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.

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, 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 BIPAR working party on MiFID have been actively following the discussions and developments regarding MiFID II (level 1, 2 and 3) and its review.

Additional measures

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, the European Securities and Markets Authority, has 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. ESMA is currently developing Guidelines re. the appropriateness test and execution-only rules and consulted stakeholders in February 2021. These draft Guidelines are based on the existing suitability Guidelines, adapting them to non-advised sales. ESMA also considers including sustainability factors/risks in the context of the appropriateness test. BIPAR responded to the consultation on the draft Guidelines. BIPAR does not support that Guidelines introduce stricter rules with limited added value and fears that some of the draft requirements would discourage customers from making investments / motivate them to invest in investments that are not regulated.

ESMA also 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”.

Review of MiFID II

The European Commission is required to review certain parts of MiFID II and launched in this respect a public consultation in February 2020 to which BIPAR responded.

Early April 2020, ESMA in this respect 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 does not call for a complete ban on inducements under MiFID II. It does 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 that could be taken to mitigate the risk of undesired consequences of an inducement ban.

MiFID II Covid-19 “Quick-Fix”

On 5 March 2021, the text of the MiFID “Quick-Fix” was published in the Official Journal of the EU.This Quick Fix is part of the broader “Capital Markets Recovery package” with which the European Commission intended to make it easier for capital markets to support European businesses to recover from the Covid-19 crisis by encouraging greater investments in the economy, allowing for the rapid re-capitalisation of companies and increasing banks' capacity to finance the recovery.

For the MiFID II Quick-Fix, the changes apply mostly to professional clients and eligible counterparties such as insurers, pension funds, or public institutions.The targeted amendments to MiFID II include:

  • more targeted information to (professional) clients;
  • digital information as default;
  • adapted product governance requirements for certain bonds and
  • a review clause for MiFID II by 31 July 2021, amongst others re. the operation of the structure of the securities markets, research rules, rules on payments to advisors and their level of professional qualifications, product governance, client categorisation; and, if appropriate, to submit a legislative proposal.

The targeted amendments to MiFID II entered into force on the day following the publication in the Official Journal and Member States are required to transpose them into national law within nine months of that date. The measures will become applicable 12 months after the entry into force of the Directive (6 March 2022).

Timing of the review?

The European Commission 2021 work programme foresees a revision of MiFID with legislative proposals for Q4 2021. The new CMU action plan states the Commission will put forward a legislative proposal to amend MiFID II by Q4 2021/Q1 2022 to reduce the administrative burden and information requirements for a subset of retail investors. This will involve reviewing the existing investor categorisation of retail vs. professional investors or the introduction of a new category of qualified investors.

The Commission's work on the MiFID II review however, also has to be seen in context of the Commission’s upcoming Retail Investment Strategy, which is currently scheduled for Q2 2022 (see separate article).

Other ESMA activities related to MiFID II

In July 2020, ESMA published its second report on national sanctions and other measures that National Competent Authorities (NCAs) imposed in 2019. ESMA states that the 371 sanctions and measures in 15 jurisdictions do not yet provide the basis for detailed statistics, clear trends or tendencies. National authorities and ESMA will repeat this exercise on a yearly basis.

In February 2021, ESMA launched a common supervisory action (CSA) with NCAs on the application of MiFID II product governance rules across the EU. The CSA will be conducted during 2021 and will allow ESMA and the NCAs to assess the progress made by manufacturers and distributors of financial products in the application of these requirements.The CSA should help in the analysis of:

  • how manufacturers ensure that financial products’ costs and charges are compatible with the needs, objectives and characteristics of their target market and do not undermine the financial instrument's return expectations;
  • how manufacturers and distributors identify and periodically review the target market and distribution strategy of financial products; and
  • what information is exchanged between manufacturers and distributors and how frequently this is done.

In February 2021, ESMA released a statement following the US “GameStop” experience to highlight to retail investors the risks connected with trading decisions based exclusively on exchanges of views, informal recommendations and sharing of trading intentions through social networks and unregulated online platforms.

In the statement, entitled “Episodes of very high volatility in trading of certain stocks”, ESMA stresses that although market rules and structures are different from the US ones, it cannot be ruled out that similar circumstances may occur in the EU. The statement highlights the following issues:

  • Investors need to use reliable information for investment decisions while keeping in mind one’s investment objectives, the benefits of diversification and the ability to bear losses.
  • Price volatility increases investors’ risk of loss; and
  • Risks of committing market abuse / market manipulation.

Next steps

BIPAR will continue to closely follow this file, in particular the MiFID II review.

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