCA 2017/38
SYSC 4.1.-2G Not applicable Not applicable SYSC 4.1.-1G Guidance Guidance SYSC 4.1.1R Rule Rule SYSC 4.1.1AR Not applicable Not applicable SYSC 4.1.1BR Not applicable Not applicable SYSC 4.1.1CR Not applicable Rule SYSC 4.1.1DR Not applicable Not applicable SYSC 4.1.1ER Not applicable Not applicable SYSC 4.1.1FG Not applicable Not applicable SYSC 4.1.2R Rule Guidance SYSC 4.1.2AG Not applicable Not applicable SYSC 4.1.2AAR Not applicable Not applicable SYSC 4.1.2BR Not applicable Not applicable SYSC 4.1.2CR Not applicable Not applicable SYSC 4.1.2DR Not applicable Not applicable SYSC 4.1.4R Not applicable Not applicable SYSC 4.1.4AG Not applicable Not applicable SYSC 4.1.5R Not applicable Not applicable SYSC 4.1.6R Rule Guidance SYSC 4.1.7R Rule Guidance SYSC 4.1.7AG Not applicable Not applicable SYSC 4.1.8G Guidance Guidance SYSC 4.1.9R Not applicable Not applicable SYSC 4.1.10R Not applicable Not applicable SYSC 4.1.10AG Not applicable Not applicable SYSC 4.1.11G Guidance Guidance

FCA 2017/38
SYSC 4.1.13G Guidance Guidance
SYSC 4.1.14G Guidance Guidance
SYSC 4.2.1R Rule Rule
SYSC 4.2.1AG Not applicable Not applicable SYSC 4.2.2R Rule Rule SYSC 4.2.3G - 4.2.5G Guidance Guidance SYSC 4.2.6R Rule Rule SYSC 4.2.7R Not applicable Not applicable SYSC 4.2.8G Not applicable Not applicable SYSC 4.3.1R Not applicable Not applicable SYSC 4.3.2R Not applicable Not applicable SYSC 4.3.2AG Not applicable Not applicable SYSC 4.3.3G Guidance Guidance SYSC 4.3A.-1R Rule Not applicable SYSC 4.3A.1R Rule Not applicable SYSC 4.3A.1AR Rule Not applicable SYSC 4.3A.2R Rule Not applicable SYSC 4.3A.2AG Guidance Not applicable SYSC 4.3A.3R Rule Not applicable SYSC 4.3A.4R Rule Not applicable SYSC 4.3A.5R Rule Not applicable SYSC 4.3A.6R Rule Not applicable SYSC 4.3A.7R Rule Not applicable SYSC 4.3A.8R Rule Not applicable SYSC 4.3A.9R Rule Not applicable SYSC 4.3A.10R Rule Not applicable

FCA 2017/38
SYSC 4.3A.11R Not applicable Not applicable SYSC 4.4.1AR Not applicable Not applicable SYSC 4.4.2G Not applicable Not applicable SYSC 4.4.3R Not applicable Not applicable SYSC 4.4.5R Not applicable Not applicable SYSC 4.4.6G Not applicable Not applicable SYSC 4.5 Not applicable Not applicable SYSC 4.6 Not applicable Third country relevant authorised person: each provision applies as rule or guidance as shown in SYSC 4.6 SYSC 4.7 Not applicable Not applicable SYSC 4.8 Not applicable Third country relevant authorised person: each provision applies as rule or guidance as shown in SYSC 4.8 SYSC 4.9 Not applicable Third country relevant authorised person: each provision applies as rule or guidance as shown in SYSC 4.9 SYSC 5 SYSC 5.1.-2G Not applicable Not applicable SYSC 5.1.-1G Guidance Guidance SYSC 5.1.1R Not applicable Not applicable SYSC 5.1.2G Guidance Guidance SYSC 5.1.3G Guidance Guidance SYSC 5.1.4G Guidance Guidance SYSC 5.1.4AG Guidance Guidance SYSC 5.1.5G Guidance Guidance SYSC 5.1.5AG Guidance Guidance

FCA 2017/38
SYSC 5.1.6R Not applicable Not applicable SYSC 5.1.7R Rule Rule SYSC 5.1.7AG Not applicable Not applicable SYSC 5.1.8G Guidance Guidance SYSC 5.1.9G Guidance Guidance SYSC 5.1.10G Guidance Guidance SYSC 5.1.11G Guidance Guidance SYSC 5.1.12R Not applicable Not applicable SYSC 5.1.12AG Not applicable Not applicable SYSC 5.1.13R Not applicable Not applicable SYSC 5.1.14R Not applicable Not applicable SYSC 5.1.15G Not applicable Not applicable SYSC 5.2 Not applicable Third country relevant authorised person: each provision applies as rule or guidance as shown in SYSC 5.2 SYSC 6 SYSC 6.1.-2G Not applicable Not applicable SYSC 6.1.-1G Guidance Guidance SYSC 6.1.1R Rule Rule SYSC 6.1.1AG Guidance Guidance SYSC 6.1.2R Not applicable Not applicable SYSC 6.1.2AG Not applicable Not applicable SYSC 6.1.3R Not applicable Not applicable SYSC 6.1.3AG Not applicable Not applicable SYSC 6.1.4R Not applicable Not applicable SYSC 6.1.4-AG Guidance Guidance

FCA 2017/38
SYSC 6.1.4AR Not applicable Not applicable SYSC 6.1.4-BG Not applicable Not applicable SYSC 6.1.4CR Not applicable Not applicable SYSC 6.1.4-CG Not applicable Guidance for a third country relevant authorised person SYSC 6.1.5R Not applicable Not applicable SYSC 6.1.6G Not applicable Not applicable SYSC 6.1.7R Not applicable Not applicable SYSC 6.2.1R Not applicable Not applicable SYSC 6.2.1AG Not applicable Not applicable SYSC 6.2.1BG Not applicable Guidance for a third country relevant authorised person SYSC 6.2.2G Guidance Guidance SYSC 6.3.1R Rule Rule SYSC 6.3.2G Guidance Guidance SYSC 6.3.3R Rule Rule SYSC 6.3.4G Guidance Guidance SYSC 6.3.5G Guidance Guidance SYSC 6.3.6G Guidance Guidance SYSC 6.3.7G Guidance Guidance SYSC 6.3.8R Rule Rule SYSC 6.3.9R Rule Rule SYSC 6.3.10G Guidance Guidance SYSC 6.3.11G Guidance Guidance SYSC 7 SYSC 7.1.-2G Not applicable Not applicable SYSC 7.1.-1G Guidance Guidance

FCA 2017/38
SYSC 7.1.1G Guidance Guidance
SYSC 7.1.2R Not applicable Not applicable SYSC 7.1.2AG Not applicable Not applicable SYSC 7.1.2BG Not applicable Not applicable SYSC 7.1.3R Not applicable Not applicable SYSC 7.1.4R Rule Guidance SYSC 7.1.4AG Guidance Guidance SYSC 7.1.4BG Not applicable Not applicable SYSC 7.1.5R Not applicable Not applicable SYSC 7.1.6R Not applicable Not applicable SYSC 7.1.7R Not applicable Not applicable SYSC 7.1.7AG Not applicable Not applicable SYSC 7.1.7BG Not applicable Not applicable SYSC 7.1.7BAG Not applicable Not applicable SYSC 7.1.7BBG Not applicable Not applicable SYSC 7.1.7CG Guidance Guidance SYSC 7.1.8G Guidance Guidance SYSC 7.1.9R Not applicable Not applicable SYSC 7.1.10R Not applicable Not applicable SYSC 7.1.11R Not applicable Not applicable SYSC 7.1.12G Not applicable Not applicable SYSC 7.1.13R - 7.1.16R Not applicable Not applicable SYSC 7.1.16AG Not applicable Not applicable SYSC 7.1.16BG Not applicable Not applicable SYSC 7.1.16CR Not applicable Not applicable

