OFAC revokes so-called U-turn authorization for Cuba-related financial transactions
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
The Markets in Financial Instruments Directive (MiFID) is one of the cornerstones of EU financial services law, setting out which investment services and activities should be licensed across the EU and the organisational and conduct standards that those providing such services should comply with.
Following technical advice received from the European Securities and Markets Authority (ESMA) and a public consultation, the European Commission (the Commission) published legislative proposals in 2011 to amend MiFID by recasting it as a new Directive (MiFID II1) and a new Regulation (MiFIR2). The legislative proposals were the subject of intense political debate between the European Parliament, the Council of the EU, and the Commission. However, informal agreement between the EU institutions was finally reached in February 2014. The final MiFID II and MiFIR texts were published in the Official Journal of the EU on July 12, 2014 and entered into force 20 days later on July 2, 2014. Entry into application will follow 30 months after entry into force on January 3, 2017.
The implementing measures that will supplement MiFID II and MiFIR will take the form of delegated acts and technical standards. On May 22, 2014, ESMA released a consultation paper (the CP) setting out ESMA’s proposed advice to the Commission regarding delegated acts and on December 19, 2014 ESMA issued its final report to that consultation paper providing its draft advice to the Commission. The Commission will implement the resulting legislative proposals during 2015, taking into consideration ESMA’s final advice as well as the views of the European Parliament and Council of the EU. The Parliament and Council have three months to formally scrutinise and object to the Commission’s adopted legislation (extendable by up to a further three months) before it is finalised.
On May 22, 2014, ESMA also issued a discussion paper (the DP) setting out ESMA’s proposals for technical standards. On December 19, 2014, ESMA responded on the DP with a consultation paper setting out draft technical standards. The period for responding in relation to these draft technical standards was 2 March 2015.
While the headline changes to the MiFID regime center on market infrastructure, there are many changes being made to investor protection requirements. The overall theme is one of a small number of macro changes but a large number of micro changes which, together, will represent significant regulatory reform in this area. What is developing is a thick layer of additional EU requirements applicable to investment firms, some of which is clearly post-crisis reaction (for example, new product intervention powers, full prohibitions on some inducements, a tougher stance on execution-only business and a tighter client categorisation regime).
MiFID currently requires firms to:
There are no substantive changes made to these requirements in MiFID II (Level 1). There is an express statement that conflicts can arise from inducements and remuneration structures.
Following its summer 2014 consultation, ESMA has now finalised its draft advice to the Commission which recommends significant changes as follows (these changes will apply in addition to the current requirements):
Although not items consulted upon last summer, ESMA has decided to clarify two points in the MiFID Implementing Directive which have quite far reaching consequences.
There are no specific restrictions under MiFID in relation to remuneration although, as noted above, there are general requirements in relation to managing conflicts of interest. In 2013 ESMA did, however, publish Guidelines on remuneration policies and practices for investment firms.
MiFID II proposes restrictions on incentive schemes, internal rewards and sales targets for those firms operating in both the retail and professional markets as follows:
Following its summer 2014 consultation, ESMA has now finalised its draft advice to the Commission which follow ESMA’s principles in its Guidelines on remuneration (mentioned above):
MiFID requires all information addressed to clients or potential clients to be fair, clear and not misleading and for marketing communications to be addressed as such. There are specific conditions that communications need to meet in order to be fair, clear and not misleading, which currently only apply to retail clients.
MiFID II is not proposing any direct changes to the current regime. However, it does reinforce in the recitals that eligible counterparties are clients. Consistent with this, MiFID II is proposing a new obligation on firms to communicate with eligible counterparties in a way that is fair, clear and not misleading.
Bearing in mind that one of the objectives of MiFID II is to improve, where appropriate, the treatment of non-retail clients, ESMA has confirmed the proposals from its summer 2014 consultation to: (1) make targeted improvements to the current regime applicable to retail clients; and (2) extend some ‘retail like’ obligations to communications with professional clients.
ESMA’s advice strengthens the conditions with which information must comply in order to be fair, clear and not misleading as follows:
ESMA’s summer 2014 consultation proposed to extend some of the detailed requirements on communications to retail clients (both from the existing regime under MiFID and as discussed above) to apply to communications with professional clients. In its final advice, ESMA has confirmed that the only ‘retail-like’ obligations which it is extending to communications with professional clients are the following three items:
ESMA has confirmed that its technical advice does not apply to eligible counterparties. Accordingly, firms have greater flexibility to determine how to comply with the Level 1 requirement for all communications with eligible counterparties to be ‘fair, clear and not misleading’ and need not be constrained by ESMA’s proposals for retail and professional clients.
