M2G 2.1 Background

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1This guide sets out an overview of the FCA’s approach to the transposition of the Markets in Financial Instruments Directive II (MiFID II) in the SYSC sourcebook. It explains how this fits within the context of the overall implementation of the legislation at EU and UK levels. The guide focuses on the regulatory regime for UK firms and is aimed at UK MiFID investment firms, that is investment firms authorised under MiFID and credit institutions carrying on MiFID business, and MiFID Optional exemption firms. The latter comprise advisers or arrangers who do not hold client money or assets and meet other conditions imposed under article 3 MiFID II, so as to be exempt from the Directive’s full application. See PERG 13 Q49, as updated by the Conduct, Perimeter Guidance and Miscellaneous Provisions (MiFID 2) Instrument 2017, FCA 2017/39.

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1MiFID II (2014/65/EU) is addressed to all Member States and is binding as to the result to be achieved, albeit leaving the choice and method to national authorities. The UK has implemented the Directive via a combination of primary legislation, secondary legislation and regulatory rules.

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1MiFID II contains revised senior management and systems and controls obligations relating to firms. With the exception of one aspect of the implementation of the whistleblowing obligations in MiFID II by way of primary legislation, transposition takes the form of regulatory rules. The relevant FCA rules are mainly contained in SYSC but PRA-authorised firms will also be subject to rules in the General Organisational Requirements in the PRA Rulebook.

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1MiFID II also enables the European Commission to make secondary legislation which is of particular importance in the case of systems and controls. The Commission Delegated Regulation 2017/565 of 25 April 2016 (the MiFID Org Regulation (see http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32017R0565)) contains detailed organisational requirements for those firms to which it applies, including authorised MiFID investment firms and credit institutions. These ‘Level 2’ obligations supplement the more general systems and controls obligations in MiFID II itself. As an EU regulation, the MiFID Org Regulation is binding in its entirety and directly applicable, and it becomes law in the UK without the need for domestic legislation.

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1Many of the obligations in the MiFID Org Regulation feature in the MiFID implementing Directive (2006/73/EC) and so were implemented in SYSC by way of regulatory rules. The use of a regulation in MiFID II to impose many detailed requirements necessitates revisiting the corresponding rules in SYSC implementing MiFID and adapting the structure of SYSC.

M2G 2.2 MiFID I implementation and SYSC

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1The main Handbook sourcebook for implementing the MiFID requirements in relation to the management body, general organisational requirements, conflicts of interest and whistleblowing is SYSC. As regards the obligations on the management body, general organisational requirements and conflicts of interest, the corresponding requirements in MiFID I were implemented using the ‘common platform’. The common platform requirements in SYSC 4 to 10 covered the following areas:

  1. ● SYSC 4 (General organisational requirements including persons who effectively direct the business and responsibility of senior personnel);

  2. ● SYSC 5 (Employees, agents and other relevant persons);

  3. ● SYSC 6 (Compliance, internal audit and financial crime);

  4. ● SYSC 7 (Risk control);

  5. ● SYSC 8 (Outsourcing);

  6. ● SYSC 9 (Record-keeping);

  7. ● SYSC 10 (Conflicts of interest).

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1The common platform was initially devised to ensure that a single set of requirements apply to firms subject to MiFID and CRD, as opposed to similar, but different, regulatory requirements arising from these Directives being imposed upon the same business functions. A unified set of requirements is simpler and more cohesive for firms, and was supported in consultation responses. The common platform requirements in SYSC 4-10 were then adapted and extended to non-MiFID firms, including investment advisers and arrangers subject to the article 3 MiFID exemption. The adaptation of the common platform requirements took the form of applying various rules as guidance to these firms, as set out in the application tables in SYSC 1 Annex 1 Part 3.

M2G 2.3 Main types of senior management and organisational requirements in MiFID II

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1MiFID II’s senior management and systems and controls requirements for firms fall into five broad categories:

  1. ● management body (article 9);

  2. ● general organisational requirements (article 16);

  3. ● conflicts of interest (article 23);

  4. ● remuneration and performance management of sales staff (article 24);

  5. ● whistleblowing (article 73).

Firms operating an MTF or an OTF are subject to additional systems and controls for algorithmic trading (see MAR 5 and 5A). Likewise, MAR 7A contains systems and controls requirements for other firms engaged in algorithmic trading or providing direct electronic access.

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1The general organisational requirements in article 16 are added to by detailed provisions in the MiFID Org Regulation including the following areas:

  1. ● compliance;

  2. ● risk management;

  3. ● internal audit;

  4. ● responsibility of senior management;

  5. ● complaints handling;

  6. ● remuneration policies and practices;

  7. ● personal transactions;

  8. ● outsourcing;

  9. ● conflicts of interest;

  10. ● record-keeping.