FCA 2017/38
SYSC 7.1.17R Guidance Not applicable
SYSC 7.1.18R Guidance Not applicable
SYSC 7.1.18AAG Guidance Not applicable
SYSC 7.1.18BR Guidance Not applicable
SYSC 7.1.19R Guidance Not applicable
SYSC 7.1.20R Guidance Not applicable
SYSC 7.1.21R Guidance Not applicable
SYSC 7.1.22R Guidance Not applicable
SYSC 7.1.23G Not applicable Guidance for a third country relevant authorised person SYSC 8 SYSC 8.1.-2G Not applicable Not applicable SYSC 8.1.-1G Guidance Guidance SYSC 8.1.1R Rule Guidance SYSC 8.1.1AG Not applicable Not applicable SYSC 8.1.2G Guidance Guidance SYSC 8.1.3G Guidance Guidance SYSC 8.1.4R Not applicable Not applicable SYSC 8.1.5R Not applicable Not applicable SYSC 8.1.5AG Not applicable Not applicable SYSC 8.1.6R Not applicable Not applicable SYSC 8.1.6AG Not applicable Not applicable SYSC 8.1.7R Not applicable Not applicable SYSC 8.1.8R Not applicable Not applicable SYSC 8.1.9R Not applicable Not applicable SYSC 8.1.10R Not applicable Not applicable

FCA 2017/38
SYSC 8.1.11R Not applicable Not applicable SYSC 8.1.11AG Not applicable Not applicable SYSC 8.1.12G Not applicable Not applicable SYSC 8.1.13R Not applicable Not applicable SYSC 8.1.14G Not applicable Not applicable SYSC 9 SYSC 9.1.-2G Not applicable Not applicable SYSC 9.1.-1G Guidance Guidance SYSC 9.1.1R Not applicable Not applicable SYSC 9.1.1AR Rule Rule SYSC 9.1.2R Rule Not applicable SYSC 9.1.4G Guidance Guidance SYSC 9.1.5G Guidance Guidance SYSC 9.1.6G Guidance Guidance SYSC 10 SYSC 10.1.-2G Not applicable Not applicable SYSC 10.1.-1G Guidance Guidance SYSC 10.1.1R Rule Rule SYSC 10.1.1AR Not applicable Not applicable SYSC 10.1.2G Guidance Guidance SYSC 10.1.3R Rule Rule SYSC 10.1.4R Rule Guidance SYSC 10.1.4AG Not applicable Guidance SYSC 10.1.5G Guidance Guidance SYSC 10.1.6R Rule Guidance SYSC 10.1.6AG Not applicable Guidance

FCA 2017/38
SYSC 10.1.6BG Not applicable Guidance
SYSC 10.1.7R Rule Rule
SYSC 10.1.8R Rule Rule
SYSC 10.1.8AR Rule Rule
SYSC 10.1.9G Guidance Guidance
SYSC 10.1.9AR Not applicable Not applicable SYSC 10.1.10R Rule Guidance SYSC 10.1.11R Rule Guidance SYSC 10.1.11AG Not applicable Guidance SYSC 10.1.11BG Not applicable Guidance SYSC 10.1.12G Guidance Guidance SYSC 10.1.16R Not applicable Not applicable SYSC 10.1.17R Not applicable Not applicable SYSC 10.1.18G Not applicable Not applicable SYSC 10.1.19R Not applicable Not applicable SYSC 10.1.20R Not applicable Not applicable SYSC 10.1.21R Not applicable Not applicable SYSC 10.1.22R Not applicable Not applicable SYSC 10.1.23R Not applicable Not applicable SYSC 10.1.24R Not applicable Not applicable SYSC 10.1.25R Not applicable Not applicable SYSC 10.1.26R Not applicable Not applicable SYSC 10.1.27G Not applicable Not applicable SYSC 10.2.1R Rule Rule SYSC 10.2.2R Rule Rule SYSC 10.2.3G Guidance Guidance

FCA 2017/38
SYSC 10.2.4R Rule Rule
SYSC 10.2.5G Guidance Guidance
Table C:
Part 1: Application of the requirements in articles 1(2), 21 to 25, 30 to 32 and 72 of the
MiFID Org Regulation to MiFID optional exemption firms and third country firms Provision MiFID Org Regulation Text of the MiFID Org Regulation as of:
MiFID optional exemption firm
Third country firm
Article 1 – Subjectmatter and scope
(2) 31/3/2017 Not applicable Not applicable
Article 21 – General
organisational requirements
(1) 31/3/2017 Rule (a), (b) and (g):
Guidance;
(c), (d), (e), (f) and final paragraph: Rule (2) Rule Rule (3) Rule Guidance (4) Rule Guidance (5) Rule Guidance
Article 22 –
Compliance
(1) 31/3/2017 Guidance Guidance
(2) Guidance Guidance
(3) Guidance (a), (c), (d) and
(e): Guidance;
(b): Rule
(4) Guidance Guidance
Article 23 – Risk
management
31/3/2017 Guidance Guidance
Article 24 – Internal audit 31/3/2017 Guidance Guidance
Article 25 – Responsibility of
senior management
31/3/2017 Guidance (1): Rule;
(2), (3) and (4):
Guidance

FCA 2017/38
Article 30 – Scope of critical
and important operational functions
31/3/2017 Guidance Guidance
Article 31 – Outsourcing
critical or important operational functions 31/3/2017 (1): Rule; (2), (3), (4) and (5):
Guidance
(1): Rule;
(2), (3), (4) and
(5): Guidance
Article 32(1) and (2) –
Service providers located in third countries 31/3/2017 Rule Guidance
Article 72 – Retention of
records
31/3/2017 Rule Guidance
Part 2: Articles 1(2), 21 to 25, 30 to 32 and 72 of the MiFID Org Regulation
EU Article 1 - Subject-matter and scope
2 References to investment firms shall encompass credit institutions and references to financial instruments shall encompass structured deposits in relation to all the requirements referred to in Article 1(3) and 1(4) of Directive 2014/65/EU and their implementing provisions as set out under this Regulation. EU Article 21 - General organisational requirements 1 Investment firms shall comply with the following organisational requirements:
(a) establish, implement and maintain decision-making procedures and an organisational structure which clearly and in documented manner specifies reporting lines and allocates functions and responsibilities; (b) ensure that their relevant persons are aware of the procedures which must be followed for the proper discharge of their responsibilities; (c) establish, implement and maintain adequate internal control mechanisms designed to secure compliance with decisions and procedures at all levels of the investment firm; (d) employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them; (e) establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the investment firm; (f) maintain adequate and orderly records of their business and internal organisation;

