MiFID II Quick Fix Directive – Part 1 of a 4-Part Series on the upcoming changes

(5 minute read)                                                                                               22 February 2021

This is the first article in a four-part series about the MiFID II Quick Fix Directive.

On 16 February 2021, the European Parliament and the Council of the European Union signed a directive (MiFID II Quick Fix Directive) that brings targeted amendments to Directive 2014/65/EU (MiFID II). The MiFID II Quick Fix Directive is expected to be published in the Official Journal before the end of February 2021, after which the EU’s Member States have 12 months before they must apply the amendments. The amendments are part of the EU’s Capital Markets Recovery Package, which in turn is part of the EU’s COVID-19 recovery strategy. 

In this first article, the changes to MiFID II’s cost disclosure and inducements regimes will be explained. 

1.     Professional clients and eligible counterparties: much less cost disclosure

Currently, all investment services and all ancillary services provided to professional clients and eligible counterparties are in scope of mandatory cost and charges disclosure requirements. This is going to change substantially. The cost and charges disclosure requirements will no longer apply to ancillary services and will no longer apply to most investment services, with the exception of investment advice and portfolio management. This is the effect of the insertion of a new article 29a in MiFiD II and by amending article 30(1) MiFID II.

The changes introduced by article 29a and article 30(1) MiFID II have a fundamental impact on an investment firm’s obligations under article 50 of Commission Delegated Regulation (EU) 2017/565 (MiFID II Delegated Regulation). For common investment services, such as “reception and transmission of orders” or “execution-only”, investment firms no longer need to comply with the detailed ex-ante and ex-post cost and charges disclosure requirements in respect of professional clients and eligible counterparties. This is likely to provide substantial operational relief to investment firms.

At this moment, many investment firms have used the right currently granted to them in the MiFID II Delegated Regulation to agree to a limited application of the disclosure requirements with professional clients and eligible counterparties. That type of agreement is going to be affected by the MiFID II Quick Fix Directive. In order to handle these and other changes, investment firms should probably take a close look at their current terms of business and verify which parts will need redrafting. 

2.     Retail clients: for execution services ex-ante cost disclosure no longer is ex-ante

Currently, investment firms are required to provide clients “in good time” before the provision of investment services or ancillary services with information about costs and charges (article 24(4) MiFID II and article 46(2) MiFID II Delegated Regulation). This requirement hinders the smooth execution of investment decisions, which often depend on swift order execution. The ex-ante cost disclosure requirement, however, slows down the order execution process and, by doing so, may adversely affect clients’ interests. This is going to change. 

When the client and the investment firm use distance communication when concluding “the agreement to buy or sell a financial instrument”, the ex-ante cost disclosure will no longer need to be provided before the transaction but may be provided without undue delay after the conclusion of the transaction (amendment of article 24(4) MiFID II). This delay option is subject to two conditions:

a)     the client’s consent to the delay of the ex-ante cost disclosure; and 

b)     the investment firm having offered the client the option of delaying the transaction until ex-ante cost disclosure has been taken care of. 

In addition to the second condition, it is stipulated that the client must be given the option to receive the ex-ante cost disclosure over the phone prior to the transaction.

The wording of the delay option is almost identical to the delay option in respect of the timely provision of a suitability statement to retail clients. The latter delay option uses the same trigger: ‘where the agreement to buy or sell a financial instrument is concluded using a means of distance communication which prevents the prior delivery […]’. 

It is worth noting that the wording of the trigger effectively limits its scope to the provision to retail clients of the investment services “reception and transmission of orders” and “execution-only”. For other investment services (notably portfolio management) or ancillary services (notably custody services) provided to retail clients, the trigger and the delay option appear not to be relevant. 

In order to incorporate the delay option into their business operations, investment firms should probably review their IT systems in order to determine where to integrate the required conditions.

3.     Inducements: partial ‘unbundling’ of the research unbundling rule

MiFID II introduced the so-called research unbundling rule, i.e. investment firms that provided execution services were no longer allowed to provide research services at no cost to other investment firms. Also, investment firms were no longer allowed to receive research from third parties for free, in order to comply with the requirement not to accept and retain non-monetary benefits paid or provided by a third party in relation to the provision of investment services to clients. The unbundling rule is going to be ‘unbundled’ in respect of research on small and midcap issuers.

By inserting a new paragraph 9a in article 24(4) MiFID II, investment firms are going to be allowed to receive research from third parties without having to pay separately for it. This is subject to three conditions, each of which assumes that the third party research provider is also providing execution services to the investment firm. The three conditions are:

a)     the investment firm and the third party enter an agreement which identifies the ‘research part’ and the ‘execution services part’ in the combined fee that is payable by the investment firm to the third party; and

b)     the investment firm informs its clients about the combined fee that it is paying to the third party; and 

c)     the research is restricted to small and midcap issuers, which are defined as issuers with a market capitalisation not in excess of EUR 1 billion in the 36 months preceding the provision of the research.

The partial reversal of the unbundling rule will require interaction with clients and will probably require some redrafting of investment firms’ terms of business. In addition, investment firms are required to negotiate and enter into an agreement with third parties that provide research and execution services. 

Matthijs Groot is an independent interim legal counsel with extensive experience with MiFID II, MiFIR, EMIR, EMIR Initial Margin, CRR, CRD, ISDA Documentation, LMA Documentation and finance related litigation. Connect with Matthijs on LinkedIn.