The European Securities and Markets Authority ("ESMA") has recently published final technical advice on the effects of product intervention measures under the Markets in Financial Instruments Regulation ("MiFIR"). ESMA makes recommendations in relation to the product intervention framework under MiFIR, including proposing extending the framework to alternative investment fund managers (“AIFMs“) and UCITS management companies. In addition, ESMA has said that it will be monitoring the markets in financial instruments linked to crypto assets as it is aware that some national competent authorities ("NCAs") are consulting on potential product intervention measures concerning these products. If necessary, ESMA will consider exercising its intervention powers in this area.
When MiFIR was introduced in 2018, ESMA was given the power to temporarily prohibit or restrict the marketing, distribution or sale of certain financial instruments, financial instruments with certain specified features or a type of financial activity or practice. ESMA has since used this product intervention power in relation to binary options and contracts for difference (“CFDs“) due to detriment caused to retail investors. ESMA has been asked to report to the European Commission on, amongst other MiFID II/MiFIR topics, its experience of temporary intervention powers, including areas in which legislative changes might be appropriate in relation to the product intervention framework.
For more information on regulators’ product intervention powers across various jurisdictions, please see our global guide on Product Intervention Powers and Design and Distribution Obligations in Financial Services, available here.
ESMA's technical advice
The main elements of ESMA's technical advice are as follows:
- Level playing field between MiFID firms and AIFMs/UCITS management companies: ESMA and NCAs currently cannot exercise MiFIR product intervention powers in relation to AIFMs and UCITS management companies despite these firms being able to carry out certain MiFID services/activities. ESMA recommends that the European Commission addresses the risk of arbitrage between MiFID firms and these fund management companies, and advises that NCAs and ESMA should have the powers to apply restrictions/prohibition directly to AIFMs and UCITS management companies.
- Extending time validity of ESMA's temporary product intervention powers: ESMA's product intervention measures currently only last for a short-term period (3 months – although this period will be increased to 6 months from 1 January 2022) and reviews for extension is resource intensive and burdensome for both ESMA and the NCAs. Additionally, ESMA notes that there are divergences in product intervention measures taken by different NCAs, particularly where permanent national measures diverge from temporary ESMA ones. ESMA recommends consolidation of temporary measures into permanent ones by the European Commission, or alternatively extending ESMA's powers to allow the introduction of temporary product intervention measures for 18 months.
- Interaction of national product intervention measures: Article 42(1) MiFIR permits NCAs to take product interventions measures "in or from" their Member State, which ESMA suggests means that an NCA has the possibility to take measures that only apply in that Member State (and not from), and vice versa. Confusion also arises where Member States take overlapping product intervention measures. ESMA advises the Commission to clarify the application of product intervention measures to firms acting on a cross boarder basis and how those measures will be supervised and enforced.
- ESMA opinion on proposed national product intervention measures: NCAs are required under Article 42(3) MiFIR to notify ESMA of proposed national product intervention measures, at least one month before the measure is intended to take effect, in order for ESMA to issue an opinion on the measure (Article 43(3) MiFIR). In ESMA's view, this requirement is burdensome. ESMA advises the European Commission that NCAs should be exempt from seeking an opinion where their national measures are exactly the same as ESMA's temporary measures, and that ESMA should have the option (not an obligation) to give an opinion in these circumstances.
- Further clarification on Article 40(3) MiFIR: ESMA considers the wording in Article 40(3) MiFIR ("Where ... competent authorities have taken a measure under Article 42, ESMA may take any ... measures ... without issuing the opinion provided for in Article 43") to be unclear, and is of the view that the situation described is unlikely to occur in practice. ESMA asks the European Commission for further clarification of Article 40(3) MiFIR.
Future use of product intervention measures
ESMA is aware that some NCAs are consulting on potential product intervention measures concerning certain financial instruments linked to crypto assets. ESMA will continue to monitor markets and will exercise its coordination role in relation to measures proposed by NCAs. ESMA will consider taking product intervention measures if issues become apparent which cause significant concerns around investor protection or a threat to the orderly functioning and integrity of markets.
Next steps and Brexit
The European Commission will now present a report to the European Parliament and the Council on product intervention, and a decision will be taken on whether to adopt any of the measures set out by ESMA in this final report. If so, we may see an expansion of the scope of product intervention powers in the future.
Now that the UK has formally left the EU, the UK's FCA is no longer a member of ESMA's Board of Supervisors nor can it participate in any of ESMA's other governance bodies. However, until the end of the transitional period on 31 December 2020, EU law (including MIFIR) will continue to apply to the UK as if it were a Member State, which means that ESMA will have product intervention powers over financial instruments and firms in the UK. Therefore any extension of these powers prior to the end of 2020 could have an effect in the UK. From 2020 onwards, it remains to be seen whether the UK will follow the EU's approach in relation to product intervention.
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