FCA 2017/38
(g) ensure that the performance of multiple functions by their relevant persons does not and is not likely to prevent those persons from discharging any particular function soundly, honestly, and professionally. When complying with the requirements set out in the this paragraph, investment firms shall take into account the nature, scale and complexity of the business of the firm, and the nature and range of investment services and activities undertaken in the course of that business. 2 Investment firms shall establish, implement and maintain systems and procedures that are adequate to safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question. 3 Investment firms shall establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the case of an interruption to their systems and procedures, the preservation of essential data and functions, and the maintenance of investment services and activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of their investment services and activities. 4 Investment firms shall establish, implement and maintain accounting policies and procedures that enable them, at the request of the competent authority, to deliver in a timely manner to the competent authority financial reports which reflect a true and fair view of their financial position and which comply with all applicable accounting standards and rules. 5 Investment firms shall monitor and, on a regular basis, evaluate the adequacy and effectiveness of their systems, internal control mechanisms and arrangements established in accordance with paragraphs 1 to 4, and take appropriate measures to address any deficiencies EU Article 22 - Compliance 1 Investment firms shall establish, implement and maintain adequate policies and procedures designed to detect any risk of failure by the firm to comply with its obligations under Directive 2014/65/EU, as well as the associated risks, and put in place adequate measures and procedures designed to minimise such risk and to enable the competent authorities to exercise their powers effectively under that Directive. Investment firms shall take into account the nature, scale and complexity of the business of the firm, and the nature and range of investment services and activities undertaken in the course of that business. 2 Investment firms shall establish and maintain a permanent and effective compliance function which operates independently and which has the following responsibilities:

FCA 2017/38
(a) to monitor on a permanent basis and to assess, on a regular basis, the adequacy and effectiveness of the measures, policies and procedures put in place in accordance with the first subparagraph of paragraph 1, and the actions taken to address any deficiencies in the firm's compliance with its obligations; (b) to advise and assist the relevant persons responsible for carrying out investment services and activities to comply with the firm's obligations under Directive 2014/65/EU; (c) to report to the management body, on at least an annual basis, on the implementation and effectiveness of the overall control environment for investment services and activities, on the risks that have been identified and on the complaints-handling reporting as well as remedies undertaken or to be undertaken; (d) to monitor the operations of the complaints-handling process and consider complaints as a source of relevant information in the context of its general monitoring responsibilities. In order to comply with points (a) and (b) of this paragraph, the compliance function shall conduct an assessment on the basis of which it shall establish a risk-based monitoring programme that takes into consideration all areas of the investment firm's investment services, activities and any relevant ancillary services, including relevant information gathered in relation to the monitoring of complaints handling. The monitoring programme shall establish priorities determined by the compliance risk assessment ensuring that compliance risk is comprehensively monitored. 3 In order to enable the compliance function referred to in paragraph 2 to discharge its responsibilities properly and independently, investment firms shall ensure that the following conditions are satisfied:
(a) the compliance function has the necessary authority, resources, expertise and access to all relevant information; (b) a compliance officer is appointed and replaced by the management body and is responsible for the compliance function and for any reporting as to compliance required by Directive 2014/65/EU and
Article 25(2) of this Regulation;
(c) the compliance function reports on an ad-hoc basis directly to the management body where it detects a significant risk of failure by the firm to comply with its obligations under Directive 2014/65/EU; (d) the relevant persons involved in the compliance function are not involved in the performance of services or activities they monitor; (e) the method of determining the remuneration of the relevant persons involved in the compliance function does not compromise their

FCA 2017/38 objectivity and is not likely to do so.
4 An investment firm shall not be required to comply with point (d) or point (e) of paragraph 3 where it is able to demonstrate that in view of the nature, scale and complexity of its business, and the nature and range of investment services and activities, the requirements under point (d) or (e) are not proportionate and that its compliance function continues to be effective. In that case, the investment firm shall assess whether the effectiveness of the compliance function is compromised. The assessment shall be reviewed on a regular basis. EU Article 23 - Risk management 1 Investment firms shall take the following actions relating to risk management:
(a) establish, implement and maintain adequate risk management policies and procedures which identify the risks relating to the firm's activities, processes and systems, and where appropriate, set the level of risk tolerated by the firm; (b) adopt effective arrangements, processes and mechanisms to manage the risks relating to the firm's activities, processes and systems, in light of that level of risk tolerance; (c) monitor the following:
(i) the adequacy and effectiveness of the investment firm's risk management policies and procedures; (ii) the level of compliance by the investment firm and its relevant persons with the arrangements, processes and mechanisms adopted in accordance with point (b); (iii) the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant persons to comply with such arrangements, processes and mechanisms or follow such policies and procedures. 2 Investment firms shall, where appropriate and proportionate in view of the nature, scale and complexity of their business and the nature and range of the investment services and activities undertaken in the course of that business, establish and maintain a risk management function that operates independently and carries out the following tasks:
(a) implementation of the policy and procedures referred to in paragraph 1; (b) provision of reports and advice to senior management in accordance with Article 25(2). Where an investment firm does not establish and maintain a risk management function under the first sub-paragraph, it shall be able to demonstrate upon

FCA 2017/38 request that the policies and procedures which it is has adopted in accordance with paragraph 1 satisfy the requirements therein. EU Article 24 - Internal audit Investment firms shall, where appropriate and proportionate in view of the nature, scale and complexity of their business and the nature and range of investment services and activities undertaken in the course of that business, establish and maintain an internal audit function which is separate and independent from the other functions and activities of the investment firm and which has the following responsibilities:
(a) establish, implement and maintain an audit plan to examine and evaluate the adequacy and effectiveness of the investment firm's systems, internal control mechanisms and arrangements; (b) issue recommendations based on the result of work carried out in accordance with point (a) and verify compliance with those recommendations; (c) report in relation to internal audit matters in accordance with Article 25(2). EU Article 25 - Responsibility of senior management 1 Investment firms shall, when allocating functions internally, ensure that senior management, and, where applicable, the supervisory function, are responsible for ensuring that the firm complies with its obligations under Directive 2014/65/EU. In particular, senior management and, where applicable, the supervisory function shall be required to assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the obligations under Directive 2014/65/EU and to take appropriate measures to address any deficiencies. The allocation of significant functions among senior managers shall clearly establish who is responsible for overseeing and maintaining the firm's organisational requirements. Records of the allocation of significant functions shall be kept up-to-date. 2 Investment firms shall ensure that their senior management receive on a frequent basis, and at least annually, written reports on the matters covered by Articles 22, 23 and 24 indicating in particular whether the appropriate remedial measures have been taken in the event of any deficiencies. 3 Investment firms shall ensure that where there is a supervisory function, it receives written reports on the matters covered by Articles 22, 23 and 24 on a regular basis. 4 For the purposes of this Article, the supervisory function shall be the function within an investment firm responsible for the supervision of its senior management.

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EU Article 30 - Scope of critical and important operational functions 1 For the purposes of the first subparagraph of Article 16(5) of Directive 2014/65/EU, an operational function shall be regarded as critical or important where a defect or failure in its performance would materially impair the continuing compliance of an investment firm with the conditions and obligations of its authorisation or its other obligations under Directive 2014/65/EU, or its financial performance, or the soundness or the continuity of its investment services and activities. 2 Without prejudice to the status of any other function, the following functions shall not be considered as critical or important for the purposes of paragraph 1:
(a) the provision to the firm of advisory services, and other services which do not form part of the investment business of the firm, including the provision of legal advice to the firm, the training of personnel of the firm, billing services and the security of the firm's premises and personnel; (b) the purchase of standardised services, including market information services and the provision of price feeds. EU Article 31 - Outsourcing critical or important operational functions 1 Investment firms outsourcing critical or important operational functions shall remain fully responsible for discharging all of their obligations under Directive 2014/65/EU and shall comply with the following conditions:
(a) the outsourcing does not result in the delegation by senior management of its responsibility; (b) the relationship and obligations of the investment firm towards its clients under the terms of Directive 2014/65/EU is not altered; (c) the conditions with which the investment firm must comply in order to be authorised in accordance with Article 5 of Directive 2014/65/EU, and to remain so, are not undermined; (d) none of the other conditions subject to which the firm's authorisation was granted is removed or modified. 2 Investment firms shall exercise due skill, care and diligence when entering into, managing or terminating any arrangement for the outsourcing to a service provider of critical or important operational functions and shall take the necessary steps to ensure that the following conditions are satisfied:
(a) the service provider has the ability, capacity, sufficient resources, appropriate organisational structure supporting the performance of the outsourced functions, and any authorisation required by law to perform the outsourced functions, reliably and professionally;