Under MiFID, “eligible counterparty business” is essentially excluded from the majority of investor protection requirements. Eligible counterparties are, broadly speaking, financial institutions, insurers, pension funds and governments. Eligible counterparty business refers to arranging and dealing activities when carried out by eligible counterparties.
MiFID II extends some existing investor protection requirements to eligible counterparties. The recitals note that “the financial crisis has shown limits in the ability of non-retail clients to appreciate the risk of their investments. While it should be confirmed that conduct of business rules should be enforced in respect of those investors most in need of protection, it is appropriate to better calibrate the requirements applicable to different categories of clients. To that extent, it is appropriate to extend some information and reporting requirements to the relationship with eligible counterparties. In particular, the relevant requirements should relate to the safeguarding of client financial instruments and funds as well as information and reporting requirements concerning more complex financial instruments and transactions.”
MiFID II introduces the following express obligations on firms when dealing with eligible counterparties:
While these obligations are not new concepts for firms generally (i.e. they currently apply to their dealings with retail and professional clients), they have not been applied to eligible counterparties before.
ESMA has not provided any technical advice on any additional requirements in relation to the obligation to act honestly, fairly and professionally, or to communicate in a manner that is fair, clear and not misleading with eligible counterparties.
In relation to the information to be provided to eligible counterparties, ESMA’s final advice is that eligible counterparties can ‘opt-out’ of receiving certain disclosures (for instance, post-sales periodic disclosures) in certain circumstances. These circumstances exclude situations the eligible counterparty is on-selling products to its clients, or the relevant financial instruments embed a derivative. In addition, firms can agree with eligible counterparties different standards for the content and timing of reports than those required for professional and retail clients.
MiFID currently prohibits the payment of fees or commissions and receipt of other non-monetary benefits between firms and persons other than their clients (e.g. advisory firms and distributors), unless certain criteria are met. This prohibition is intended to ensure such payments and benefits are not inducements and, as such, do not introduce conflicts with clients’ interests.
Payments and non-monetary benefits are required to be assessed to ensure that they do not impair the firm’s duty to act in the best interests of the client, that they are “designed to enhance the quality” of the service being provided to the client and that they are disclosed to the client.
With the introduction at an EU level of the new concept of ‘independent advice’ (discussed later in this note) and with historic concerns about potential conflicts of interest with firms receiving third party payments, MiFID II strengthens the current inducement rules and introduces the following changes:
Following last summer’s consultation, ESMA’s technical advice confirms its original proposals with some important retractions as follows:
Ban on independent advisers / portfolio managers receiving commission
Interpretation of minor non-monetary benefits (which are excluded from the ban)
Treatment of research
Quality enhancement and disclosure requirements
Under MiFID, investment advice is given when a personal recommendation is made to an investor. However, a personal recommendation is not made when it is given exclusively through distribution channels or to the public. Under MiFID, there is no distinction between different types of advice (e.g. independent or non-independent).
MiFID II makes no changes to the definition of ‘investment advice’ from that contained in MiFID.
It does, however, introduce the concept of ‘independent advice’ (as opposed to non-independent (i.e. restricted) advice although the term ‘restricted advice’ is not used in MiFID II). MiFID II requires the following to be satisfied in order for advice to be considered to be ‘independent’:
Definition of investment advice
ESMA has, since 2010, considered that there was a risk that firms would misinterpret the exclusion set out in Article 52 of the MiFID Implementing Directive to mean that advice could never be given when made through distribution channels. This exclusion operates so that a personal recommendation is not made when it is given exclusively through distribution channels or to the public. In addition, ESMA has found that intermediaries do provide personal recommendations through the use of distribution channels (e.g. the internet). As a result, ESMA originally consulted, and has now confirmed, that its advice is to delete the reference to ‘through distribution channels’ from the exclusion as currently drafted. This still leaves the exclusion for advice addressed ‘to the public’ generally, but it may mean that where firms may have viewed that they do not give advice if they use particular distribution channels, they may now need to accept that they could be giving investment advice (i.e. through a restricted-access website, not available to the public generally). ESMA has noted that it may develop further guidelines as part of its work on Level 3.
