Industry groups and associations including the Alternative Investment Management Association (Aima), the Association for Financial Markets in Europe (AFME) and the Futures and Options Association (FOA) have all indicated that they do not wish the Committee of European Securities Regulators (CESR) to push ahead with its proposed changes to the MiFID client categorisation regime as they may prove too costly and would not likely result in significant benefits. Most of the respondents to the regulator’s recent consultation paper on the subject indicate that the current client categories under MiFID are good enough, thus circumventing the data management challenges that would be involved in any significant changes to these categories, as well as the potentially high costs.
The proposals, which are aimed at strengthening investor protection, would require firms to adopt a more structured approach to maintaining and monitoring entity data due to the introduction of new criteria for consideration when categorising clients under MiFID for reporting purposes. This would therefore mean data managers would need to add new data validation steps to ensure that the updated categories are applied to their customer data sets.
For example, the consultation paper indicates that CESR could narrow the range of regulated entities that can qualify to be treated as clients who are considered to be professionals. This means firms would have to set up data checking around the three new criteria: whether the entity is regulated or authorised in a jurisdiction with an equivalent regulatory regime to the EU; whether it is conducting business on behalf of underlying clients or not; and the size of the entity. And this is just one of the changes. Others include geographic distinctions such as whether the entity resides in a member state that has fully implemented the MiFID directive or the Capital Requirements Directive (CRD).
It is no surprise then that firms are not keen for widescale changes to the regime to be put into effect. The AFME response, which includes input from the International Swaps and Derivatives Association (ISDA), the International Capital Market Association (ICMA) and the British Bankers’ Association (BBA), states therefore: “Despite public commentary to the contrary, in general, we believe that the current tiered approach to customer categorisation provides appropriate levels of investor protection to the three categories. Our experience has shown that transactions executed since the implementation of the regime have not resulted in significant numbers of client complaints and that the regime provides a proportionate and graduated system of investor protection that is relatively recent, has been implemented at significant cost and is maturing well.” In other words, if it isn’t broken, don’t fix it.
CESR’s intent in the consultation paper has been to provide more clarity around the details that must be assessed during the client categorisation process. This includes suggestions for tests around a potential client’s knowledge and experience, which would add in a new set of data to the validation process.
Obviously, this suggestion has not gone down well with the 33 respondents to the consultation, with the majority indicating that such tests are unnecessary. The AFME led group highlights the potentially high cost of maintaining this data as a prime reason why it should not be pursued: “We believe that it would be unnecessary to incorporate requirements for investment firms to assess the knowledge and experience of these entities where in the overwhelming majority of cases the result would be the same as if no such assessment been required. The cost and effort to carry out and maintain records of such assessments would therefore far outweigh the possible benefits of doing so.”
The group therefore points to the current ability of clients to opt for greater regulatory protection as protection enough, calling it an “important safety feature already built into the process”.
AIMA makes the same point in its own response: “AIMA supports the addition of clarifications to the definitions in MiFID where there is currently some ambiguity to be addressed. However, we see no specific need to narrow the scope of the current categories to give greater investor protection for non-retail clients. We also disagree that placing further obligations on investment firms to assess per se professional clients’ knowledge, experience and expertise is necessary. It is likely to create unjustified burden and cost for investment firms and their clients.”
Many of the other changes suggested by CESR are related to the wording of MiFID and have therefore received much more support from the industry at large, judging by the responses. “We support the proposed changes in standards for eligible counterparties, harmonisation and clarity on the treatment of local authorities and some minor definitional improvements to regulated entities,” notes the AFME response.
It also suggests that the regulator should provide illustrative examples of client categorisation issues and their appropriate treatment in the Q&A section of the Commission’s website, to seek to ensure a consistent application of MiFID. Thus ironing out any potential wrinkles and providing a customer and counterparty data management best practice example for this space.
It will be up to CESR now to take these comments on board and determine whether it will push forward with categorisation changes despite the reticence of market participants.
The full 33 responses are available to download from the CESR website here.
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