On 3 January 2018, the Directive on Markets in Financial Instruments (MiFID) II became applicable. Financial intermediaries providing investment advice are acting as investment firms and have to comply with a set of conduct rules. These concern, amongst others, remuneration, information requirements and professional knowledge. Independent advice is clearly distinguished from non-independent advice. A ban on commission for independent advice is introduced. The Directive foresees an opt-out regime. Firms that are regulated at national level and that do not hold clients’ money and only receive and transmit orders and/or provide advice, like many financial intermediaries, can be exempt by Member States from the MiFID II regime. Some MiFID II requirements, however, have to be applied in an “analogous” way to opt-out firms. Opt-out firms do not benefit from the MIFID II Single License to operate cross-border. BIPAR and its working party on MiFID have been actively following the discussions and developments regarding MiFID II (Levels 1, 2 and 3) and its review.
MiFID II is completed by additional measures. Amongst these are Delegated Regulations and a Delegated Directive that, for instance, further develop the condition for inducements to enhance the quality of the service to the client.
ESMA also developed Guidelines such as on cross-selling, suitability, on complex debt instruments and structured deposits, on the assessment of knowledge and competence, on product governance (more in particular regarding the setting of the target market) and Guidelines regarding the suitability of the management body. At the start of 2022, ESMA published Guidelines on the application of certain aspects of the appropriateness and execution-only requirements under MiFID II. ESMA took into account various comments BIPAR made on the then draft guidelines. ESMA also published revised Guidelines on certain aspects of the MiFID II staff remuneration requirements in spring 2022.
ESMA regularly publishes updates of its detailed Q&A on investor protection and intermediaries’ topics of MiFID II. Q&As are a practical convergence tool “used to promote common supervisory approaches and practices”. ESMA also provides an online tool for MiFID II (“Interactive Single Rulebook”). With this tool, ESMA aims to facilitate the consistent application of the EU Single Rulebook in the securities markets area.
Review of MiFID II
The Commission is required to review certain parts of MiFID II. This review is happening in different phases:
- In February 2020 the Commission launched a public consultation to which BIPAR responded.
- In early April 2020, ESMA published its report containing technical advice to the Commission on the impact of the MiFID II requirement to disclose any fees, commissions and non-monetary benefits in connection with the provision of an investment service or an ancillary service to the client, including its impact on the proper functioning of the internal market on cross-border investment advice. In the advice, ESMA did not call for a complete ban on inducements under MiFID II. It did call on the Commission to assess the impact the MiFID II inducements regime has had on the distribution of retail investment products across the Union, the effects a ban on inducements would have on the different distribution models existing in the Union and what actions could be taken to mitigate the risk of undesired consequences of an inducement ban.
- The MiFID quick-fix (applicable since March 2022 and part of the broader “Capital Markets Recovery package” as a reaction to the Covid-19 crisis) introduced targeted changes to MiFID II including more targeted information to (professional) clients and the move towards digital information as a default.
- The CMU follow-up package (published at the end of 2021) including a review of the MiFIR - Markets in Financial Instruments Regulation and some targeted changes to MiFID II. Important proposed changes include the introduction of an EU-wide consolidated tape for trading information and a ban on payment for order flow (PFOF - triggered by the “GameStop-case”).
- The Retail Investment Strategy (RIS) is looking at MiFID II as well and, more in particular, at disclosures, digital disclosures and at digital tools and channels. As mentioned above, ESMA delivered technical advice (after consultation to which BIPAR responded) to the Commission in this respect on 30 April 2022. Here are some key points of ESMA’s technical advice regarding:
- Disclosures: standard EU format for disclosure (especially for costs and charges and for the calculations used); machine-readability requirement; definition of marketing communications via ESMA Guidelines; tackle information overload by layering and by identifying vital information (preferably similar approach on cross- sectoral basis), alignment of MiFID II ex ante costs and charge disclosures and PRIIPs KID cost disclosures for the one-year holding period
- Digital disclosures: ESMA guidelines on digital disclosures and the use of digital techniques and tools by firms; ESMA/NCAs to impose on firms the use of risk warnings for specific complex and risky financial instruments aimed at informing retail investors.
- Digital tools and channels: for robo-advisers no need for regulatory changes; for online brokers/ payment for order flow: Commission to complement its legislative proposal which already bans PFOFs by also amending, where relevant, other MiFID II requirements; for zero commission brokers: level playing field (also have to provide information to the client on all costs and charges); for open finance: Commission to consider all potential risks and benefits and different concepts when developing any legislative proposal.
In the framework of the RIS, the Commission is also expected to look at reducing the administrative burden and information requirements for a subset of retail investors.
- The Commission is also expected to publish a report in 2022, assessing the feasibility of introducing a pan-EU label for financial advisors.