MiFID II KYC Poses Challenge06.14.2017
When are institutional investors not institutional investors?
Clients who are local authorities or public municipalities will be automatically classified as retail investors once MiFID II goes into effect on January 3, 2018, which could open a can of worms.
“They may opt up one level to elective-professional status, but they will need to be reclassified automatically to the retail status,” Laura Glynn, director of regulatory compliance at Fenergo told Markets Media. “That’s one thing on which firms should focus their attention- identifying the clients and determine what percentage of their book will constitute this client type.”
For financial institutions that are not based in the EU but seek to maintain their relationships with newly minted retail investors, they will only be able to conduct business with the reclassified retail client through an office branch based in the EU.
However, firms should think carefully when possibly addressing this via “letterbox” entities that would have the same benefits of operating within the euro zone while operating outside the EU borders.
ESMA recently published an opinion that comes down on such entities, according to Glynn. “The piece talks about the Brexit issue, but there will be some third-country matters related to MiFID II in it as well,” she said.
Financial institutions operating outside of the EU should not expect any favorable treatment the European regulators in preparing for changes in client classification than their EU-based counterparts.
“MiFID II has been a long time in the planning and originally was going to apply starting on January 3 of this year,” said Glynn. “Based on that original timeline, we should be six months post-implementation at this stage. After a lot of lobbying and debating, a 12-month delay was granted to provide sufficient time to comply with the rules.”
In a perfect world, financial institutions should be well down the path towards meeting MiFID II’s know-your-client requirements
“They should be updating their onboarding procedures and policies to make sure that any new requirements are built in,” she said. “In terms of their existing client base, they should be performing a look-back exercise to determine whether they have any exposure to the changes to these client types.”
Financial institutions also should ensure that they have collected sufficient information relating to investment knowledge and experience to determine the correct classification is applied, she added. “They should take reasonable steps to ensure that information provided is both accurate and reliable.”
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