ESMA proposed last summer, and has now confirmed, a number of additional requirements to those contained in MiFID II.
ESMA’s advice is that firms providing independent advice should define and implement a selection process to assess and compare a range of sufficiently diverse financial instruments, which must contain the following elements (only slightly tweaked from the summer 2014 consultation):
For firms that provide independent advice, but who focus on certain classes or a specified range of financial instruments, ESMA advises additional restrictions (e.g. marketing restrictions to ensure only relevant investors are attracted; to allow investors to easily identify a preference for the specified classes / specified range of financial instruments; clients must indicate that they only want these specified classes / specified range of financial instruments; the firm must be able to easily confirm whether its service is appropriate for each new client).
For firms providing both independent and non-independent advice, ESMA has confirmed that its advice is that these firms must:
MiFID does not currently contain any EU-wide specific product intervention powers, although different Member States have their own national measures.
In a clear post-crisis reaction, MiFIR sees the introduction of formal product intervention powers at an EU level, which complement the new product governance regime (see below in this note). The intervention powers appear to be based on the UK’s existing product intervention regime although there are some differences. MiFIR gives these powers to ESMA (in relation to financial instruments), to the European Banking Authority (EBA) (in relation to structured deposits) and to the national regulator of each Member State.
The national regulator of a Member State may prohibit or restrict: (1) marketing or distribution of a particular instrument (including structured deposits); or (2) any type of financial practice, in or from that Member State. The Member State national regulator may only take action if it is satisfied on reasonable grounds:
Before exercising such power, the Member State national regulator must consult with the national regulators in other Member States that might be significantly affected by the intervention and take into account whether any action will have a discriminatory effect on services or activities provided from another Member State.
This represents a major impact in those Member States that do not already have national measures that permit their local regulator to ban products. All Member State national regulators, regardless of whether they are a principles-based, light touch regulator, will now have a relatively heavy-handed power to supplement their enforcement tools.
Powers to ESMA and the EBA
Both the EBA and ESMA have similar powers to those described above for Member State national regulators. Any product ban / restriction can be exercised on an EU-wide basis or can be exercised in relation to a particular Member State. This power can only be used in certain circumstances, namely where:
Each ban / restriction lasts for a maximum of three (3) months but can be renewed (if it is not renewed, it expires) and will be published on the website of ESMA or the EBA (as the case may be).
Any action taken by ESMA / EBA will apply instead of action taken by a Member State national regulator.
Additional product intervention introduced by other measures
While these powers apply to instruments caught by MiFID II, they mirror product intervention powers being introduced in relation to insurance-backed investments under the Insurance Mediation Directive (IMD) as contained in the new EU Regulation for a key investor document in relation to packaged retail and insurance-backed investment products.
ESMA and the EBA worked together to set out the factors which Member State national regulators should consider when determining if there are circumstances which require the use of product intervention powers. The EBA carried out its own consultation in relation to structured deposits, so these have been excluded from ESMA’s technical advice. While acknowledging that these factors are intended to limit the otherwise relatively wide discretion of Member State national regulators to use the powers, ESMA’s aim appears to be for the factors to be sufficiently flexible so as not to restrict a regime that needs to remain relatively dynamic. ESMA’s technical advice made certain changes from the summer 2014 proposals, in particular to clarify some aspects in relation to the criteria.
Therefore, ESMA’s technical advice sets out a list of factors for each of the items below but, for flexibility, intends the list to be general in nature, non-exhaustive and to not include quantitative thresholds. In addition, ESMA re-emphasises that the primary focus should be on using the powers in a proportionate way.
The factors include the following the:
Further to a recent ECJ court case, ESMA’s commentary advises the Commission to consider whether the list of criteria should be exhaustive when ESMA is proposing to exercise the power, but makes clear its view that the list should be non-exhaustive for national regulators.
As these powers are new, it remains to be seen how Member State national regulators will use them (if at all) and whether there may be inconsistent use of the powers in relation to the same or similar products (i.e. whether it may be banned in one Member State but not in another due to the different views of the Member State national regulators). Conscious of this, ESMA proposes to undertake further work (including sharing information across Member State national regulators) to encourage a common understanding on the use of the powers.