M2G 2.4 MiFID II implementation and SYSC

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1The combination of senior management and systems and controls requirements for firms in a directive and regulation means that FCA rules are still required in order to implement the provisions in the directive. As such, the approach to implementation of MiFID II retains the familiar approach of the common platform but adapts the existing structure of SYSC in the following principal ways:

  1. ● updates the application of common platform requirements in SYSC 1 Annex 1 Part 3 and creates a new Table B for MiFID optional exemption firms;

  2. ● creates a new rule which has the effect, amongst other things, of extending the application of certain parts of the MiFID Org Regulation to all of a UK MiFID investment firm’s designated investment business, MiFID or otherwise (SYSC 1 Annex 1 2.8AR);

  3. ● creates a new rule which extends the application of the MiFID Org Regulation in relation to general organisational requirements, compliance, risk management, internal audit, responsibility of senior management, remuneration policies and practices and outsourcing to all of a MiFID optional exemption firm’s designated investment business, by way of rule or guidance depending on the individual provision (SYSC 1 Annex 1 3.2CR discussed further in M2G 2.5);

  4. ● uses signposting references in the application provisions to individual SYSC chapters to identify the relevant articles of the MiFID Org Regulation which supplement the rules implementing the MiFID requirements. These are also listed in the new Table C in SYSC 1 Annex 1;

  5. ● creates a new chapter (SYSC 10A) on recording telephone conversations and electronic communications to implement new obligations imposed by MiFID II, supplemented by the MiFID Org Regulation;

  6. ● creates a new section (SYSC 18.6) on the whistleblowing obligations imposed upon MiFID investment firms and includes a signposting mechanism pointing firms to similar obligations in other single market legislation;

  7. ● creates a new section (SYSC 19F) to implement a new obligation in respect of remuneration and performance management of sales staff.

M2G 2.5 Navigating SYSC

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1In order to navigate SYSC material implementing MiFID II, it is essential to follow the relevant application provisions in the sourcebook.

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1SYSC 1.1A summarises the application of the sourcebook to different types of firms. UK MiFID investment firms and MiFID optional exemption firms fall into the category of ‘every other firm’ in SYSC 1.1A and so the applicable chapters are 4 to 12, 18, 19A, 19D and 21. The detailed application of the provisions in chapters 4-10 is cut back in SYSC 1 Annex 1 and it is this annex which provides the starting point for understanding and determining the application of the common platform requirements to your business. More specifically, SYSC 1 Annex 1 Part 3.1G provides a roadmap for individual categories of firms, including UK MiFID investment firms and MiFID optional exemption firms, in explaining how the common platform requirements and the MiFID Org Regulation apply to them.

M2G 2.6 UK MiFID investment firms

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1In the case of UK MiFID investment firms, these are common platform firms for the purposes of the Handbook so are subject to the following MiFID II related obligations:

  1. ● SYSC 4 to 10 in accordance with SYSC 1 Annex 1 Part 3 Table A Column A. This table identifies whether individual provisions in these chapters apply:

    1. (i) either as rules or guidance;

    2. (ii) only to certain sub-categories of common platform firms; or

    3. (iii) are non-applicable.

These obligations apply to the firm’s regulated activities generally and other activities identified in SYSC 1 Annex 1.2.8R.

  1. ● The MiFID Org Regulation.

Certain provisions of the MiFID Org Regulation are also adapted to apply to the firm’s non-MiFID business in accordance with SYSC 1 Annex 1.2.8R and SYSC 1 Annex 1.2.8AR. The effect of SYSC 1 Annex 1.2.8AR is to adapt the MiFID Org Regulation so that a small number of its terms are to be read as if they were broader corresponding Handbook terms. For example, references in the MiFID Org Regulation to ‘investment service’ and ‘investment services and activities’ are to be read as ‘designated investment business’. This helps maintain a common single standard of organisational requirements applying to all of a UK MiFID investment firm’s business.

  1. ● Other non-common platform requirements including recording telephone conversations and electronic communications (SYSC 10A), whistleblowing (SYSC 18) and remuneration and performance management of sales staff (SYSC 19F). These chapters apply to a firm’s MiFID and other business to the extent set out in the application provisions of each chapter.

