Last week, at the very end of August, the UK regulator, the Financial services Authority, released an early informal discussion paper on the Markets in Financial Instruments Directive (MiFID) entitled "Implementing MiFID’s Client Categorisation Requirements". This paper is not a formal discussion paper with draft rules and guidelines – that will be released in October – but invites responses from the market.
MiFID is planned to be implemented for all investment firms within the European Union in November 2007. Client classification is a key area of the new regulation as it defines which clients of investment firms will be most affected and what the obligations there will be in such areas as contracts, trading practices and transparency. Of these, contracts are seen as a major exercise for all firms and one that they can and will get started on well before the November deadline. Although the three client classes – retail client, professional and eligible counterparties - are similar to the current FSA Conduct of Business categories, there are significant differences in the way they are established. In general MiFID is more restrictive and many current clients of investment firms will find themselves in a lower class than as current. MiFID also gives clients the option to elect for a lower class in all or part of its business with the firm.
The above implications means that all client contracts will have, at very least, to be checked before the MiFID deadline; many will have small but important changes brought about by the new requirements; and a significant number may find that their class changes. This "repapering" exercise is vital for ease of MiFID implementation and the new FSA paper makes the planning of this easier.
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