Markets in Financial Instruments Directive (MiFID II)

Markets in Financial Instruments Directive (MiFID II)

The aim of this article is not to provide you with the most up-to-date information on the subject but to give you a general insight in the subject and its importance for the sector.

Background

MiFID II, the Directive on Markets in Financial Instruments repealing MiFID I, was adopted in May 2014. Its transposition and application dates were delayed by one year: Member States had to transpose the new rules by 2 July 2017, and they have applied since 3 January 2018. All Member States have now transposed MiFID II.

The revised MiFID builds on the MiFID I rules that were already in place and it strengthens the protection of investors by introducing new organisational and conduct requirements.

During the legislative process of levels 1 and 2 texts, and during the development of level 3 measures such as ESMA guidelines, BIPAR and its Working Party on MiFID have been active in expressing their views to EU and national legislators on provisions affecting intermediaries and financial advisers.

The European Commission is required to review certain parts of MiFID II by March 2020.

Key points from an intermediary perspective in the level 1 Directive

Key points include the “analogous regime” for “opt-out” firms (firms that are regulated at national level and that do not hold clients’ money and only receive and transmit orders and/or provide advice can be exempted by Member States but have to comply with an “analogous regime”); the provisions on the ban of commission in the case of independent advice, the requirement of quality enhancement in the case of commissions, the knowledge and competence requirements, provisions adding unjustified burden to SME intermediaries and financial advisers such as product governance requirements, etc.

Level 2 rules

The MiFID II, level 1, Directive is completed by level 2 instruments. These include:

  • a Delegated Directive which contains specifications with regard to the safeguarding of financial instruments and funds belonging to clients, product governance obligations, and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits.
  • a Delegated Regulation that deals with organisational requirements and operating conditions for investment firms and defined terms.
  • a Delegated Regulation dealing, amongst others, with product intervention
  • Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) relating amongst others to requirements applying on and to trading venues, commodity derivatives, market data reporting, criteria when an activity can be considered an ancillary activity under MiFID, or regarding the information and requirements for the authorisation of investment firms.

For more details on levels 1 and 2 rules, please see the BIPAR Annual Report of 2016-2017.

Guidelines

The MiFID II Directive is also completed by level 3 Guidelines prepared by the European Securities and Markets Authority (ESMA). ESMA consulted on and published Guidelines on cross-selling, on complex debt instruments and structured deposits, on the assessment of knowledge and competence, on product governance (and the target market in particular), on the assessment of suitability of the members of the management body and key function holders, and on certain aspects of the MiFID II suitability requirements.

Guidelines are not legally binding, but they are subject to the “comply or explain” procedure. From the moment that the Guidelines are published in all languages, a two-month period starts to run during which the national competent authorities have to notify ESMA as to whether they comply or intend to comply with the Guidelines, stating their reasons for non-compliance.

Questions & Answers (Q&As)

In 2018 and 2019, ESMA published updates on its Q&As regarding the implementation of investor protection and intermediaries’ topics under MiFID II. The purpose of these Q&As is to “promote common supervisory approaches and practices in the application of MiFID II/ MiFIR for investor protection topics, providing responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of MiFID II/ MiFIR requirements”.

The recent updates deal with topics such as:

  • Investment advice on an independent basis
  • Inducements
  • Information on costs and charges
  • Suitability and appropriateness
  • Best execution
  • Provision of investment services and activities by third country firms
  • Product governance
  • Client categorisation

ESMA Q&As are not meant to constitute new policy and are periodically reviewed to update them where required and to identify if some of the material has to be converted into Guidelines and Recommendations.

In March 2019, ESMA published an online tool for MiFID II (“Interactive Single Rulebook”), which provides links to the different MiFID II and MiFIR level 2 (delegated acts, regulatory technical standards, implementing technical standards) and level 3 (questions and answers, guidelines, opinions) measures. With this tool, ESMA aims to facilitate the consistent application of the EU single rulebook in the securities markets area.

Review of MiFID II and next steps

The European Commission is required to review MiFID II by March 2020. ESMA has to prepare various contributions to the Commission in this respect, for example 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.

Early 2019, ESMA sent a letter to the European Commission proposing to postpone its deliveries by 6 to 24 months, considering the uncertainties introduced by Brexit and aiming to ensure that enough experience is gathered on the application of MiFID II/MiFIR before beginning the review of the functioning of the various MiFID II provisions.

At a meeting of the European Parliament’s ECON committee in April 2019, Vice-President and Commissioner for Financial Stability, Financial Services and Capital Markets Union, Valdis Dombrovskis said that the Commission is preparing the MiFID II review and that initial lessons can be drawn.

The Commission will look at consumer protection and the operation of equities and bond markets. They will assess whether it is time to consider establishing more market transparency through the consolidated tape and they would like ESMA to prioritise its report on the latter. They will also assess how unbundling investment research from brokering has worked and whether they need to adjust this unbundling rule.

Commissioner Dombrovskis also referred to the ESMA letter, saying that such delay was unfortunate, adding, however, that delivering the analysis to produce those reports is particularly challenging until there is further clarity of the trading landscape post-Brexit.

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