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(b) the service provider carries out the outsourced services effectively and in compliance with applicable law and regulatory requirements, and to this end the firm has established methods and procedures for assessing the standard of performance of the service provider and for reviewing on an ongoing basis the services provided by the service provider; (c) the service provider properly supervises the carrying out of the outsourced functions, and adequately manage the risks associated with the outsourcing; (d) appropriate action is taken where it appears that the service provider may not be carrying out the functions effectively or in compliance with applicable laws and regulatory requirements; (e) the investment firm effectively supervises the outsourced functions or services and manage the risks associated with the outsourcing and to this end the firm retains the necessary expertise and resources to supervise the outsourced functions effectively and manage those risks; (f) the service provider has disclosed to the investment firm any development that may have a material impact on its ability to carry out the outsourced functions effectively and in compliance with applicable laws and regulatory requirements (g) the investment firm is able to terminate the arrangement for outsourcing where necessary, with immediate effect when this is in the interests of its clients, without detriment to the continuity and quality of its provision of services to clients; (h) the service provider cooperates with the competent authorities of the investment firm in connection with the outsourced functions; (i) the investment firm, its auditors and the relevant competent authorities have effective access to data related to the outsourced functions, as well as to the relevant business premises of the service provider, where necessary for the purpose of effective oversight in accordance with this
article, and the competent authorities are able to exercise those rights of
access;
(j) the service provider protects any confidential information relating to the investment firm and its clients; (k) the investment firm and the service provider have established, implemented and maintained a contingency plan for disaster recovery and periodic testing of backup facilities, where that is necessary having regard to the function, service or activity that has been outsourced; (l) the investment firm has ensured that the continuity and quality of the outsourced functions or services are maintained also in the event of termination of the outsourcing either by transferring the outsourced

FCA 2017/38 functions or services to another third party or by performing them itself. 3 The respective rights and obligations of the investment firms and of the service provider shall be clearly allocated and set out in a written agreement. In particular, the investment firm shall keep its instruction and termination rights, its rights of information, and its right to inspections and access to books and premises. The agreement shall ensure that outsourcing by the service provider only takes place with the consent, in writing, of the investment firm. 4 Where the investment firm and the service provider are members of the same group, the investment firm may, for the purposes of complying with this Article and Article 32, take into account the extent to which the firm controls the service provider or has the ability to influence its actions. 5 Investment firms shall make available on request to the competent authority all information necessary to enable the authority to supervise the compliance of the performance of the outsourced functions with the requirements of Directive 2014/65/EU and its implementing measures. EU Article 32 - Service providers located in third countries 1 In addition to the requirements set out in Article 31, where an investment firm outsources functions related to the investment service of portfolio management provided to clients to a service provider located in a third country, that investment firm ensures that the following conditions are satisfied:
(a) the service provider is authorised or registered in its home country to provide that service and is effectively supervised by a competent authority in that third country; (b) there is an appropriate cooperation agreement between the competent authority of the investment firm and the supervisory authority of the service provider. 2 The cooperation agreement referred to in point (b) of paragraph 1 shall ensure that the competent authorities of the investment firm are able, at least, to:
(a) obtain on request the information necessary to carry out their supervisory tasks pursuant to Directive 2014/65/EU and Regulation (EU) No 600/2014; (b) obtain access to the documents relevant for the performance of their supervisory duties maintained in the third country; (c) receive information from the supervisory authority in the third country as soon as possible for the purpose of investigating apparent breaches of the requirements of Directive 2014/65/EU and its implementing measures and Regulation (EU) No 600/2014; (d) cooperate with regard to enforcement, in accordance with the national and international law applicable to the supervisory authority of the third

FCA 2017/38 country and the competent authorities in the Union in cases of breach of the requirements of Directive 2014/65/EU and its implementing measures and relevant national law. 3 Competent authorities shall publish on their website a list of the supervisory authorities in third countries with which they have a cooperation agreement referred to in point (b) of paragraph 1. Competent authorities shall update cooperation agreements concluded before the date of entry into application of this Regulation within six months from that date. EU Article 72 - Retention of records 1 The records shall be retained in a medium that allows the storage of information in a way accessible for future reference by the competent authority, and in such a form and manner that the following conditions are met:
(a) the competent authority is able to access them readily and to reconstitute each key stage of the processing of each transaction; (b) it is possible for any corrections or other amendments, and the contents of the records prior to such corrections or amendments, to be easily ascertained; (c) it is not possible for the records otherwise to be manipulated or altered; (d) it allows IT or any other efficient exploitation when the analysis of the data cannot be easily carried out due to the volume and the nature of the data; and (e) the firm's arrangements comply with the record keeping requirements irrespective of the technology used. 2 Investment firms shall keep at least the records identified in Annex I to this Regulation depending upon the nature of their activities. The list of records identified in Annex I to this Regulation is without prejudice to any other record-keeping obligations arising from other legislation. 3 Investment firms shall also keep records of any policies and procedures they are required to maintain pursuant to Directive 2014/65/EU, Regulation (EU) No 600/2014, Directive 2014/57/EU and Regulation (EU) No 596/2014 and their respective implementing measures in writing. Competent authorities may require investment firms to keep additional records to the list identified in Annex I to this Regulation. 4 General organisational requirements

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4.1 General requirements
…
Application to a common platform firm
4.1.-2 G For a common platform firm:
(1) the MiFID Org Regulation applies, as summarised in SYSC 1 Annex 1 3.2G, SYSC 1 Annex 1 3.2-AR and SYSC 1 Annex 1 3.2-BR; and (2) the rules and guidance apply as set out in the table below:
Subject Applicable rule or guidance
General requirements SYSC 4.1.1R, SYSC
4.1.1CR, SYSC 4.1.2R,
SYSC 4.1.2AAR
Business continuity SYSC 4.1.6R, SYSC 4.1.7R, SYSC 4.1.8G Audit committee SYSC 4.1.11G, SYSC 4.1.13G, SYSC 4.1.14G Persons who effectively direct the business SYSC 4.2.1R, SYSC 4.2.2R, SYSC 4.2.3G, SYSC 4.2.4G, SYSC 4.2.5G, SYSC 4.2.6R Responsibility of senior personnel SYSC 4.3.3G Management body SYSC 4.3A-1R to SYSC 4.3A.7R Nominations committee SYSC 4.3A.8R to SYSC 4.3A.11R Management responsibilities maps for UK relevant authorised persons SYSC 4.5 Management responsibilities maps for non-UK relevant authorised persons SYSC 4.6 Senior management responsibilities for UK relevant authorised persons SYSC 4.7 Handover procedures and material SYSC 4.9 Application to a MiFID optional exemption firm and to a third country firm

