Investment providers have to ask for a lot of information these days, and it is not always clear why.
In a previous FT Adviser article I looked at FATCA and CRS, which are rules about identifying a client’s country of tax residence and, in some cases, country of citizenship. This is about spotting individuals from one country who are sheltering assets for tax reasons in another country.
If you are wondering why your clients get asked about nationality, it may be to do with Mifid II transaction reporting. This is a completely unrelated set of rules, but there are some similarities and overlap in respect of the information being asked for.
In this article, I will explore the background to these rules, how they are used and, more importantly, what they mean in practice. I will also identify a couple of scenarios that can catch people out.
Background
The markets in financial instruments directive 2014, usually known as Mifid II, is a piece of EU legislation that came into force in July 2014. It was introduced alongside the markets in financial instruments regulation (Mifir).
Together, these acts create the legal framework for securities markets, with the aim of making them more competitive, transparent and resilient. Mifid I, which had been in effect since 2007, was repealed as part of this.
While Mifid II came into force in July 2014, the actual implementation date was not until January 3 2018. The UK retained these rules following its exit from the EU in 2020, albeit with some changes.
Transaction reporting is one part of these rules, and this is what this article will focus on. They are not new rules, as they appeared in Mifid I, but Mifid II expanded their scope.
Under these rules, investment firms executing transactions, such as investment platforms or stockbrokers, are required to report details of the transaction as quickly as possible to the FCA and no later than the following working day. As such, there is a tremendous amount of data now being sent to financial regulators.
Since their introduction, the use of these rules has developed, and they are now the Financial Conduct Authority's primary tool for detecting and preventing market abuse.
The Bank of England was also able to use transaction reports to unpick the bond crash following the Truss-Kwarteng "mini"-Budget in 2022.
Investment providers can also use the data to check for system issues and irregularities, to identify weaknesses and to ensure good customer outcomes.
Reportable instruments
It is important to understand what transactions are reported, and here the rules refer to “reportable instruments”. In short, these are any investments that are traded on a stock exchange. This mainly means equities, investments trusts and ETFs, although some derivatives are also included in the definition.
It is important to mention that other investment funds such as unit trusts and OEICs are not reportable.
