Current requirements under MiFID
Under MiFID, so long as any commissions complied with the inducement rules (discussed above), there were no additional restrictions on receiving commission.
Changes to be introduced by MiFID II
MiFID II will introduce the following changes:
- firms providing investment advice on an independent basis or portfolio management, will in most circumstances, be prohibited from retaining any fees, commission, monetary or non-monetary benefits received from third parties – these payments/benefits can be received and passed onto clients but cannot be received and retained by firms;
- after much negotiation, minor non-monetary benefits are excluded from the ban but must comply with the inducement rules – i.e. enhance the service to clients, etc., (see the commentary above). There is no definition of what constitutes a ‘minor non-monetary benefit’ and this is expected in the Level 2 measures;
- firms are unable to set off any payments from fees owed to them;
- clients need to be accurately and, where relevant, periodically informed about all the fees, commissions and benefits the firm has received in connection with the investment services provided; and
- Member States are also given the ability to impose greater restrictions (i.e. gold plate), in exceptional circumstances.
These changes have been introduced to address concerns around potential conflicts of interest arising where advisory firms hold themselves out as being independent yet receive payments from product providers or other third parties and similarly with portfolio managers receiving such payments.
Impact on firms
- EU Member States firms (excluding UK)
For EU firms providing independent advice or portfolio management, this will have a huge impact. While such firms would have previously been able to be remunerated by commission, this will cease. It remains to be seen what grandfathering arrangements are to be provided for. These changes will have the following impact on relevant firms:
- as there are no similar obligations on product providers, relevant firms will need to start to review their distribution arrangements with product providers and to renegotiate their distribution agreements;
- relevant firms may need to reassess their business models to determine what changes they will need to make to be appropriately remunerated;
- relevant firms will need to assess what non-monetary benefits they currently receive and whether these can be classified as minor and watch out for additional ESMA clarification on what this means; and
- relevant firms will need to set up a policy to ensure that third party payments received are allocated and transferred to clients.
For firms from some EU Member States (notably the Netherlands, Italy and France), there has already been a ban of sorts on investment firms receiving payments from third parties so this may not represent such an impact in these countries.
As the majority of advisory firms in Europe generally operate a bancassurance model (so restricted advice), where commissions can continue to be paid and received (subject to complying with the inducement rules), this may not be a big impact.
For product provider firms distributing through independent advisory firms or dealing with portfolio managers, this will have a huge impact. They will see their distribution arrangements changing other than when they are distributing into the UK (where non-UK product providers would have already seen changes to their distribution arrangements – discussed below).
For UK firms, the changes being introduced by MiFID II will not be as significant as for EU firms as, the UK already has a ban on advisory firms receiving commission for both independent and restricted advice by the UK’s Retail Distribution Review (RDR) which gold-plated MiFID. The changes being introduced by MiFID II will in effect result in the UK ‘gold plating’ MiFID II in this area. MiFID II permits Member States to implement additional requirements. Therefore, for UK advisory businesses it is essentially business as usual. One area of potential change is the new requirement not to set-off any payments received against fees due to the firm, as this may have the potential to impact on the current ability of firms in the RDR to have the fees due to them from the client for their advice facilitated from the product. In addition, with structured deposits now included as a form of investment product, it is likely that the UK regulator will amend the products that are caught under the RDR to include structured deposits, so UK advisory firms will need to bring structured deposits within their RDR adviser charging models.
For UK portfolio management firms, MiFID II may see the rules on the use of dealing commission tightened (even further than what has been proposed recently by the UK regulator) depending on ESMA’s final views on what constitutes a ‘minor’ non-monetary benefit.
The changes proposed by MiFID II, together with the UK measures (under the RDR) having already gold-plated MiFID II, will continue to see an un-level playing field in Europe. UK firms operating on a cross-border basis into other Member States will be subject to the more restrictive UK requirements and non-UK firms may find that different rules apply when they wish to conduct business into the UK. Having said that, if non-UK firms operate into the UK on a purely cross-border basis (and not through a branch), the UK is not likely to apply the stricter UK requirements to that cross-border business as this is the approach that the UK took when it gold-plated MiFID.