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MiFID II : governance and organisational requirements

Giovanni Giro

In addition to changes to market structure, conduct of business and transparency, MiFID II will introduce extensive requirements in respect of internal management, organisational arrangements, individual responsibilities and governance. The reform takes provisions derived from the Capital Requirement Directive (CRD IV) that were originally intended for banks and large institutions, and extends these to all MiFID firms.

In good time before 3 January 2018 all firms in scope of MiFID II will need to assess the impact of these new requirements to identify next steps, which in some cases may include reviewing the composition of the Management Body and documenting the assessment behind the selection of Board members, focusing on individuals’ skills and expertise and review their competence for the roles and responsibilities they cover, and also updating/rewriting their corporate governance policy.

One key change under MiFID II relates to the new extended definition of ‘Management Body’ in Article 9, as the governing body responsible for defining and overseeing the implementation of governance arrangements including:
  • the overall business strategy;
  • the organisation of the firm’s governance structure, allocation of appropriate resources with the right  skills, knowledge and expertise required;
  • the procedures for the segregation of functions and decision-making process;
  • adequate internal control mechanisms to maintain compliance with the firm’s policies and regulatory obligations;
  • effective access to Management Information, to be proportionate and easily retrievable;
  • a remuneration policy and conflicts of interest policy aiming at protecting clients’ interests.

Similarly to CRD IV, the composition of the Management Body should reflect a broad range of professional backgrounds and cultural diversity. Whether it is represented by a large Board of Directors or a few Managing Partners in an LLP, the definition and new requirements will be applicable regardless of size.

There are also specific changes to the individual accountability of the members of the Management Body as they will be expected to:
  • commit sufficient time to perform their functions;
  • ensure that the performance of multiple functions by one person does not prevent them from discharging their duties soundly and professionally.
  • at all times be of good repute and possess sufficient knowledge, skills and experience to perform their duties.
  • remain subject to greater scrutiny by the firm itself and by the FCA when they are first appointed as well as on ongoing business decisions.
  • the Management Body must include at least two independent executive minds for the management of the firm’s business;
  • the Chairman cannot also be the CEO
  • they can only hold a limited number of directorships at the same time in different entities (excluding directorships in the same group or charities)

Article 16 of MiFID II prescribes the organisational arrangements that a firm must maintain, including:
  • written decision-making procedures;
  • clearly documented organisational structure, governance arrangements and reporting lines;
  • adequate internal control mechanisms to ensure compliance with regulatory obligations;
  • an effective risk management framework.
  • a policy for the management and monitoring of products and services offered to clients, including regular stress testing to measure risk;
  • higher training and competence criteria upon recruitment of resources and for the ongoing assessment of individuals.

It is expected that the Management Body will be responsible for all of this and will be supported by all Senior Managers and by an independent Compliance function and Risk function.

The FCA is quite active in the area of governance and responsibilities of individuals, even outside the scope of the MiFID II reform, and has recently published a consultation paper further to the Asset Management Market Study, which includes proposed new rules around governance arrangements for fund managers.

The FCA has also made it clear that some non-MiFID firms will have some of the MiFID II requirements extended to them, due to the adoption by the FCA of new Conduct of Business Rules. Firms are encouraged to keep an eye out for these changes and assess what effect they may have on their business.
30 June 2017 Waiting for the FCA to publish its second Policy Statement on the implementation of MiFID II
3 July 2017 Deadline for submission of complete applications for variations of permission or authorisation for investment firms and DRSPs
31 July 2017 FCA to open the passporting gateway
31 October 2017 Deadline for operators of MTFs to provide information and apply to register as an SME growth market
2 December 2017 Notification deadline for cross-border services
3 January 2018 Implementation date

How we can help
If you have not done so already, we encourage firms to start identifying the changes being introduced by MiFID II that are relevant to your business. We recommend firms take action now, as failing to have the correct permissions or passports on implementation date will result in being unable to conduct regulated activities and provide cross border services. Firms are encouraged to undertake a gap analysis to determine if and how they fall in scope of MiFID II.

If your firm requires assistance then please do not hesitate to contact us. We can assist in a number of ways, from standard packages to tailored services, to ensure your firm is fully compliant with the new MiFID II requirements.

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