There are no existing detailed provisions addressing product governance or sales processes in MiFID, although high level organisational requirements do exist.
MiFID II introduces a new EU-wide product governance regime which applies to both sides of the product development and sales process, namely to: (1) product manufacturers; and (2) product distributors (if different).
For product manufacturers, there are new requirements to maintain appropriate product governance policies and procedures as part of their organisational arrangements, including product approval processes, to ensure investment products are designed appropriately, ‘consistent with the needs’ of identified target markets, distributed appropriately to the target market, the relevant risks are assessed, appropriate information is made available to distributors, and investment products are regularly reviewed to ensure that they are being sold appropriately and remain consistent with the identified target market.
For product distributors, there are new requirements to ensure that the firm’s knowledge and understanding of the products allows them to match these to the needs of their clients which are primarily linked to training from product manufacturers on products and access to all information (including from product manufacturers) necessary to enable the distributor to sell the product appropriately. Product distributors must also regularly review the products they market to assess whether they remain consistent with the needs of the identified target market and whether the distribution strategy remains appropriate.
ESMA’s summer 2014 consultation proposed a quite detailed extension of the MiFID Level 1 requirements as follows:
These have been confirmed in the technical advice with clarificatory tweaks to confirm:
Therefore, ESMA’s advice is for there to be two different policies, those that apply specifically to product manufacturers and those that apply specifically to distributors (firms that both manufacture and distribute will be required to comply with both sets of proposals). Importantly, ESMA has confirmed that firms which create, develop, issue and / or design products (including investment firms that advise corporate issuers on the launch of new securities) are, themselves, manufacturers.
The obligations on manufacturers and, separately, on distributors are relatively extensive and detailed and relate to: (i) governance and oversight of the product design and manufacturing process; (ii) managing conflicts of interest; (iii) identifying the target market; (iv) risk assessment; (v) charging structures; (vi) information to distributors; and (vii) regular review of products.
Some of the more interesting items are as follows:
ESMA has confirmed that UCITS / AIFs firms will need to comply with these product governance / sales process requirements when they carry out MiFID II activities but not when they carry out UCITS / AIF management. ESMA has noted that the requirements across the different pieces of legislation might be harmonised over time.
Investment firms must already comply with an obligation of ‘best execution’ under MiFID, namely to take all reasonable steps to obtain the best possible result for their clients (taking account of factors such as price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order).
Where retail clients are concerned, best execution is considered in terms of the ‘total consideration’ (being the price paid for the instrument and all associated costs including costs / commission charged by the firm).
MiFID II imposes new requirements on firms and trading venues to produce public data about executed transactions. Firms must summarise and publish annually their top five execution venues by trading volume for each class of financial instrument, as well as information on the quality of execution obtained. Trading venues and systematic internalisers must also publish information annually on quality of execution for certain types of financial instrument.
MiFID II also strengthens the current requirements in a number of ways:
ESMA’s summer 2014 consultation proposed, and its final report now confirms (with slight retractions), a number of additional requirements and clarifications to contribute to improving investor protection and the transparency of firms’ policies and procedures.
ESMA’s advice to the Commission includes:
In relation to the new requirement that firms take ‘all sufficient steps’ to obtain best execution, it had been hoped that ESMA would clarify the extent to which taking ‘all sufficient steps’ is more onerous than the current MiFID requirement of taking ‘all reasonable steps’. However, ESMA has refrained from doing this expressly in its technical advice but has noted that ‘all sufficient steps’ should result in the ‘best possible result’ being received by the client.
MiFID currently requires firms authorised to execute client orders to implement procedures and arrangements which provide for the prompt, fair and expeditious execution of client orders, relative to other client orders or the trading interests of the firm. There are also general principles that firms have to satisfy when carrying out client orders, on aggregation and allocation of client orders.
MiFID II has not introduced major changes to the client order handling rules. The existing requirement to disclose unexecuted client limit orders to the public is being extended to capture additional trading venues (e.g. OTFs) but this is being consulted upon by ESMA under data publication requirements which are covered in a separate note.
ESMA did not consult on any changes aside from those relating to data publication (see our separate note). As it was already implemented in the MiFID II Level 1 text, the existing requirement to disclose unexecuted client limit orders to the public has been extended to capture the additional trading venues created by MiFID II. ESMA has made no additional technical advice.
