The regulatory landscape for investment firms is evolving once again. With MiFID III (Markets in Financial Instruments Directive III) now on the horizon, UK investment advisers must prepare for another wave of change. Although the UK officially left the EU in 2020, the influence of MiFID is still felt, particularly through equivalence rules and the UK’s commitment to maintaining high regulatory standards.
Understanding MiFID: A Brief History
The original MiFID was introduced in 2007 to create a harmonised regulatory framework for investment services across the European Economic Area (EEA). It aimed to increase transparency, investor protection, and market efficiency.
MiFID II, which came into force in 2018, introduced stricter rules, particularly on disclosure, product governance, and costs. It dramatically reshaped advisory practices, leading to the rise of unbundled research, more stringent client profiling, and an enhanced focus on inducement rules.
Now, the European Commission is preparing to roll out MiFID III, which is expected to address the shortcomings identified in MiFID II and to reflect the changing financial environment following the COVID-19 pandemic and Brexit.
Key Themes of MiFID III
While the final form of MiFID III is still subject to negotiation, several major areas of reform are already emerging:
- Simplification of Investor Disclosures
One of the major criticisms of MiFID II was that it created excessive paperwork. MiFID III proposes to streamline the provision of information – especially pre-contractual documents – to improve clarity and reduce the burden on both clients and firms. The aim is to enhance investor comprehension, rather than overwhelming them with regulatory jargon.
- Tighter Rules on Inducements
MiFID III is likely to revisit inducement rules, with strong momentum towards banning inducements for retail investment advice across the EU. This follows similar moves in the Netherlands and the UK (through RDR). The UK has already implemented a fee-based advice model, but equivalency with the EU regime may demand reassessment.
- ESG Integration
MiFID III will strengthen the obligations related to Environmental, Social, and Governance (ESG) factors. Advisers will be expected to consider sustainability preferences as a core part of suitability assessments, moving beyond box-ticking into real integration. This aligns with broader EU sustainability initiatives, such as the Sustainable Finance Disclosure Regulation (SFDR).
- Product Governance and Complexity
MiFID III may bring stricter product governance rules, particularly targeting complex financial instruments. The emphasis will be on ensuring that products are only marketed to appropriate target markets and are clearly understood by end investors.
- Research Unbundling Revisited
One of MiFID II’s most controversial elements – research unbundling – may be relaxed under MiFID III, particularly for SMEs and smaller fund managers. This could create opportunities for UK firms to offer competitive research services, especially if UK regulations remain more permissive post-Brexit.
What Does This Mean for UK Investment Advisers?
Although EU regulations no longer apply to the UK, the Financial Conduct Authority (FCA) continues to monitor European reforms closely. There are several implications:
- Competitive Alignment
To retain equivalence status or facilitate cross-border business, UK advisers working with EU clients may need to comply with the spirit of MiFID III. Firms with EU operations or clients will be most affected.
- Regulatory Divergence or Convergence
The UK could choose to diverge from MiFID III in areas where it sees disproportionate burdens, such as research unbundling or ESG reporting. However, for client protection and global reputation, convergence is likely in many areas, especially in ESG.
- Review of Disclosure Practices
Even if MiFID III’s disclosure reforms aren’t adopted wholesale, they may inspire the FCA’s approach to consumer duty and transparency. UK advisers should proactively review how they present costs, risks, and sustainability information to clients.
- Technology and Data Considerations
As investor reporting and ESG integration become increasingly data-driven, UK advisers will need to ensure their technology infrastructure can meet the updated demands for suitability, documentation, and compliance reporting.
Investor Impact: A Mixed Bag
For retail investors, MiFID III could lead to:
- Clearer disclosures with more digestible information
- Better aligned investment advice with ESG preferences
- Potential restriction of product choices if complexity thresholds are tightened
- Improved transparency on adviser charges and inducements
For high-net-worth and institutional clients, the impact may be more muted; however, reforms surrounding research access and cross-border services could influence how investment firms structure their offerings.