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4.1.-1 G For a MiFID optional exemption firm and a third country firm:
(1) the rules and guidance in this chapter apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(1); and (2) those articles of the MiFID Org Regulation in SYSC 1 Annex 1 2.8AR and 3.2CR apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(2). General requirements
4.1.1 R (1) A firm must have robust governance arrangements, which include a
clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, and internal control mechanisms, including sound administrative and accounting procedures and effective control and safeguard arrangements for information processing systems. … [Note: article 74 (1) of CRD, article 13 16(5) second paragraph of MiFID,
article 12(1)(a) of the UCITS Directive, and article 18(1) of AIFMD]
(3) Without prejudice to the ability of the FCA or any other relevant competent authority to require access to communications in accordance with MiFID and MiFIR, a common platform firm must have sound security mechanisms in place for the following, while maintaining the confidentiality of the data at all times:
(a) to guarantee the security and authentication of the means of transfer of information; (b) to minimise the risk of data corruption and unauthorised access; and (c) to prevent information leakage. [Note: article 16(5) third paragraph of MiFID] …
4.1.2 R For a common platform firm, the arrangements, processes and mechanisms
referred to in SYSC 4.1.1R must be comprehensive and proportionate to the nature, scale and complexity of the risks inherent in the business model and of the common platform firm's activities and must take into account the specific technical criteria described in SYSC 4.1.7R article 21(3) of the MiFID Org Regulation, SYSC 5.1.7R, SYSC 7 and whichever of the following as applicable:

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(1) (for a firm to which SYSC 19A applies) SYSC 19A (IFPRU Remuneration Code); (2) (for a full-scope UK AIFM) SYSC 19B (AIFM Remuneration Code); (3) (for a firm to which SYSC 19C applies) SYSC 19C (BIPRU Remuneration Code); (4) (for a firm to which SYSC 19D applies) SYSC 19D (Dual-regulated firms Remuneration Code); (5) (for a firm to which the remuneration part of the PRA Rulebook applies) the remuneration part of the PRA Rulebook. [Note: article 74(2) of CRD] 4.1.2A G Other firms should take account of the comprehensiveness and proportionality rule (SYSC 4.1.2R) as if it were guidance (and as if "should" appeared in that rule rule instead of "must") as explained in SYSC 1 Annex 1 3.3 G R(1). … Mechanisms and procedures for a firm
4.1.4 R A firm (with the exception of a common platform firm and a sole trader who
does not employ any person who is required to be approved under section 59 of the Act (Approval for particular arrangements)) must, taking into account the nature, scale and complexity of the business of the firm, and the nature and range of the financial services and activities undertaken in the course of that business:
(1) (if it is a common platform firm or a management company) establish, implement and maintain decision-making procedures and an organisational structure which clearly and in a documented manner specifies reporting lines and allocates functions and responsibilities; … (3) (if it is a common platform firm) establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the firm; and … [Note: articles 5(1) final paragraph, 5(1)(a), 5(1)(c) and 5(1)(e) of the MiFID implementing Directive and articles 4(1) final paragraph, 4(1)(a), 4(1)(c) and 4(1)(d) of the UCITS implementing Directive] 4.1.4A G A firm that is not a common platform firm or a management company should take into account the decision-making procedures and effective internal reporting rules (SYSC 4.1.4R (1), (3) and (4)) as if they were guidance (and as if "should" appeared in those rules rules instead of "must") as explained in

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SYSC 1 Annex 1 3.3G R(1).
4.1.5 R A MiFID investment firm and a management company must establish,
implement and maintain systems and procedures that are adequate to safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question. [Note: article 5(2) of the MiFID implementing Directive and article 4(2) of the UCITS implementing Directive] Business continuity
4.1.6 R A common platform firm must take reasonable steps to ensure continuity and
regularity in the performance of its regulated activities. To this end the common platform firm must employ appropriate and proportionate systems, resources and procedures. [Note: article 13 16(4) of MiFID]
4.1.7 R A common platform firm CRR firm and a management company must
establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the case of an interruption to its systems and procedures, that any losses are limited, the preservation of essential data and functions, and the maintenance of its regulated activities, or, in the case of a management company, its collective portfolio management activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of those activities. [Note: article 5(3) of the MiFID implementing Directive, annex V paragraph 13 of the Banking Consolidation Directive, article 4(3) of the UCITS implementing Directive and article 85(2) of the CRD] 4.1.7A G Other firms should take account of the business continuity rules (SYSC 4.1.6R and 4.1.7R) as if they were guidance (and as if "should" appeared in those rules rules instead of "must") as explained in SYSC 1 Annex 1 3.3G R(1).
4.1.8 G The matters dealt with in a business continuity policy should include:
…
(3) communication arrangements for internal and external concerned parties (including the appropriate regulator FCA, clients and the press); … (6) regular testing of the business continuity policy in an appropriate and proportionate manner in accordance with SYSC 4.1.10R and for a common platform firm with article 21(5) of the MiFID Org Regulation.

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…
Accounting policies: management company
4.1.9 R A common platform firm and a management company must establish,
implement and maintain accounting policies and procedures that enable it, at the request of the FCA, to deliver in a timely manner to the FCA financial reports which reflect a true and fair view of its financial position and which comply with all applicable accounting standards and rules. [Note: article 5(4) of the MiFID implementing Directive and article 4(4) of the UCITS implementing Directive] Regular monitoring: management company
4.1.10 R A common platform firm and a management company must monitor and, on a
regular basis, evaluate the adequacy and effectiveness of its systems, internal control mechanisms and arrangements established in accordance with SYSC 4.1.4R to SYSC 4.1.9R and take appropriate measures to address any deficiencies. [Note: article 5(5) of the MiFID implementing Directive and article 4(5) of the UCITS implementing Directive] Regular monitoring: other firms 4.1.10A G Other firms should take account of the regular monitoring rule (SYSC 4.1.10R) as if it were guidance (and as if "should" appeared in that rule rule instead of "must") as explained in SYSC 1 Annex 1 3.3G R(1), but ignoring the cross-reference to SYSC 4.1.5R and SYSC 4.1.9R. …
4.2 Persons who effectively direct the business
General requirement
4.2.1 R The senior personnel of a common platform firm, a management company, a
full-scope UK AIFM, or of the UK branch of a non-EEA bank must be of sufficiently good repute and sufficiently experienced as to ensure the sound and prudent management of the firm. [Note: article 9(1)(4) of MiFID, article 7(1)(b) of the UCITS Directive ,
article 8(1)(c) of AIFMD, article 11(1) second paragraph of the Banking
Consolidation Directive and article 13(1) 91(1) of the CRD] 4.2.1A G Other firms should take account of the senior personnel rule (SYSC 4.2.1R) as if it were guidance (and as if "should" appeared in that rule rule instead of "must") as explained in SYSC 1 Annex 1 3.3G R(1). …

