On 3 January 2018, the Directive on Markets in Financial Instruments (MiFID) II became applicable. Financial intermediaries providing investment advice act as investment firms as defined by the MiFID II and have to comply with a set of MiFID II conduct rules. These concern, amongst others, remuneration, information requirements and professional knowledge. Independent advice is clearly distinguished from non-independent advice and there is a ban on commission for independent advice. 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.
State of play
The Commission is required to review certain parts of MiFID II. This review is happening in different phases, with parts of the review covered by Quick-Fix measures that have applied since 2022 (amongst others, introducing default digital information), partly covered by the CMU follow-up package, and other parts expected to be covered by the Retail Investment Strategy (RIS).
The CMU follow-up package included a review of the MiFIR (Markets in Financial Instruments Regulation) and some targeted changes to MiFID II. Important proposed changes by the Commission 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”). In the European Parliament, some MEPs called for the introduction of a full ban on inducements in MiFID in their amendments. BIPAR and its members actively participated in this debate. The amendments were not adopted but the EP introduced a specific ban on PFOFs in its report. The Council adopted a less strict approach, banning PFOFs but leaving discretion to Member States to allow them in their territory. The file is still under discussion in trilogue.
The RIS, published on 24 May 2023, also contains amendments to MiFID II. Indeed, the first set of articles of the Omnibus Directive deal with MiFID II.
Focus on some key proposed amendments to MiFID II
The proposed Omnibus Directive brings, amongst others, changes to:
- the inducement rules: the current ban remains (in case of independent advice and portfolio management) but there is an additional ban on inducements regarding reception and transmission of orders or execution of orders.
- introduction of a “best interest test”: the quality enhancement test for inducements is replaced by a "best interest test", requiring firms: (a) to provide advice on the basis of an assessment of an appropriate range of financial instruments; (b) to recommend the most cost-efficient financial instruments among financial instruments identified as suitable to the client and offering similar features; (c) to recommend, among the range of financial instruments identified as suitable to the client, a product or products without additional features that are not necessary to the achievement of the client’s investment objectives and that give rise to extra costs.’
- the appropriateness and suitability tests: as part of the suitability test, firms will have to look at portfolio diversification and the appropriateness test is expanded to also contain the capacity to bear full or partial loss and risk tolerance. In case of a negative appropriateness, the firm has to give a warning and can only proceed upon explicit request of the client.
- a new type of “independent advice” is introduced when well-diversified, cost-efficient and non-complex financial instruments are advised upon, with a “light” suitability test (no need to assess knowledge and experience of clients, nor portfolio diversification).
- value for money: new product governance rules are introduced to ensure value for money. ESMA is to create benchmarks and there are requirements (reporting) for distributing firms as well.
- training: the current ESMA guidelines are moved into a new annex, continuous professional development is added (15 h per year) and a training requirement re sustainable investment. A certificate is needed.
- more detailed rules on costs and charges and their disclosure.
Also, in the framework of the RIS, in July 2022, the Commission published a report, assessing the feasibility of introducing a pan-EU label for financial advisors. In the paper, the Commission illustrated two possible options forward:
- strengthening existing standards and harmonising further requirements set out in MiFID II/IDD (for instance a mandatory requirement for certification; transform ESMA guidelines into level 1; apply continuous training also to entry into the profession; …);
- a voluntary pan-EU label for financial advisors;
- with the RIS, the Commission has chosen the first option. In the report, the Commission had already indicated that “the feasibility of a pan-EU label for advisors may appear uncertain, notably due to concerns regarding its successful uptake and the likely high administrative costs.”
With regard to the CMU package (PFOF file), once the trilogue agreement is reached, this will be officially adopted and published in the Official Journal.
The RIS proposals will now follow the normal legislative procedure of Parliament and Council amendments and adoption. It has to be seen if this will be achieved before the Parliament and Commission change in Spring/Summer 2024.
ESMA has continued working on MiFID II related guidance over the past year. BIPAR responded to ESMA’s public consultations on the:
- Guidelines on MiFID II product governance requirements: the changes to the existing Guidelines concern amongst others the introduction of target markets for clusters of products instead of individual products and the specification of sustainability objectives. The English version of the guidance was published in March 2023.
- Guidelines on certain aspects of the MiFID II suitability requirements: these amended Guidelines address the inclusion of sustainability preferences into the suitability assessment conducted by investment firms. The reviewed Guidelines will start applying on 3 October 2023.
- Guidelines on certain aspects of the MIFID II remuneration requirements: the reviewed Guidelines deal with staff remuneration and will start applying on 3 October 2023. For more detail on the content of the Guidelines we refer to our emails with BIPAR analysis.
ESMA’s other actions
In January 2023, ESMA also launched a joint supervisory action with national competent authorities to assess investment firms’ application of MiFID II rules on marketing/advertising. The supervisory action is being carried out during 2023 and focuses on:
- fair, clear and non-misleading marketing;
- how firms select target audience - especially for riskier and more complex products;
- marketing and advertising through apps, websites, social media and influencers;
- possible ‘greenwashing practices’ in marketing communications / advertisements.