M2G 2.7 MiFID optional exemption firms

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1MiFID optional exemption firms are subject to the following MiFID II related obligations:

  1. ● SYSC 4 to 10 in accordance with SYSC 1 Annex 1 Part 3 Table B Column A. This table identifies whether individual provisions in these chapters apply:

    1. (i) either as rules or guidance; or

    2. (ii) are non-applicable. These obligations apply to the firm’s regulated activities and other activities identified in SYSC 1 Annex 1.2.8R.

  2. ● Articles 21 to 25, 27, 30 to 35 and 72 of the MiFID Org Regulation are applied to the business of a MiFID optional exemption firm in accordance with SYSC 1 Annex 1 3.2CR. The effect of SYSC 1 Annex 1 3.2CR is to apply these provisions of the MiFID Org Regulation:

    1. (i) as either rules or guidance in accordance with SYSC 1 Annex 1 Part 3 Table C; and

    2. (ii) to the firm’s regulated activities generally and other activities identified in SYSC 1 Annex 1.2.8R.

The effect of SYSC 1 Annex 1 3.2CR is to also to adapt articles 21 to 25, 27, 30 to 35 and 72 of the MiFID Org Regulation so that a small number of terms in the regulation are to be read as if they were broader corresponding Handbook terms, as set out in SYSC 1 Annex 1.2.8AR.

  1. ● Other non-common platform requirements applying MiFID optional exemption firms include recording telephone conversations and electronic communications (SYSC 10A) and remuneration and performance management of sales staff (SYSC 19F). The requirements in these chapters apply to a firm’s business to the extent set out in the application provisions in each chapter.

M2G 2.8 Other firms- Collective portfolio management firms and authorised professional firms

1 This short summary focuses only on MiFID II transposition and not obligations arising under other single market legislation

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1A collective portfolio management investment firm (‘CPMI’) is a firm which is subject to authorisation under UCITS or AIFMD2 which does MiFID business, in accordance with article 6 UCITS directive or2 article 6 AIFMD. A CPMI takes the forms of a ‘UCITS investment firm’ or ‘AIFM investment firm’, as defined in the FCA Handbook Glossary. A UCITS investment firm is subject to the common platform requirements as set out in Column A+ in SYSC 1 Annex 1 Table A. An AIFM investment firm is subject to the requirements listed in Column A in SYSC 1 Annex 1 Table A in relation to their MiFID business. More generally, both a UCITS investment firm and an AIFM investment firm fall within the Handbook definition of MiFID investment firm broadly when doing MiFID business - this is relevant as regards the application of SYSC 10A (‘Recording telephone conversations and electronic communications’). By contrast, neither SYSC 18 (‘Whistleblowing’) nor SYSC 19.1 (MiFID remuneration incentives) apply to their MiFID business, as a result of the derogations in the application provisions in these chapters.

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1Authorised professional firms exempt from MiFID II under article 2(1)(c) of the directive will be subject to common platform requirements as set out in Column B in SYSC 1 Annex 1 Table A. If they satisfy the criteria of a MiFID optional exemption firm they will be subject to the provisions in the SYSC 1 Annex 1 Part 3 Table B column A. If they fall within both the article 2(1)(c) and 3 exemptions, they are entitled to comply only with the common platform requirements relating to article 2(1)(c) exempt firms in Column B in SYSC 1 Annex 1 Table A. Where they are required to be authorised by MiFID II, they will be subject to common platform requirements in Column A in SYSC 1 Annex 1 Table A and other SYSC requirements as a UK MiFID investment firm, except to the extent indicated otherwise (including SYSC 1 Annex 1 2.5R).

For an authorised professional firm when carrying on non-mainstream regulated activities, the common platform requirements on financial crime, conflicts of interest and Chinese walls do not apply.

See the definition of authorised professional firms at https://www.handbook.fca.org.uk/handbook/glossary/?starts-with=A. In essence, the definition captures persons regulated by a designated professional body under Part XX FSMA, with a Part 4A permission.

M2G 2.9 Other organisational requirements

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1In addition to the SYSC obligations outlined above, firms will find MiFID II-related organisational requirements in respect of complaints handling in DISP, client money and assets (CASS) and product governance obligations in [PROD]. Firms will also remain subject to domestic obligations in the form of the relevant senior management, certification, COCON and approved persons requirements.

M2G 2 Annex 1 Overview

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1The diagrams in this Annex provide an overview of organisational requirements deriving from MiFID II and the location of their implementation, as well as the MiFID Org Regulation including its extension to non-MiFID II business in the case of UK MiFID investment firms and MiFID optional exemption firms.

The diagram focuses on the position of UK MiFID investment firms (other than CPMI and authorised professional firm) and MiFID optional exemption firms.

MiFID II Organisational requirements for firms

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MiFID Org Regulation

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