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Composition of management
4.2.2 R A common platform firm, a management company, a full-scope UK AIFM
and the UK branch of a non-EEA bank must ensure that its management is undertaken by at least two persons meeting the requirements laid down in SYSC 4.2.1R and, :
(a) for a full-scope UK AIFM, SYSC 4.2.7R; or (b) for a common platform firm, SYSC 4.3A.3R. [Note: article 9 (4) (6) first paragraph of MiFID, article 7(1)(b) of the UCITS Directive, article 8(1)(c) of AIFMD and article 13(1) of CRD] …
4.2.4 G At least two independent minds should be applied to the formulation and
implementation of the policies of a common platform firm, a management company, a full-scope UK AIFM and the UK branch of a non-EEA bank third country firm. Where a firm nominates just two individuals to direct its business, the appropriate regulator FCA will not regard them as both effectively directing the business where one of them makes some, albeit significant, decisions relating to only a few aspects of the business. Each should play a part in the decision-making process on all significant decisions. Both should demonstrate the qualities and application to influence strategy, day-to-day policy and its implementation. This does not require their day-today involvement in the execution and implementation of policy. It does, however, require involvement in strategy and general direction, as well as knowledge of, and influence on, the way in which strategy is being implemented through day-to-day policy.
4.2.5 G Where there are more than two individuals directing the business of a
common platform firm, a management company, a full-scope UK AIFM or the UK branch of a non-EEA bank third country firm, the appropriate regulator FCA does not regard it as necessary for all of these individuals to be involved in all decisions relating to the determination of strategy and general direction. However, at least two individuals should be involved in all such decisions. Both individuals' judgement should be engaged so that major errors leading to difficulties for the firm are less likely to occur. Similarly, each individual should have sufficient experience and knowledge of the business and the necessary personal qualities and skills to detect and resist any imprudence, dishonesty or other irregularities by the other individual. Where a single individual, whether a chief executive, managing director or otherwise, is particularly dominant in such a firm this will raise doubts about whether SYSC 4.2.2R is met. Alternative arrangements
4.2.6 R If a common platform firm, (other than a credit institution or AIFM
investment firm) or the UK branch of a non-EEA bank third country firm, is:

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(1) a natural person; or
(2) a legal person managed by a single natural person; then:
(3) it must have alternative arrangements in place which ensure:
(a) sound and prudent management of the firm ; and (b) adequate consideration of the interests of clients and the integrity of the market; and (4) the natural persons concerned must be of sufficiently good repute, possess sufficient knowledge, skills and experience and commit sufficient time to perform their duties. [Note: article 9 (4)(6) second paragraph of MiFID] …
4.3 Responsibility of senior personnel
4.3.1 R A firm (with the exception of a common platform firm and a sole trader who
does not employ any person who is required to be approved under section 59 of the Act (Approval for particular arrangements)), when allocating functions internally, must ensure that senior personnel and, where appropriate, the supervisory function, are responsible for ensuring that the firm complies with its obligations under the regulatory system. In particular, senior personnel and, where appropriate, the supervisory function must assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the firm's obligations under the regulatory system and take appropriate measures to address any deficiencies. [Note: article 9(1) of the MiFID implementing Directive and articles 9(1) and 9(3) of the UCITS implementing Directive]
4.3.2 R A common platform firm (with the exception of a sole trader who does not
employ any person who is required to be approved under section 59 of the Act (Approval for particular arrangements)) and a management company , must ensure that:
(1) its senior personnel receive on a frequent basis, and at least annually, written reports on the matters covered by SYSC 6.1.2R to SYSC 6.1.5R, SYSC 6.2.1R and , SYSC 7.1.2R, SYSC 7.1.3R and SYSC 7.1.5R to SYSC 7.1.7R, indicating in particular whether the appropriate remedial measures have been taken in the event of any deficiencies; and (2) the supervisory function, if any, receives on a regular basis written reports on the same matters.

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[Note: article 9(2) and article 9(3) of the MiFID implementing Directive and articles 9(4) and 9(6) of the UCITS implementing Directive] 4.3.2A G Other firms should take account of the written reports rule (SYSC 4.3.2R) as if it were guidance (and as if "should" appeared in that rule rule instead of "must") as explained in SYSC 1 Annex 1 3.3G R(1). … 4.3A CRR firms Management body and nomination committee Management body 4.3A.-1 R In SYSC 4.3A.6R and SYSC 4.3A.8R a 'CRR firm common platform firm that is significant' significant means a significant IFPRU firm. 4.3A.1 R A CRR firm common platform firm must ensure that the management body defines, oversees and is accountable for the implementation of governance arrangements that ensure effective and prudent management of the firm, including the segregation of duties in the organisation and the prevention of conflicts of interest, and in a manner that promotes the integrity of the market and the interests of clients. The firm must ensure that the management body:
(1) has overall responsibility for the firm; (2) approves and oversees implementation of the firm's strategic objectives, risk strategy and internal governance; (3) ensures the integrity of the firm's accounting and financial reporting systems, including financial and operational controls and compliance with the regulatory system. (4) oversees the process of disclosure and communications; (5) has responsibility for providing effective oversight of senior management . ; (6) monitors and periodically assesses:
(a) the adequacy and the implementation of the firm’s strategic objectives in the provision of investment services and/or activities and ancillary services; (b) the effectiveness of the firm's governance arrangements; and (c) the adequacy of the policies relating to the provision of services to clients, and takes appropriate steps to address any deficiencies.; and

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(7) has adequate access to information and documents which are needed to oversee and monitor management decision-making. [Note: article 88(1) of CRD and articles 9(1) and 9(3) of MiFID] 4.3A.1A R Without prejudice to SYSC 4.3A.1R, a common platform firm must ensure that the management body defines, approves and oversees:
(1) the organisation of the firm for the provision of investment services and/or activities and ancillary services, including the skills, knowledge and expertise required by personnel, the resources, the procedures and the arrangements for the provision of services and activities, taking into account the nature, scale and complexity of its business and all the requirements the firm has to comply with; (2) a policy as to services, activities, products and operations offered or provided, in accordance with the risk tolerance of the firm and the characteristics and needs of the firm’s clients to whom they will be offered or provided, including carrying out appropriate stress testing, where appropriate; and (3) a remuneration policy of persons involved in the provision of services to clients aiming to encourage responsible business conduct, fair treatment of clients as well as avoiding conflict of interest in the relationships with clients. [Note: article 9(3) of MiFID] 4.3A.2 R A CRR firm common platform firm must ensure that the chairman of the firm's management body does not exercise simultaneously the PRA’s Chief Executive function (controlled function ( SMF1) or chief executive function within the same firm, unless justified by the firm and authorised by the FCA. [Note: article 88(1)(e) of CRD and article 9(1) of MiFID] 4.3A.2A G A firm may apply to the FCA under section 138A of the Act to waive SYSC 4.3A.2R. 4.3A.3 R A CRR firm common platform firm must ensure that the members of the management body of the firm:
(1) are of sufficiently good repute;
(2) possess sufficient knowledge, skills and experience to perform their duties; (3) possess adequate collective knowledge, skills and experience to understand the firm's activities, including the main risks; (4) reflect an adequately broad range of experiences;

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(5) commit sufficient time to perform their functions in the firm; and (6) act with honesty, integrity and independence of mind to effectively assess and challenge the decisions of senior management where necessary and to effectively oversee and monitor management decision-making. [Note: article 91(1)-(2) and (7)-(8) of CRD and article 9(1) and 9(4) of MiFID] 4.3A.4 R A CRR firm common platform firm must devote adequate human and financial resources to the induction and training of members of the management body. [Note: article 91(3) (9) of CRD and article 9(1) of MiFID] 4.3A.5 R A CRR firm common platform firm must ensure that the members of the management body of the firm do not hold more directorships than is appropriate taking into account individual circumstances and the nature, scale and complexity of the firm's activities. [Note: article 91(3) of CRD and article 9(1) of MiFID] 4.3A.6 R (1) A CRR firm common platform firm that is significant must ensure that the members of the management body of the firm do not hold more than one of the following combinations of directorship in any organisation at the same time:
(a) one executive directorship with two non-executive directorships; and (b) four non-executive directorships. (2) Paragraph (1) does not apply to members of the management body that represent the United Kingdom. [Note: article 91(3) of CRD and article 9(1) of MiFID] 4.3A.7 R For the purposes of SYSC 4.3A.5R and SYSC 4.3A.6R:
(1) directorships in organisations which do not pursue predominantly commercial objectives shall not count; and (2) the following shall count as a single directorship:
(a) executive or non-executive directorships held within the same group; or (b) executive or non-executive directorships held within:
(i) firms that are members of the same institutional protection scheme provided that the conditions set out