Under MiFID, clients can be categorised as eligible counterparties, professional clients or retail clients. The category of retail clients captures every client that is not a professional client or eligible counterparty.
MiFID II does not change the categories of clients, nor the various monetary thresholds and experience levels that eligible counterparties and professional clients are required to meet.
However, a few bespoke changes are being made.
Municipalities and local public authorities
Due to a number of mis-selling concerns in connection with the sale of complex products to local authorities, some changes have been made to how municipalities and local public authorities are able to be classified. They are no longer permitted to be eligible counterparties or per se professional clients, so they are, in effect, deemed to be retail clients. They are still able to elect to be treated as elective professional clients and ‘opted up’ from retail client status.
MiFID II also allows Member States the discretion to adopt specific criteria for the assessment of the knowledge and expertise of municipalities and local public authorities requesting to be treated as professional clients. These criteria can be alternative or additional to the criteria normally required to be satisfied by firms when opting up clients to elective professional client status. In principle, a Member State could adopt less strict criteria for the opting up of municipalities and local authorities.
Elective eligible counterparties
MiFID II is proposing no changes to the various categories of clients that can elect to be eligible counterparties.
Municipalities and local public authorities
ESMA was not requested to provide any technical advice or recommend any delegated acts in relation to this point.
Elective eligible counterparties
Bearing in mind that the objective of MiFID II is to increase the protection of investors and reduce the areas of exemption, including strengthening the treatment of eligible counterparties ESMA proposed in its summer 2014 consultation, and has confirmed in its technical advice that the types of investors who can qualify as an elective eligible counterparty is to be restricted. ESMA’s advice is to remove the ability for investors who have elected to be professional clients to then also elect to be eligible counterparties.
Although not consulted upon last summer, ESMA’s technical advice also introduces a specific procedure to apply when eligible counterparties request treatment as such. This procedure will mean that eligible counterparties will need to be warned that they are losing protection and they must provide written confirmation that they are requesting this status (either generally or in relation to one or more specific trades / services / products) and acknowledge that they are aware of the consequences of the protections they may lose.
Likewise, for the reverse, ESMA’s advice is that eligible counterparties who wish to be reclassified as either a professional client or retail client must do so in writing and with an indication of whether it is requested on a general basis or in relation to one or more specific trades / services / products.
Firms providing advice (whether independent or not) or providing portfolio management services to clients must obtain the necessary information regarding the client's knowledge and experience, their financial situation and investment objectives so as to enable the firm to (in the case of advice) provide suitable personal recommendations to clients or potential clients or (in the case of portfolio management) to make suitable investment decisions on their behalf.
MiFID II does not introduce any major changes to the current regime but incorporates into the Level 1 text obligations (similar to those already in the current MiFID Implementing Directive) requiring firms to obtain information about the client’s ability to bear losses and their risk tolerance. It also makes explicit that, where products are packaged or bundled, there is an obligation to ensure the overall package or bundle is suitable.
MiFID II introduces a new requirement that firms must, before the relevant transaction, provide retail clients receiving an advisory service with a suitability report specifying how the advice given meets the client’s circumstances. For retail portfolio management clients, the suitability report can form part of periodic reporting to the client.
ESMA’s summer 2014 consultation proposed, and its final report confirms these proposals (with some tweaks), to enhance both the suitability assessment and suitability report requirements.
ESMA’s advice consists of the following:
ESMA’s advice is that:
In the commentary to its technical advice, ESMA has also expressly clarified the applicability of suitability assessments to simplified advice type scenarios (i.e. where advice is provided through automated systems).
MiFID currently requires firms, when providing investment services other than investment advice or portfolio management, to obtain information regarding their existing or potential clients’ knowledge and experience relevant to a specific service or product, to enable the firm to assess whether it is appropriate for the client. (Professional clients are assumed to have sufficient knowledge and experience.)
Firms are not required to carry out this appropriateness assessment where the service being provided is ‘execution only’ and the financial instruments are either listed shares, money market instruments, bonds or other forms of securitised debt, UCITS funds or other non-complex financial instruments.
The MiFID Implementing Directive set out four criteria for assessing when a financial instrument is non-complex, and ESMA’s predecessor (CESR) provided guidance in a Q&A in 2009 on the distinction between complex and non-complex products.
