MiFID II
ESMA peer’s review on the compliance function under MiFID II
On 4 July 2023, the ESMA issued a follow-up report on the actions certain NCAs have undertaken further to the 2017 peer review report on certain aspects of the compliance function under MiFID II (the “Follow-up”).
The compliance function, plays a key role in promoting the sound and compliant functioning of an investment firm. It acts as a second line of defence that identifies, assesses, advises, monitors and reports on the risk when an investment firm fails to comply with its obligations, as set out in MiFID II. The compliance function can provide a key source of information to supervisors on the firm’s compliance with its obligations.
The ESMA considers that the NCAs should continue to monitor the proper application of the guidelines, taking supervisory measures where necessary, given that the compliance function remains a key element to promote sound and compliant functioning of investment firms.
ESMA provides guidance of the ‘investment advice’ definition under MiFID II
On 11 July 2023, the ESMA issued a supervisory briefing with respect to the definition of ‘investment advice’ under MiFID II (the “Supervisory Briefing”). This Supervisory Briefing updates a document previously published by the Committee of European Securities Regulators (CESR) to consider the evolution of business models, technology, and the increase of use of social media.
The Supervisory Briefing provides guidance on the concept of investment advice. For this purpose, the Supervisory Briefing offers a test and explanations pertaining to such test. To determine whether there is an investment advice including the following questions should be raised:
- Does the service being offered constitute a recommendation?
In this respect, a distinction should be made between providing advice and providing information (some types of information could constitute investment advice). It should be noted that a recommendation requires an element of implicit or explicit suggestion. Information, on the other hand, involves statements of fact or figures.
- Is the recommendation in relation to one or more transactions in financial instruments?
Any advice that relates to particular financial instruments – whether or not transactions ultimately go ahead – could be considered as investment advice under MiFID II. Nevertheless, general recommendations are not investment advice under MiFID II, unless they are a part of the whole investment advice process.
- Is the recommendation presented as suitable?
It should be noted that a financial instrument may be implicitly presented as suitable for the investor in an explicit or implicit form. In such a case, before making the recommendation, the firm should have obtained the necessary information regarding the client’s knowledge and experience, their financial situation including the ability to bear losses, and investment objectives including risk tolerance and sustainability preferences so as to recommend a financial instrument that is suitable for the investor.
- Is the recommendation presented as suitable or based on a consideration of the person’s circumstances?
Information about a person’s circumstances could include both factual information (such as their address, income or marital status) and more subjective information about their wants and needs (their overall risk appetite, short-term and long-term investment objectives, including sustainability preferences, or their desire for protection from particular risks, to name a few). Any such information could be considered part of a person’s circumstances.
- Is the recommendation issued otherwise than exclusively to the public?
In view of the growing number of intermediaries providing personal recommendations through the use of distribution channels, it should be clarified that a recommendation issued, even exclusively, through distribution channels, such as internet, could be considered a personal recommendation. It is understood that recommendation would not be considered personal if the recommendation is only made to the public (i.e. through newspapers, television, radio or through posters). Nonetheless, according to MiFID II Delegated Regulation the use of distribution channels, such as internet, could be considered a personal recommendation. As a result, a recommendation concerning financial instruments made through internet websites, investment apps, and/or social media may be deemed a personal recommendation and not as having been issued exclusively to the public (notably in case of personalisation).
- Is the recommendation made to a person in their capacity as an investor (or potential investor) or an agent for an investor (or potential investor)?
Regarding the notion of investor, it is considered that person is an investor or potential investor where an investment firm makes a recommendation to a person to buy, sell, or hold a financial instrument. Concerning the concept of agent for an investor, it is notably where a person holds a power of attorney to act in the name of another person, such as their spouse or child, otherwise agents for investor are requested to be clear about the fact that the portfolio manager is acting for a particular client (or a particular group of clients) and to ensure that the firm commissioned possesses the necessary information about the clients involved.
ESMA report on the technical standards for passporting under MiFID II
On 11 July 2023, the ESMA published a final report on the review of the technical standards for passporting (the “Final Report”).
Article 34 of MiFID II requires ESMA to prepare RTS and ITS to determine the information to be notified by investment firms intending to perform cross-border services without having established a branch, and to draw up standard forms, templates and procedures for submitting the required information.
In this respect, the ESMA published a consultation paper on 17 November 2022 (the “Consultation Paper”), which introduced several changes to the RTS and ITS by adding to the information that investment firms are obliged to disclose during the passporting notification including:
(i) the marketing means that the investment firm will use for the purposes of actively targeting clients (such as a social media campaign, a mobile app, roadshows, post, calls, a dedicated website, dedicated marketing materials, webinars, educational material, etc.) in the host Member States;
(ii) the language(s) in which the investment firm has made arrangements to handle complaints from investors in each of the host Member States where it provides services;
(iii) in which EU Member States the investment firm will actively use its MiFID passport as well as the categories of clients targeted; and
(iv) the internal organisation of the investment firm with respect to cross-border activities.
The Final Report highlights that the NCAs are divided on whether investment firms should inform their home NCA in the event of a change in the internal organisation of the investment firm in the context of cross-border activities and the main arrangements which have been put in place to ensure that the internal control functions have the capacity to control the cross-border activities.
ESMA has submitted the final report to the European Commission and intends to provide additional technical advice and guidance.
Investment firms’ disclosure of cost and charges under MiFID II
On 6 July 2023, the ESMA published a public statement presenting the results of the CSA and Mystery Shopping Exercise (MSE) on MiFID II requirements on information on costs and charges for the year 2022 (the “Statement”).
As part of its investor protection duties, ESMA has decided to conduct MSE visits in relation to ex ante information on costs and fees provided to retail clients; the focus was on what the client received and whether it found the information understandable and useful. This enables new risks and problems to be identified at an early stage.
The Statement first mentions that, generally, firms provide ex post information on costs and charges to client and have the appropriate controls in place. In most cases, upon request, firms also furnish detailed breakdowns of costs and charges. However, the Statement points out that companies do not always provide the percentage of costs and expenses, even though they must be indicated both as a nominal amount and as a percentage. Furthermore, for the sake of comparability, investment firms must explain how this percentage has been calculated. The Statement also indicates a discrepancy in the way third-party payments received are indicated in ex post disclosures. Moreover, investment firms are required to disclose to clients all costs and charges relating to the service and product, whether explicit or implicit, and the latter are sometimes not disclosed.
As a result, the ESMA intends to develop new Q&As or revise existing ones to address simple and straightforward issues that need to be resolved and to initiate preparatory work on a potential standardised European approach for the provision of information on costs and charges to clients.