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.
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. In January 2018, the European Commission sent “reasoned opinions” (the second step of the European infringement procedure) for late or incomplete implementation of MiFID II to Bulgaria, Croatia, Greece, Latvia, Lithuania, Luxembourg, Poland, Portugal, Romania, Slovenia, Spain, and Sweden.
The revised MiFID builds on the MiFID I rules that are already in place and 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 explaining their views to EU and national legislators on provisions affecting intermediaries and financial advisers.
Firms that are regulated at national level and that do not hold clients’ money and only receive and transmit orders and/or provide advice, such as financial intermediaries, can be exempted 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. These relate to conditions and procedures for authorisation and ongoing supervision, conduct of business requirements (including the ban on commission for independent advice), organisational requirements (e.g. the requirement to keep records). Opt-out firms have to be covered by an investor's compensation scheme or a PII. Opt-out firms do not benefit from the MiFID II Single Licence to operate cross-border.
Firms have to: “take all appropriate steps to identify and to prevent or manage conflicts of interest between themselves, including their managers, employees and tied agents, or any person directly or indirectly linked to them by control and their clients or between one client and another that arise in the course of providing any investment and ancillary services, or combinations thereof, including those caused by the receipt of inducements from third parties or by the investment firm’s own remuneration and other incentive structures“.
In case the prevention of conflicts of interest does not ensure that risks of damage to clients' interests will be prevented, the firm has to clearly disclose the general nature and/or sources of conflicts of interest and the steps taken to mitigate those risks before undertaking business. The MiFID II Delegated Acts further define the steps to identify, prevent, manage and disclose conflicts of interest and also establish appropriate criteria for determining the types of conflicts of interest whose existence may damage the interests of clients.
Firms have to act honestly, fairly and professionally in accordance with the best interests of their clients. All information to clients has to be fair, clear and not misleading and manufacturers have to design products for an identified target market, have a compatible distribution strategy and take reasonable steps to ensure that the instrument is distributed to this target market.
Firms have to understand the products they offer or recommend, assess the compatibility of the financial instruments with the needs of the clients, also taking account of the identified target market of end clients and ensure that financial instruments are only offered or recommended when this is in the interest of the client. Information has to be given about the firm and its services, financial instruments and proposed investment strategies, execution venues and all costs and related charges.In case investment advice is provided, firms have to inform the client in good time before the advice is provided:
The information on all costs and associated charges (regarding investment or ancillary services) must include the cost of advice, where relevant the cost of the financial instrument recommended or marketed and how the client may pay for it, also encompassing any third party payments (this info is to be aggregated and upon request itemised).
Where applicable, such information shall be provided to the client on a regular basis, at least annually, during the life of the investment. The information has to be provided in a comprehensible form (Member States may allow a standardised format).Where a firm informs the client that investment advice is provided on an independent basis, the firm:
Firms are not seen as fulfilling the conflict of interest rules or the requirement to act honestly etc. where they pay or are paid any “remuneration” to or by any party except the client (or a person on behalf of the client), unless this:
There also has to be a clear disclosure of the existence, nature and amount of “payments and benefits” or, where the amount cannot be ascertained, the method of calculating, prior to the provision of the service. Where applicable, the firm shall also inform the client on mechanisms for transferring this “remuneration” to the client.
Remuneration or the assessment of the performance of staff should not be done in a way that conflicts with the duty to act in the best interests of its clients (in particular no incentives should be given to recommend something when a different instrument that would better meet that retail client’s needs could be offered).
Regarding cross-sales, when an investment service is offered together with another service /product as part of a package or as a condition for the same agreement or package, the firm shall inform the client whether it is possible to buy the different components separately and shall provide for a separate evidence of the costs and charges of each component. The text requires that in case of cross-sales the overall package is suitable or appropriate. The European Securities and Markets Authority (ESMA) developed Guidelines for the assessment and the supervision of cross-selling practices.
Member States may, in exceptional cases, impose additional requirements on investment firms in respect of the matters covered by Article 24. There are MiFID II Delegated Acts that further develop the requirement for investment firms to comply with the principles set out in Article 24.
Firms have to ensure and demonstrate to their authorities -upon request- that natural persons giving investment advice or information possess the necessary knowledge and competence. Member States have to publish the criteria used to assess knowledge and competence. ESMA has published Guidelines on the assessment of knowledge and competence. The knowledge and competence provision is not amongst the list of requirements for opt-out firms to comply with in an "analogous" way.
The suitability test implies that in case of advice, firms have to obtain the necessary information regarding the client's knowledge and experience in the investment field relevant to the specific type of product or service, his financial situation including his ability to bear losses, and his investment objectives including his risk tolerance. A statement on suitability, specifying the advice given and how that advice meets the preferences, objectives and other characteristics of the retail client, will have to be given in a durable medium.