MiFID II modifies the existing list of financial instruments where no appropriateness analysis is required as follows (which narrows the scope of execution-only business):
In addition, it clarifies that where credit is provided (i.e. discussions on existing credit facilities, overdrafts and current accounts), an appropriateness analysis will always be required.
Further, where a package of services or products is provided and a suitability assessment is not required, the overall bundled package must be assessed as appropriate.
ESMA’s advice confirms the four criteria set out in the existing MiFID Implementing Directive as being appropriate to determine when a financial instrument is non-complex and adds two additional criteria, namely the:
ESMA’s advice also confirms that instruments explicitly excluded from the (narrowed) list of non-complex products in the above bullet point list should be automatically deemed to be complex. Further, that these expressly excluded products should then not be able to be considered to be non-complex by going through the MiFID Implementing Directive criteria (set out above).
ESMA has not given any advice in relation to what information needs to be obtained in order to carry out the appropriateness assessment.
Although not consulted upon last summer, ESMA is advising new recording-keeping requirements in relation to the assessment of appropriateness including where the assessment concluded the product was appropriate, was not appropriate, where the assessment could not be carried out due to insufficient information, etc.
ESMA has confirmed that units in a structured UCITS and shares that embed a derivative should automatically be considered complex as well as certain debt and money market instruments and structured deposits. Further, shares or units in AIFs should automatically be considered to be complex.
ESMA may develop additional guidelines particularly around the warning that is given to customers when an appropriateness assessment concludes that a product or service may not be appropriate.
MiFID requires various reports to be provided to clients in a durable medium, namely:
MiFID II does not propose any significant changes to the current regime. It confirms the above, but extends the reporting requirement to also include ‘periodic communications… taking into account the type and the complexity of financial instruments involved and the nature of the service provided to the client’.
What is new is that these reports may also now need to go to eligible counterparties.
ESMA’s summer 2014 consultation made certain proposals in relation to the reporting requirements and these have been confirmed in its technical advice with some tweaks.
Reporting to eligible counterparties
Reporting to professional clients
Content of reports for portfolio management
Reporting obligations re: portfolio management or contingent liability transactions
Statements in respect of client assets and funds
Reporting on costs and charges
MiFID requires investment firms to provide certain information to clients or potential clients, such as information on its services, on financial instruments, on costs and charges, and its terms of business (in a client agreement).
MiFID II retains the existing measures but given that it introduces new measures (e.g. the new concept of ‘independent’ investment advice), the information requirements imposed also need to be extended.
Information on investment advice
Before advice can be given (see ‘investment advice’ discussed in this note), firms must inform clients of the following:
Information on financial instruments
Information on financial instruments which, from existing measures, must contain appropriate guidance on, and warnings of, the risks associated with investment in the instruments, must now indicate whether the instrument is intended for retail or professional clients, and must take account of any target market identified in accordance with the new product governance requirements (see ‘product governance’ discussed in this note).
Information on costs and charges
MiFID II reinforces the existing requirements but clarifies them in places and sets additional requirements. Information on all costs and associated charges, including charges related to investment and ancillary services, the cost of advice and the cost of financial instruments must be disclosed; the method of payment stated, and details of any third-party payments. All costs and charges should be aggregated so the client understands the overall cost as well as the cumulative effect on the return of the investment (with an itemised breakdown should a client request it). Information about costs and charges is to be provided, where applicable, at least annually post-sale.
Information on investment advice
ESMA’s advice confirmed its summer 2014 consultation, such that firms must properly explain the scope and the features of the advice given. This includes requirements to:
ESMA has confirmed that this applies to advice provided to both retail and professional clients.
Information on financial instruments
ESMA’s advice includes that the following additional information is disclosed on financial instruments:
Information on costs and charges
ESMA considers that cost disclosure, together with the disclosure about risk, is an important element to improve the ability of investors to assess the products that are offered to them. Due to concerns that the current MiFID II requirements could still result in different application by investment firms due to certain ambiguities in the drafting, ESMA’s advice is that there should be a significant level of detail in the information provided on costs and charges, including the following:
ESMA has set out various examples of how it considers disclosures might be made in the final advice.
Information in client agreements
ESMA’s advice significantly expands the scope of the current requirements as follows the:
Information on client assets
See ‘Safeguarding of client assets’ in this note.
