MiFID II, the Directive on Markets in Financial Instruments repealing MiFID I, was adopted in May 2014. Member States have two years to transpose the new rules, i.e. July 2016. However, due to important delays in the preparation of the level 2 rules and after calls from various stakeholders, including BIPAR, the Commission has accepted to propose a delay of MiFID II of one year.
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 (ongoing) legislative process, 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, such as the ones 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.
Key MiFID II provisions for intermediaries/ financial advisers
Opt-out provisions (Article 3)
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.
Conflicts of interest (Article 23)
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. Delegated Acts will define the steps to identify, prevent, manage and disclose conflicts of interest and Delegated Acts will also establish appropriate criteria for determining the types of conflicts of interest whose existence may damage the interests of clients (see below).
Information requirements, independent advice, cross-selling (Article 24)
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 (see below). The European Securities and Markets Authority (ESMA) developed Guidelines for the assessment and the supervision of cross-selling practices (see below).
Member States may, in exceptional cases, impose additional requirements on investment firms in respect of the matters covered by Article 24. MiFID II foresees Delegated Acts to ensure that investment firms comply with the principles set out in Article 24 (see below).
Knowledge and competence, suitability, appropriateness (Article 25)
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 (see below). 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 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.
Levels 2 and 3 and BIPAR action in this respect
The work on levels 2 and 3 is still underway, with ESMA as a key player. ESMA held various consultations on their draft wording for the Delegated and Implementing Acts on the one hand (ESMA technical advice to the European Commission, delivered end December 2014) and on technical standards (implementing and regulatory technical standards - ITS and RTS) on the other hand. BIPAR responded to the consultations preceding delivery
of the ESMA advice and also undertook actions once the advice was published, in particular with regard to the rules on quality enhancement, product governance and proportionality of organisational requirements.
The European Parliament and the Council of the EU have a scrutiny right regarding the Delegated Acts. They have three months to object (extendable by three months). The dates of transposition and application of the Delegated Acts follow the transposition and application dates of MiFID II -and its delay which is currently under discussion.
The Commission published its first Delegated Act on 7 April 2016. It takes the form of a Delegated Directive and contains specifications of the level 1, MiFID II text with regard to the safeguarding of financial instruments and funds belonging to clients, product governance obligations, the rules applicable to the provision or reception of fees, commissions or any monetary or non- monetary benefits.
Regarding product governance, BIPAR has always supported the principle of product governance for manufacturers of products. Product governance rules should, however, not lead to a shift of responsibility from the manufacturer to the distributor and this is what the current proposal does. BIPAR does not support the requirement for distributors to provide the manufacturer with sales information. Regarding “quality enhancement” on which BIPAR has been very active, BIPAR still regrets and is not, in principle, in agreement that in a highly competitive market, remuneration is supervised and regulated at such a level of detail. BIPAR supports that the list of additional or “higher level services” in the Delegated Directive is not exhaustive. BIPAR believes that the evidence-gathering required from firms to prove quality enhancement, is heavy and bureaucratic, especially for small firms.
Markus Ferber, the rapporteur on MiFID II in the European Parliament announced that the European Parliament will make full use of its scrutiny rights with regard to the Delegated Directive, adding: “We will carefully check if our concerns are addressed. This will certainly not just be a rubberstamping exercise.”
The Commission published its second Delegated Act, a Delegated Regulation, on 25 April 2016. This deals with “organisational requirements and operating conditions for investment firms and defined terms”.
The Delegated Regulation contains specifications to the level 1 text of MiFID II, amongst others, on:
The “subject matter and scope” chapter of the Delegated Regulation also contains a definition of remuneration: “all forms of payments or financial or non-financial benefits provided directly or indirectly by firms to relevant persons in the provision of investment or ancillary services to clients”.
With regard to the issues that fall under the Delegated Regulation, BIPAR had made various proportionality- related comments to the ESMA technical advice. BIPAR still considers some of these issues, such as record keeping requirements, disproportionate for the mainly small firms BIPAR represents. BIPAR and its working party on MiFID are communicating the BIPAR's views on the Commission texts to the other EU and national decision makers.
Regulatory technical standards and implementing technical standards
There have been delays within ESMA and the Commission to provide these standards. Such standards are to be technical in nature, shall not imply strategic decisions or policy choices and their content shall be delimited by the acts on which they are based. They relate, inter alia, to requirements applying on and to trading venues, commodity derivatives, market data reporting, post- trading issues etc.
Level 3 Guidelines
ESMA consulted on and published Guidelines on cross- selling, on complex debt instruments and structured deposits and on Guidelines for the assessment of knowledge and competence. 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 are expected to follow the (amended) application date of MiFID II.
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).
The English version of the final Guidelines was published on 22 December 2015. 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.
Linked to this, the three ESAs’ chairs sent a joint letter to Commissioner Hill on 27 January 2016, raising concern about inconsistencies in existing EU legislation that impact regulation of the cross-selling of financial products in the banking, insurance and investment sectors. They ask the Commission to further assess the differences in the existing legislation and to consider any necessary steps in order to ensure that the ESAs can regulate cross-selling practices in a consistent way across the three sectors.
Delay of MiFID II
Since the development of the level 2 rules of MiFID II has taken much longer than foreseen, various stakeholders, including BIPAR, called for a delay of the application of MiFID II. BIPAR called for a delay of the whole MiFID II, including the important provisions regarding investor protection (some parties suggested a partial delay of MiFID II, limited to those parts of MiFID related to data collection infrastructure only). On 10 February 2016, the European Commission issued a proposal for an extension of the deadline of application of the whole MiFID II package from January 2017 to January 2018. Both delays were adopted by the European legislators and published in the Official Journal of the EU on 30 June 2016.
Last update: 25/07/2016
For more recent news concerning this dossier, please contact your national association.