FCA 2017/38 in article 113(7) of the CRR are fulfilled; or (ii) undertakings (including non-financial entities) in which the firm holds a qualifying holding. [Note: article 91(4) and (5) of CRD and article 9(1) of MiFID] Nomination Committee 4.3A.8 R A CRR firm common platform firm that is significant must:
(1) establish a nomination committee composed of members of the management body who do not perform any executive function in the firm; (2) ensure that the nomination committee is able to use any forms of resources the nomination committee deems appropriate, including external advice; and (3) ensure that the nomination committee receives appropriate funding. [Note: article 88(2) of CRD and article 9(1) of MiFID] 4.3A.9 R A CRR firm common platform firm that has a nomination committee must ensure that the nomination committee:
(1) engage engages a broad set of qualities and competences when recruiting members to the management body and for that purpose puts in place a policy promoting diversity on the management body; (2) identifies and recommends for approval, by the management body or by general meeting, candidates to fill management body vacancies, having evaluated the balance of knowledge, skills, diversity and experience of the management body; (3) prepares a description of the roles and capabilities for a particular appointment, and assesses the time commitment required; (4) decides on a target for the representation of the underrepresented gender in the management body and prepares a policy on how to increase the number of the underrepresented gender in the management body in order to meet that target; (5) periodically, and at least annually, assesses the structure, size, composition and performance of the management body and makes recommendations to the management body with regard to any changes; (6) periodically, and at least annually, assesses the knowledge, skills and experience of individual members of the management body and of the management body collectively, and reports this to the management body;

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(7) periodically reviews the policy of the management body for selection and appointment of senior management and makes recommendations to the management body; and (8) in performing its duties, and to the extent possible, on an ongoing basis, takes account of the need to ensure that the management body's decision making is not dominated by any one individual or small group of individuals in a manner that is detrimental to the interest of the firm as a whole ; . [Note: article 88(2) and article 91(10) of the CRD and article 9(1) of MiFID] 4.3A.10 R A CRR firm common platform firm that does not have a nomination committee must engage a broad set of qualities and competences when recruiting members to the management body. For that purpose a CRR firm common platform firm that does not have a nomination committee must put in place a policy promoting diversity on the management body. [Note: article 91(10) of CRD and article 9(1) of MiFID] …
4.7 Senior management responsibilities for UK relevant authorised persons:
allocation of responsibilities
…
4.7.7 R Table: FCA-prescribed senior management responsibilities
FCA-prescribed senior management responsibility Explanation Equivalent PRAprescribed senior management responsibility …
Part Two (applies to all firms except for small CRR firms and credit unions)
…
(7) Responsibility for:
(a) safeguarding the independence of; and (b) oversight of the performance of; the internal audit function, in accordance with SYSC
6.2 (Internal Audit) or
article 24 of the MiFID
This responsibility includes responsibility for:
(a) safeguarding the independence of; and (b) oversight of the performance of; a person approved to perform the PRA's Head of Internal Audit PRA-prescribed senior management responsibility 4.1(15)

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Org Regulation. designated senior management function for the firm. (8) Responsibility for:
(a) safeguarding the independence of; and (b) oversight of the performance of; the compliance function in accordance with SYSC 6.1(Compliance) or article 22 of the MiFID Org Regulation. This responsibility includes responsibility for:
(a) safeguarding the independence of; and (b) oversight of the performance of; the person performing the compliance oversight function for the firm. PRA-prescribed senior management responsibility 4.1(16) … … 5 Employees, agents and other relevant persons
5.1 Skills, knowledge and expertise
…
Application to a common platform firm
5.1.-2 G For a common platform firm:
(1) the MiFID Org Regulation applies, as summarised in SYSC 1 Annex 1 3.2G, SYSC Annex 1 3.2-AR and SYSC 1 Annex 1 3.2-BR; and (2) the rules and guidance apply as set out in the table below:
Subject Applicable rule or guidance
Segregation of functions SYSC 5.1.2G to SYSC 5.1.5AG, SYSC 5.1.7R, SYSC 5.1.8G to SYSC 5.1.11G Certification regime SYSC 5.2 Application to an MiFID optional exemption firm and to a third country firm 5.1.-1 G For a MiFID optional exemption firm and a third country firm:
(a) the rules and guidance in this chapter apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(1); and

FCA 2017/38
(b) those articles of the MiFID Org Regulation in SYSC 1 Annex 1 2.8AR and SYSC 1 Annex 1 3.2CR apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(2). Segregation of functions
5.1.1 R A firm (other than a common platform firm) must employ personnel with the
skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them. [Note: article 5(1)(d) of the MiFID implementing Directive, articles 12(1)(a) and 14(1)(c) of the UCITS Directive and article 5(1) of the UCITS implementing Directive] … 5.1.5A G If a firm requires employees who are not subject to a qualification requirement in TC to pass a relevant examination from the list of recommended examinations maintained by the Financial Skills Partnership, the appropriate regulator FCA will take that into account when assessing whether the firm has ensured that the employee satisfies the knowledge component of the competent employees rule. Segregation of functions
5.1.6 R A common platform firm and a management company must ensure that the
performance of multiple functions by its relevant persons does not and is not likely to prevent those persons from discharging any particular functions soundly, honestly and professionally. [Note: article 5(1)(g) of the MiFID implementing Directive and article 5(3) of the UCITS implementing Directive]
5.1.7 R The senior personnel of a common platform firm must define arrangements
concerning the segregation of duties within the firm and the prevention of conflicts of interest. [Note: article 88 of the CRD and annex V paragraph 1 of the Banking Consolidation Directive article 9(1) of MiFID] 5.1.7A G Other firms should take account of the segregation of functions rules (SYSC 5.1.6R and SYSC 5.1.7R) as if they were guidance (and as if “should” appeared in those rules rules instead of “must”) as explained in SYSC 1
Annex 1 3.3G R(1).
Segregation of functions: additional guidance …
5.1.11 G Where a common platform firm outsources its internal audit function, it
should take reasonable steps to ensure that every individual involved in the

FCA 2017/38 performance of this service is independent from the individuals who perform its external audit. This should not prevent services from being undertaken by a firm's external auditors provided that:
…
Awareness of procedures: management company
5.1.12 R A common platform firm and a management company must ensure that its
relevant persons are aware of the procedures which must be followed for the proper discharge of their responsibilities. [Note: article 5(1)(b) of the MiFID implementing Directive and article 4(1)(b) of the UCITS implementing Directive] Awareness of procedures: other firms 5.1.12A G Other firms should take account of the rule concerning awareness of procedures (SYSC 5.1.12R) as if it were guidance (and as if “should” appeared in that rule rule instead of “must”) as explained in SYSC 1 Annex 1 3.3G R(1). General
5.1.13 R The systems, internal control mechanisms and arrangements established by a
firm (other than a common platform firm) in accordance with this chapter must take into account the nature, scale and complexity of its business and the nature and range of financial services and activities undertaken in the course of that business. [Note: article 5(1) final paragraph of the MiFID implementing Directive and articles 4(1) final paragraph and 5(4) of the UCITS implementing Directive]
5.1.14 R A common platform firm and a management company must monitor and, on a
regular basis, evaluate the adequacy and effectiveness of its systems, internal control mechanisms and arrangements established in accordance with this
chapter, and take appropriate measures to address any deficiencies.
[Note: article 5(5) of the MiFID implementing Directive and articles article 4(5) of the UCITS implementing Directive]
5.1.15 G Other firms should take account of the rule requiring monitoring and
evaluation of the adequacy and effectiveness of systems (SYSC 5.1.14R) as if it were guidance (and as if “should” appeared in that rule rule instead of “must”) as explained in SYSC 1 Annex 1 3.3G R(1). 6 Compliance, internal audit and financial crime
6.1 Compliance

