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24 MiFID Article 3 gives Member States the discretion to exempt from the scope of the Directive firms who: – do not hold client funds or securities;
– only receive and transmit orders and/or provide investment advice in relation to transferable securities and units in
Introduction
13.1 In CP06/19 we stated that in transposing the MiFID COB requirements into NEWCOB we were mindful that the scope of these provisions (covering only MiFID business and equivalent business of third-country investment firms) is narrower under MiFID than under existing COB. We are proposing to extend the scope of the provisions to cover non-MiFID business. In consulting on this issue we would be particularly interested to hear industry feedback on the impact of extending the best execution provisions.
Proposal
13.2 We now propose to extend the application provisions of the best execution and client order handling rules to cover non-MiFID firms and business where this business involves the execution of orders, placing client orders for execution as part of portfolio management or the transmission of orders to other entities for execution. The orders covered relate only to MiFID financial instruments and therefore, as now, do not include an order for a life policy.
13.3 The best execution and client order handling obligations in NEWCOB are modified or disapplied for particular types of non-MiFID business falling within Specialist Regimes, such as non-MiFID corporate finance business; non-MiFID energy and oil market activity; and non-MiFID spread betting, by way of derogations from the Handbook provisions. Further details of these derogations can be found in the relevant chapters on the Specialist Regimes.
Discussion
13.4 The main set of firms affected by the proposal will be those who are exempted from MiFID by Article 3 of the Directive24and receive and transmit client orders. These
13.5 The MiFID NEWCOB standard for best execution by those receiving and transmitting orders (RTOs) is worded differently to the existing COB standard. However, in our view the requirements of the two standards are broadly comparable. 13.6 MiFID requires an RTO to implement a policy for taking all reasonable steps to
obtain the best possible result for the client. That policy must include firms to which the RTO passes its orders that allow the RTO to obtain the best possible result for the execution of its client orders. In comparison, the current COB regime also requires an RTO to consider whether an entity to which it transmits orders for execution will allow it to obtain the best possible price for those orders. Other existing requirements have the effect that an RTO must monitor and review its execution approach. Furthermore, current COB requires firms to have reasonable systems and controls in place to ensure compliance with FSA rules.
13.7 Given their comparability, the existing COB standard and the MiFID standard should deliver similar outcomes in respect of RTOs. However, one reason for proposing change is that the MiFID standard offers a clearer description of a firm's responsibilities. In particular it makes more explicit a firm's responsibilities in respect of monitoring and review.
13.8 CP06/19 discussed the MiFID client order handling and client order keeping
obligations. It pointed out that they are similar to those currently in COB, although, in some areas, are pitched at a higher level.
Cost-benefit analysis
13.9 Details of the impact of these proposals in respect of Specialist Regimes are contained in the sections dealing with the Specialist Regimes, specifically those covering CIS operators and OPS firms.
13.10 For RTOs who benefit from the MiFID Article 3 exemption as indicated above we believe that the requirements of the MiFID best execution rule are broadly comparable to the requirements of the current rule. However, firms will need to familiarise
themselves with the new rule and make any necessary adjustments to their current arrangements (and ensure these arrangements are kept up to date). This will produce a one-off cost (and possibly small additional ongoing costs). Cost will vary from firm to firm. They are likely to be low where firms are predominantly receiving and transmitting orders in units in collective investment schemes and higher where a larger proportion of the orders transmitted are for other financial instruments, including shares.
13.11 We undertook a small survey of compliance consultancies in respect of best
execution. On the basis of this survey we believe that it will take, on average, up to 2 man day for firms to familiarise themselves with the new rule and update their policies and procedures. They may also spend an extra 0.25 man days a year on review and monitoring. There are around 4,500 firms likely to take advantage of the Article 3 exemption that do not do corporate finance business. Assuming a cost of £500 per day, this creates a total one-off cost for complying with the new rule of £4.5m and a total additional ongoing cost of £562,500.
13.12 Given the broad comparability of the MiFID best execution standard for RTOs with the existing COB standard, the incremental benefits of this proposal are likely to be small. The main benefits may result from clients receiving more information about firms’ execution policies, to the extent that the additional information makes it easier for clients to assess the performance of financial advisers.
13.13 CP06/19 concluded that there should not be a significant increase in compliance costs for firms as a result of the imposition of the MiFID client order handling rules (including client order record keeping)) because most firms meet these standards already.
References
• The current dealing and managing rules are in COB 7 • The new dealing and managing rules are in NEWCOB 12.
Q13a: Do you agree with our proposal to extend the NEWCOB standards for best execution, order handling, client limit orders and client order record keeping to non-MiFID business in MiFID financial instruments?
Q13b: Are there any factors relevant to this question of extension of the MiFID best execution standard to non-MiFID business in financial instruments which are not considered above?