In case no advice is given, the appropriateness test is required, implying that the firm asks the client to provide information regarding his knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded. In case the firm considers a product to be inappropriate, it has to warn the client – which may be done in a standardised format. Under specific conditions and if firms provide services that only consist of execution or reception and transmission of client orders with or without ancillary services, Member States shall allow firms to waive the appropriateness test.
The MiFID II, level 1, Directive is completed by level 2 instruments. These include:
The MiFID II Directive is also completed by level 3 Guidelines prepared by 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, 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.
The Guidelines on complex debt instruments and structured deposits intend to enhance investor protection by offering further clarification on which types of financial instruments and structured deposits can be provided, without an appropriateness test (i.e. without the firm assessing a client’s knowledge and experience).
BIPAR responded to the consultation on the draft Guidelines, broadly supporting the examples and definitions regarding complexity for the purpose of the consultation. BIPAR did request more detailed arguments of why and under which conditions packaged products should be considered complex products for the purpose of the Guidelines.
All language versions of the final Guidelines were published on 4 February 2016. ESMA removed packaged products from the scope of the Guidelines, stating they should be classified as “complex” instruments in accordance with criteria applicable to any other financial instruments.
The Guidelines on the assessment of knowledge and competence are intended to “enhance investor protection by increasing the knowledge and competence of natural persons giving investment advice or providing information about financial instruments, investment services or ancillary services to clients on behalf of investment firms”. The knowledge and competence provision of MiFID II is not part of the requirements that Member States have to apply in an analogous way to “opt-out firms” if they decide to make use of the optional exemption from MiFID II.
BIPAR responded to the consultation on the draft Guidelines, supporting the grandfathering clause for staff already active but expressing concern regarding the level of detail of the knowledge and competence requirements.
All language versions of the final Guidelines were published on 22 March 2016. The final Guidelines are more stringent than those on which ESMA consulted. In this respect, BIPAR and its members have criticized the deletion of the grandfathering period for existing staff and the introduction of a requirement of six months’ experience.
The Guidelines on cross-selling were initially meant to be joint ESAs’ Guidelines (EIOPA, EBA and ESMA) covering all cross-selling practices taking place in the banking, insurance and securities sectors. The final Guidelines however, are ESMA-only Guidelines regarding MiFID II (ESMA refers to legal and timing reasons for this reduction in scope).
All language versions of the final Guidelines were published on 11 July 2016. They intend to:
BIPAR responded to the joint ESAs’ consultation, amongst others criticizing the inclusion of a guideline on demands and needs or suitability and appropriateness since these are already regulated in specific legislation and this should not be contradicted or duplicated. This guideline was not withheld.
The Guidelines on product governance and in particular on the assessment of the target market were published in June 2017. During the consultation phase, BIPAR criticized the general shift of responsibility from product manufacturers to distributors. BIPAR also asked for certain clarifications and for the final Guidelines to contain a case study of a “simple UCIT fund”.
In its final Guidelines, ESMA added a case study of a “target market assessment of a non-complex UCIT”. The requirement for the distributor’s identification of the target market for products marketed before but distributed after the application date of MiFID II remained in the Guidelines. ESMA did, however, add that: “When the target market has been identified by the manufacturer (on a voluntary basis / on the basis of commercial agreements with distributors) in line with these guidelines, the distributor, after reviewing it with a critical look, could rely on this target market identification.”
All language versions of the final Guidelines were published on 5 February 2018.
The joint ESMA and EBA (the European Banking Authority) Guidelines on the Assessment of the Suitability of the Members of Management Body and Key Function Holders under MiFID II and the Capital Requirements Directive (CRD) were published in September 2017 and all translations were published at the end of March 2018. They tackle, amongst others, criteria to assess the knowledge (individual and collective) of the members of the management body, the need for good repute, diversity, training of the members of the management body, etc.
They entered into force on 30 June 2018.
In October 2017, ESMA consulted on draft Guidelines on certain aspects of the MiFID II suitability requirements. The new draft Guidelines build on existing 2012 Guidelines and take into account MiFID II, the results of national competent authorities’ supervisory activities on the application of the suitability requirements, as well as the technological evolution of the advisory markets (e.g. robo-advice) and recent studies on behavioural finance. BIPAR responded to the consultation.
The final Guidelines were published on 28 May 2018.
ESMA publishes regular updates on its Q&A regarding the implementation of investor protection and intermediaries topics under MiFID II. The purpose of these Q&A 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”.
They deal with topics such as:
ESMA Q&A 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 October 2017, the European Commission published Frequently Asked Questions (FAQ) to clarify how EU investment firms can -in full compliance with their obligations- obtain brokerage and research services from broker-dealers in non-EU countries. This Commission action was carried out in coordination with the U.S. Securities and Exchange Commission.
The FAQ document represents the view of the Commission, does not purport to represent an authoritative interpretation of the law and is without prejudice with the view that the Commission may take on the matter in legal proceedings before the European Court of Justice.