1. MIFID II

1.1 ESMA Guidelines on MiFID II Remuneration Requirements

On 3 April 2023, the European Securities and Markets Association (ESMA) published guidelines on certain aspects of the MiFID II remuneration requirements (Guidelines). The Guidelines apply in relation to the remuneration requirements as set out in Article 27 and 34 of Commission Delegated Regulation (EU) 2017/565 (MiFID II Delegated Regulation) as well as the conflicts of interest requirements set out in Articles 16(3) and 23 of Directive 2014/65/EU (MiFID II) and Article 34 of the MiFID II Delegated Regulation in the area of remuneration. The Guidelines also relate to the conduct of business rules set out in Article 24(1) and (10) of MiFID II.

The Guidelines have been issued by ESMA to ensure uniform implementation of these requirements at both a supervisory and firm level.

Guideline 1 deals with the design of remuneration policies and practices. When designing remuneration policies and practices and, especially, where remuneration comprises variable components, firms should define appropriate criteria to align the interests of the relevant persons and of the firms with that of the clients. Firms shall consider qualitative criteria that encourage the relevant persons to act in the best interests of the client. Examples of both good and poor practices are provided within the Guideline.

Guideline 2 relates to the governance in respect of the remuneration practices of the firm such as proper record keeping, the review of the he remuneration policy and the involvement of the board of the firm and possibly other control functions of the firm. Firms should ensure that they have appropriate and transparent reporting lines in place across the firm or group to assist in escalating issues involving risks of non-compliance with the MiFID II remuneration, conflicts of interest and conduct of business requirements.

Guideline 3 addresses the need for adequate controls in order to ensure compliance with their remuneration policies and practices and to ensure that these deliver the intended outcomes. Examples of both good and poor practices are provided within the Guideline. The Annex to the Guidelines includes illustrative examples of remuneration policies and practices that would create strong incentives to sell specific products and for which firms would therefore have difficulties demonstrating compliance with the MiFID requirements. The conduct of business and conflict of interest risks related to such examples should be taken into account by firms when designing and implementing their remuneration policies and practices.

The Central Bank of Ireland has indicated on its webpage (see here) that it intends to comply with these guidelines and incorporates them into its on-going supervisory practices and processes. Firms are expected to comply with these guidelines from 3 October 2023.

A copy of the Guidelines can be accessed here.

1.2 ESMA Guidelines on certain aspects of the MiFID II Suitability Requirements

On 3 April 2023, ESMA published guidelines on certain aspects of the suitability requirements under MiFID II (Guidelines).

The Guidelines aims is to better clarify the application of Article 25(2) of MiFID II and of Articles 54 and 55 of the MiFID II Delegated Regulation regarding the requirement obtain necessary information regarding the client's or potential client's knowledge and experience, risk appetite etc relevant to the specific type of product or service provided. The Guidelines cover key considerations such as:

  • Information to clients about the purpose of the suitability assessment and its scope;
  • Arrangements necessary to understand clients;
  • Proportionality regarding the extent of information to be collected from clients;
  • Reliability of client information;
  • Updating client information;
  • Client information for legal entities or groups;
  • Arrangements necessary to understand investment products;
  • Matching clients with suitable products

Firms are expected to comply with these Guidelines from 3 October 2023.

The Guidelines can be accessed here.

1.3 Commission Delegated Regulation correcting the RTS as regards certain transparency requirements applicable to transactions in equity instruments

On 16 May 2023, the European Commission published in the Official Journal (OJ) a Commission Delegated Regulation amending previous regulatory technical standards (RTS) set out in Delegated Regulation (EU) 2017/587as regards certain transparency requirements applicable to transactions in equity instruments.

The Commission Delegated Regulation will take effect on the 5 June 2023 and can be accessed here.

