AVCA Regulatory Update: MiFID II – What does it mean for you?

30 Nov 2017

What is MiFID II?

Markets in Financial Instruments Directive (MiFID) II is the sequel to the Markets in Financial Instruments Directive (I) which was introduced in 2007. This legislation, due to come in force in January 2018, provides an EU framework for the regulation of investment firms and trading facilities. MiFID II creates additional obligations and the extent of these vary depending on the scope of your business.

What impact will it have on me?

The impact of MiFID II will depend on the type of business you undertake and the structure of your fund. For many Africa focused funds, their structure is a UK adviser with an offshore fund. In this scenario, you will likely be a MiFID investment advisory firm and the key areas of MiFID II which will be relevant to you are: 

  • Client classification -Local government pension schemes will no longer be automatically treated as professional clients and will need to be opted up to professional status;
  • Client disclosures - Additional disclosures will need to be made to your clients, the offshore GP or manager. This may require amendments or side letters to your existing advisory agreements;
  • Product governance - New rules have been established in relation to product governance. In an advisory context these should have less impact. However, they will likely require more disclosures to your clients;
  • Telephone taping - There is an exemption to these rules which applies to private equity (PE) fund managers. However, an adviser cannot take advantage of this exemption. As such, you will need to analyse how these rules impact your structure. From a practical perspective, in a PE context, it is hoped that these will have less of an impact;
  • Inducements - There are new rules on inducements, particularly in relation to third party research. However, for most PE firms structured in a typical onshore adviser/offshore GP way, this should have less impact;
  • Knowledge and competence - Whilst not imposing strict examination requirements, MiFID II imposes new competency requirements which will likely require external training and assessment;
  • Remuneration - Firms will need to ensure they have a remuneration policy in place. This will not be as prescriptive as those required for fund managers but will require changes to your policies.

There are other changes which will need to be made, for example in relation to whistleblowing, data security, and senior management, although these are more of a procedural nature rather than substantive changes to the legislation.

If your business is structured as an onshore manager, even though you are not a MiFID firm, the Financial Conduct Authority (FCA) in the UK has gold-plated some of the provisions; therefore, you will still need to consider how MiFID II impacts you. Broadly, the key areas are client classification, product governance (which will impact a manager more than an adviser), and possibly telephone taping - although only in relation to listed securities.

What should I be doing now?

MiFID II comes into force on 3 January 2018, and will require updates to your policies and procedures and possibly agreements. As the legislation has not been designed with PE in mind, some of the provisions are difficult to apply in practice, so it is important to ensure you take an appropriate approach suitable to this asset class rather than using non-tailored policies. Those managers or advisers in the process of fundraising or due to start fundraising in the near future should ensure their fund documents and investment management/advisory agreements have captured the increased disclosure required. Client categorisation procedures should be updated and policies around telephone recording should be developed for any relevant business.

For further information, please contact:

Eve Ellis, Partner, O’Melveny | +44 20 7088 0000
Sarah Shackleton, Partner, Development Partners International | +44 207 349 5030

On behalf of the AVCA Compliance and Best Practices Committee

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