MiFID came into force on 30 April 2004. It is a major part of the EU's Financial Services Action Plan and makes significant changes to the EU regulatory framework for financial services (www.practicallaw.com/4-202-0457). It replaces the Investment Services Directive (93/22/EEC) that came into force in 1995 and is intended to take account of developments in financial services since then .

EU member states are required to finalise legislation and rules to give effect to MiFID by 31 January 2007. Investment firms must then comply with these from 1 November 2007.

The FSA's general approach to implementation is that rules will be based on copied-out text from MiFID to avoid creating unintended additional obligations. The FSA has said it will also endeavour to avoid gold-plating MiFID requirements.

The key areas of change arising from the proposals in the consultation paper include:

Tied agents. Investment firms will be able to appoint tied agents under MiFID. The proposed regime is based on the current UK appointed representatives regime. However, a key change under MiFID is that tied agents will not be able to act on behalf of more than one investment firm principal for any client (the current regime imposes this restriction in respect of retail clients only). A MiFID tied agent seeking to act for more than one principal would have to obtain authorisation as an investment firm.

Client assets. The proposals in this area will bring significant changes to the way in which investment firms must look after money and other property belonging to their clients (client assets). A key proposal is the replacement of the current opt-out from client money protection by professional clients with an alternative set of arrangements having broadly similar economic effects. Other proposals to make the client assets regime more flexible include rules on reconciliations and calculations, and permitting investment firms to place client money in qualifying money market funds.

Capital adequacy. Under MiFID, investment firms that are exempt from the risk-based capital requirements of the Capital Adequacy Directive (93/6/EEC) (such as some venture capital firms) are required to hold a minimum level of capital or professional indemnity insurance (PII) of €50,000. Under the FSA proposals, investment firms will be able to opt for capital, PII or a combination of the two. The FSA also proposes an additional minimum capital requirement (£5,000 or £10,000) for investment firms that choose the PII option.

Transaction reporting. MiFID introduces a new pan-EU transparency regime for transactions in shares admitted to trading on a regulated market (RM). Broadly speaking, investment firms will have to make public the same information in relation to all relevant transactions, whether they take place on an RM or multilateral trading facility (MTF) or over-the-counter (that is, outside an RM or MTF).

In addition, the transaction reporting requirements in MiFID apply to all financial instruments that are admitted to trading on RMs, which means that the requirements will extend to commodity, interest rate and foreign exchange derivatives contracts. The consultation paper sets out the FSA's proposals for implementing this extension in practice, and related proposals as to the definition of a reportable transaction and the content of a transaction report, not expressly required by MiFID.

MTFs. The authorisation and ongoing compliance requirements for MTFs contained in MiFID will replace the existing alternative trading systems requirements set out in the Market Conduct Sourcebook. The new requirements are broadly similar, except in the area of capital.

Waivers. The FSA's ability to grant waivers will be significantly restricted under MiFID, either because there will be no express provision allowing the waiver of a particular rule or because the new rule will have direct effect under the draft measures to implement part of MiFID, so no waiver is available (www.practicallaw.com/3-203-5416). Investment firms must review any waivers on which they currently rely.

Other proposals set out in the consultation paper include:

Authorisation. Relatively few and minor changes are anticipated in relation to the authorisation regime, though there is some clarification in relation to the position of firms that provide ancillary services, and the FSA will have new powers to cancel an investment firm's authorisation.

MiFID introduces suitability requirements for market operators that are more detailed than the current "fit and proper person" test. The requirements are similar to the current approved persons and controllers regime, and the FSA plans to consult on them later this year.

Passporting. There are relatively few new rules proposed in relation to passporting (that is, the provision of services cross-border either directly or through establishment of branches). Most of the proposals relate to practical considerations such as notifications, timings and the need for some investment firms to amend their passports.

Investment firms that meet the conditions of the optional exemption in Article 3 of MiFID will need to consider whether they wish to opt in to MiFID in order to benefit from passporting rights.

Principles for Businesses. The FSA proposes a general amendment to its Principles for Businesses so that they will not apply (or in some cases have only limited application) to investment firms which are providing investment services to certain clients (such as eligible counterparties).

Some of the proposals in the consultation paper are based on the Treasury's proposed amendments to the Financial Services and Markets Act 2000 (www.practicallaw.com/0-201-9106).

The Treasury is continuing to discuss its proposals with stakeholders and this means that some of the proposals in the consultation paper may need to change to take account of the final legislative changes. Among other things, this may affect the proposals in relation to tied agents and arrangements in relation to existing passports.

The consultation closes on 31 October 2006. The FSA intends to issue feedback in January 2007, together with made rules and guidance to take effect in November 2007.

In relation to other areas affected by MiFID, the consultation programme set out in the FSA and Treasury joint implementation plan continues. The FSA's mammoth consultation on changes to the Conduct of Business rules is still to come (it is due to be published in October 2006).

There is still some way to go but the FSA is getting there. However, recent news reports that leading industry bodies such as the Association of British Insurers, British Bankers Association and Investment Management Association have joined forces to challenge proposals that they do not like (such as the proposal that banks use formal price benchmarks to ensure that investors trading in derivatives get a fair deal) suggest that the rest of the way may be a bumpy ride.