1.4 European Commission publishes Retail Investment Strategy

On 24 May 2023, the European Commission adopted a retail investment package seeking to "empower retail investors to make investment decisions that are aligned with their needs and preferences, ensuring that they are treated fairly and duly protected". The proposal comprises:

  • a Directive amending rules set out in MiFID II Insurance Distribution Directive (IDD) 1 , Undertakings for Collective Investment in Transferable Securities Directive (UCITSD) 2 , Alternative Investment Fund Managers Directive (AIFMD) 3 and Solvency II4 (the "Omnibus Directive Proposal"); and
  • a Regulation amending the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs Regulation) 5 , in particular with regard to rules on the key information document (KID).

The European Commission aims to amend organisational and conduct requirements for various types of financial firms and to align regulatory requirements across different distribution channels.

The amendments to MiFID II proposed under the Omnibus Directive include:

  • A significant overhaul of the inducements framework which includes a new ban on inducements for execution-only or RTO services to or on behalf of retail clients (save for some limited exceptions for underwriting/placement scenarios). The inducement bans for portfolio management and independent advisors remains. In addition, the proposals include the replacement of the MiFID quality enhancement test with new obligations;
  • New requirements for investment firms relating to both ex-ante and ex-post disclosure of inducements, costs and charges;
  • New requirements for marketing communications and information such as risk warnings in respect of particularly risky products, as well as requirements for firms to put in place a policy on marketing communications and preferences. In addition, the introduction of new obligations as regards the division of responsibility of manufacturers and distributors for the content and use of such marketing communications;
  • New requirements for investment advisors, including requirements to undertake at least 15 hours of professional training and development per year and to obtain a certificate to evidence of compliance of such training;
  • Amendments to the suitability assessment to be conducted by investment firms to: (i) require that portfolio diversification must be considered as part of the suitability assessment; and (ii) to reduce the extent of the requirements which apply to independent advisors in carrying out such assessments where those advisors are providing independent advice to retail clients where that advice is restricted to well-diversified, non-complex, and cost-efficient financial instruments;
  • Amendments to the appropriateness test for retail clients to consider the capacity of the investor to bear full or partial losses and to consider risk tolerance. A new requirement is introduced for the firm to give a specific warning to potential clients if the result of the test is negative. If the firm considers that a transaction is not appropriate for a client, it must not proceed with the transaction, unless the client asks to proceed despite such warning;
  • Amendments to allow investment firms to bundle costs for the execution of orders and research where the research is limited to issuers whose capitalisation does not exceed EUR 10 billion;
  • Amendments to criteria to be assessed in respect of "elect-up" investors which involve reducing the wealth criterion from EUR 500,000 to EUR 250,000 and introducing a new criterion which relates to the investor's education or training;
  • Amendments to the product governance requirements under MiFID II, including the new requirements for manufacturers to consider the target market's objectives/ needs and to assess whether the financial instrument is designed appropriately to meet the target market's objectives and needs. New requirements for distributors to put in place adequate arrangements to obtain this information and to regularly review the products to assess whether the product remains consistent with the objectives and needs of the identified target market and whether the intended distribution strategy remains appropriate;
  • New requirements for both manufacturers and distributors to ensure that products offered to clients deliver "value for money" by not deviating from a given benchmark (which ESMA shall be required to develop). PRIIPs manufacturers will need to identify and quantify all costs and charges related to the product assess whether these are justified and proportionate. If justification and proportionality of costs and charges cannot be demonstrated, the manufacturer must not approve the product. Distributors will also be required to quantify the distribution costs and also to perform their own costs and charges assessment against relevant cost and against the benchmarks. Under the proposal, products are only to be offered to clients if they are aligned with the relevant benchmarks.
  • New reporting obligations for manufacturers and distributors to NCAs in respect of the distribution costs, costs and charges destined for retail investors;
  • New requirements for reporting on cross border activities (dependent on scale) to ESMA and additional measures to strengthen supervisory convergence regarding authorisations of firms and the ongoing compliance;
  • New requirements for product manufacturers and distributors to establish an integrated pricing process.

A copy of the Omnibus Directive Proposal can be accessed here.

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Footnotes

1. Directive 2016/97

2. Directive 2009/65/EC

3. Directive 2011/61/EU

4. Directive 2009/138/EC

5. Regulation (EU) No 1286/2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.