ADVANCED

Conflicts of Interest

The requirement to identify, prevent, manage and/or disclose conflicts of interest is already in place under MiFID and it may initially appear that MiFID II does not deviate significantly from this requirement. Indeed, the underlying principles for firms remain largely unchanged in terms of the criteria for identifying conflicts, requirements for a conflicts of interest policy and appropriate remuneration practices and, for example, disclosure of conflicts which cannot be managed

Looking closer, however, there are important differences under MiFID II which require consideration by firms. Most importantly for many firms will be the well-trawled changes to the use of dealing commission and payment for research, whereby portfolio management firms will be prevented from accepting and retaining fees, commissions and non-monetary benefits from 3rd parties, such that:

  • Research across all instrument types (including fixed income, FX and commodities) must be unbundled from execution costs and paid for by the firm itself or from a tightly controlled Research Payment Account (“RPA”);
  • The use of RPAs must be disclosed (both initially and on an ongoing basis) to clients; and
  • Corporate access must be unbundled from execution costs and may have to be paid for by the firm (not from RPAs).
  • Other conflicts of interest matters which firms will need to consider include:
  • Avoiding over-reliance on disclosure without adequate consideration of how conflicts can be managed such that disclosure is a ‘last resort’;
  • Mandatory annual review of the conflicts of interest policy;
  • Ensuring non-monetary benefits provided to clients, prospects and 3rd parties, including corporate hospitality and participation at events, either enhance the quality of service to clients or fall under the ‘minor non-monetary benefit’ exemption; and
  • New requirements for firms providing underwriting and placing services, including in relation to information which must be provided to issuer clients.