Firms (where applicable) are currently required to keep records in a significant number of areas, including in relation to:
The records are required to be kept for a period of 5 years or for the duration of the client relationship (if longer). MiFID requires Member State national regulators to draw up a list of minimum records that should be retained, and ESMA’s predecessor, CESR, provided recommendations in 2007 about what those minimum records should be.
MiFID II does not make any substantive changes to the existing requirements. It does emphasise that Member State regulators must be able to use records to fulfill their supervisory tasks and perform enforcement actions under MiFID / MiFIR and market abuse legislation - and there is an express reference to records being used to demonstrate that firms have complied with their obligations around market integrity.
ESMA’s summer 2014 consultation did not propose to alter the existing requirements but sought to codify its previous Level 3 recommendations published by CESR in 2007. These proposals would have seen a non-exhaustive list of minimum records prescribed that firms would need to keep and what they should cover, to harmonise practices across the EU. In addition, ESMA proposed that all policies that firms were required to maintain under MiFID II and the EU market abuse regime need to be kept in writing.
ESMA’s technical advice introduces some additional requirements to what was proposed last summer as follows:
There are currently no mandatory requirements under MiFID to record telephone conversations or electronic communications, although Member States have the discretion to require it.
To increase certainty, investor protection and deterrence of market abuse, MiFID II has introduced organisational requirements which require firms to record telephone conversations or electronic communications when they:
The requirements cover all telephone conversations and electronic communications that relate to activities that are intended to result in the conclusion of a transaction or the provision of client order services, even if they in fact do not. The Level 1 text also requires records to be kept for five years, and potentially a further two years where the MiFID II Member State national competent authority requests.
ESMA’s advice and commentary include the following:
MiFID introduced high level requirements in relation to the organisation of firms and the handling of complaints raised by retail clients, their record-keeping and resolution.
MiFID II continues the current regime.
ESMA’s summer 2014 consultation proposed to significantly extend the requirements in relation to complaints handling and its technical advice confirms this.
The measures contain strict (albeit still high-level) requirements (similar to the complaints handling guidelines developed by ESMA / EBA for the banking industry) with the aim that this will implement harmonised complaints-handling across the EU and apply to both retail and professional clients.
The additional requirements include:
Despite market push-back, ESMA has retained its requirement that complaints handling guidelines apply to both retail and professional clients (both per se and elective professional clients). On request, ESMA has tried to clarify (albeit not as part of its advice) what amounts to a ‘complaint’ (“a statement of dissatisfaction addressed to a firm by a client or potential client relating to the provision of investment services”) which is particularly relevant in the context of complaints by professional clients. But the explanation is of a high level nature and so is unlikely to be of much material assistance.
Despite market push-back, ESMA has confirmed that complaints handling applies to potential clients as well as clients.
ESMA has also elaborated further on the level of detail that needs to be provided to complainants about firms’ complaints handling processes.
There are also new requirements in relation to the governance of complaints. ESMA has retained its proposal for firms to have a person responsible for oversight over the complaints function (which can be performed by compliance) (see our separate note on Corporate Governance).
ESMA has stated that it may set out more specific guidelines in the future.
In relation to client assets, MiFID put in place the following requirements:
MiFID II continues the current regime.
ESMA’s proposals in its summer 2014 consultation have been confirmed in the technical advice with some tweaks as summarised below.
Governance arrangements in firms concerning custody
Title transfer collateral arrangements (TTCA)
Securities financing transactions and collateralisation
Considering diversification of firms’ holding of client funds
Intra-group deposits of client funds
Segregation of client assets in third countries
Preventing unauthorized use of client financial instruments
Availability of information to insolvency practitioners and others
Directive on Markets in Financial Instruments repealing Directive 2004/39/EC and amending Directive 2011/61/EU and Directive 2002/92/EC.
Regulation on Markets in Financial Instruments and amending Regulation 648/2012.
Directive 2013/36/EU on access to the activity of credit institutions and investment firms, amending Directive 2002/87 and repealing Directives 2006/48 and 2006/49.
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
On 5 September 2019, Professor John McMillan AO’s Final Report (Report) on the operation of the Narcotic Drugs Act 1967 (ND Act) was tabled in Parliament. Section 26A of the ND Act required the Minster to cause a review of the operation of the ND Act to be undertaken.