FCA 2017/38
…
Application to a common platform firm
6.1.-2 G For a common platform firm:
(1) the MiFID Org Regulation applies, as summarised in SYSC 1 Annex 1 3.2G, SYSC 1 Annex 1 3.2-AR and SYSC 1 Annex 1 3.2-BR; and (2) the rules and guidance apply as set out in the table below:
Subject Applicable rule or guidance
Adequate policy and procedures SYSC 6.1.1R, SYSC 6.1.1AG Compliance function SYSC 6.1.4-AG, SYSC 6.1.7R Internal audit SYSC 6.2.2G Financial crime SYSC 6.3.1R to SYSC 6.3.11G Application to an MiFID optional exemption firm and to a third country firm 6.1.-1 G For a MiFID optional exemption firm and a third country firm:
(1) the rules and guidance in this chapter apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(1); and (2) those articles of the MiFID Org Regulation in SYSC 1 Annex 1 2.8AR and 3.2CR apply to them as if they were rules or as guidance in accordance with SYSC 1 Annex 1 3.2CR(2). Adequate policy and procedures
6.1.1 R A firm must establish, implement and maintain adequate policies and
procedures sufficient to ensure compliance of the firm including its managers, employees and appointed representatives (or where applicable, tied agents) with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime. [Note: article 13 16(2) of MiFID and article 12(1)(a) of the UCITS Directive] …
6.1.2 R A common platform firm and a management company must, taking into
account the nature, scale and complexity of its business, and the nature and range of financial services and activities undertaken in the course of that business, establish, implement and maintain adequate policies and procedures designed to detect any risk of failure by the firm to comply with its obligations under the regulatory system, as well as associated risks, and put in place adequate measures and procedures designed to minimise such risks and

FCA 2017/38 to enable the appropriate regulator FCA to exercise its powers effectively under the regulatory system and to enable any other competent authority to exercise its powers effectively under MiFID or the UCITS Directive. [Note: article 6(1) of the MiFID implementing Directive and article 10(1) of the UCITS implementing Directive] 6.1.2A G Other firms should take account of the adequate policies and procedures rule (SYSC 6.1.2R) as if it were guidance (and as if “should” appeared in that rule rule instead of “must”) as explained in SYSC 1 Annex 1 3.3G R(1). Compliance function
6.1.3 R A common platform firm and a management company must maintain a
permanent and effective compliance function which operates independently and which has the following responsibilities:
(1) to monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures and procedures put in place in accordance with SYSC 6.1.2R, and the actions taken to address any deficiencies in the firm's compliance with its obligations; and (2) to advise and assist the relevant persons responsible for carrying out regulated activities to comply with the firm's obligations under the regulatory system. [Note: article 6(2) of the MiFID implementing Directive and article 10(2) of the UCITS implementing Directive] 6.1.3A G (1) Other firms should take account of the compliance function rule (SYSC 6.1.3R) as if it were guidance (and as if “should” appeared in that rule rule instead of “must”) as explained in SYSC 1 Annex 1 3.3G R(1). …
6.1.4 R In order to enable the compliance function to discharge its responsibilities
properly and independently, a common platform firm and a management company must ensure that the following conditions are satisfied:
(1) the compliance function must have the necessary authority, resources, expertise and access to all relevant information; (2) a compliance officer must be appointed and must be responsible for the compliance function and for any reporting as to compliance required by SYSC 4.3.2R; (3) the relevant persons involved in the compliance functions must not be involved in the performance of the services or activities they monitor; (4) the method of determining the remuneration of the relevant persons involved in the compliance function must not compromise their

FCA 2017/38 objectivity and must not be likely to do so.
[Note: article 6(3) first paragraph of the MiFID implementing Directive and
article 10(3) of the UCITS implementing Directive]
6.1.4-A G In setting the method of determining the remuneration of relevant persons involved in the compliance function:
(1) firms that SYSC 19A applies to will also need to comply with the Remuneration Code; (2) BIPRU firms that SYSC 19C applies to will also need to comply with the BIPRU Remuneration Code; (3) firms that SYSC 19D applies to will also need to comply with the dualregulated firms Remuneration Code; and (4) firms that the remuneration part of the PRA Rulebook Rulebook applies to will also need to comply with it. … 6.1.4-C G (1) This guidance is relevant to a relevant authorised person required to appoint a compliance officer under SYSC 6.1.4R or article 22(3) of the MiFID Org Regulation as applicable. …
6.1.5 R A common platform firm and a management company need not comply with
SYSC 6.1.4R(3) or SYSC 6.1.4R(4) if it is able to demonstrate that in view of the nature, scale and complexity of its business, and the nature and range of financial services and activities, the requirements under those rules are not proportionate and that its compliance function continues to be effective. [Note: article 6(3) second paragraph of the MiFID implementing Directive and article 10(3) second paragraph of the UCITS implementing Directive]
6.1.6 G Other firms should take account of the proportionality rule (SYSC 6.1.5R) as
if it were guidance (and as if “should” appeared in that rule rule instead of “must”) as explained in SYSC 1 Annex 1 3.3GR(1).
6.1.7 R …
(2) References to the regulatory system in SYSC 6.1.1R, SYSC 6.1.2R and SYSC 6.1.3R apply in respect of a firm's branch as if regulatory system includes a Host State's requirements under MiFID and the MiFID implementing Directive MiFID Org Regulation which are applicable to the investment services and/or activities conducted from the firm's branch. [Note: article 13(2) 16 of MiFID]

FCA 2017/38
6.2 Internal audit
6.2.1 R A common platform firm and a management company must, where
appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of its financial services and activities, undertaken in the course of that business, establish and maintain an internal audit function which is separate and independent from the other functions and activities of the firm and which has the following responsibilities:
…
[Note: article 8 of the MiFID implementing Directive and article 11 of the UCITS implementing Directive] 6.2.1A G Other firms should take account of the internal audit rule (SYSC 6.2.1R) as if it were guidance (and as if “should” appeared in that rule rule instead of “must”) as explained in SYSC 1 Annex 1 3.3G R(1). 6.2.1B G (1) This guidance is relevant to a relevant authorised person required to establish and maintain an internal audit function under SYSC 6.2.1R
article 24 of the MiFID Org Regulation.
6.2.2 G (1) The term 'internal audit function' in SYSC 6.2.1R (and SYSC 4.1.11G),
and for a common platform firm in article 24 of the MiFID Org Regulation, refers to the generally understood concept of internal audit within a firm, that is, the function of assessing adherence to and the effectiveness of internal systems and controls, procedures and policies. … … 7 Risk control
7.1 Risk control
…
Application to a common platform firm
7.1.-2 G For a common platform firm:
(1) the MiFID Org Regulation applies, as summarised in SYSC 1 Annex 1 3.2G, SYSC 1 Annex 1 3.2-AR and SYSC 1 Annex 1 3.2-BR; and (2) the rules and guidance apply as set out in the table below:
Subject Applicable rule or guidance

PS17/14: Markets in Financial Instruments Directive II Implementation Policy Statement II

Lineage: In force

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