Paving the way for MiFID III/MIFIR II EC consultation paper on the revisal of MIFID II/MiFIR : what's in it for you and your institutions ?

Two years after the entry into force of the legislative package MiFID II/MIFIR, the European Commission (the “Commission”) has launched its awaited public consultation for the reviewing[1] of these two major pieces of the EU financial markets law that affect practically every area of financial services.

During the implementation phase, the industry has showed a high level of discontent towards a number of MIFID II/MIFIR rules it considered to be disproportionate and not fitting the initial purpose of policy-makers. 

Meanwhile, Capital Markets Union’s project (“CMU”) is still alive and the Commission intends to use the stakeholders’ feedback from the current public consultations led by ESMA on the functioning of certain aspects of MiFID II[2] or itself[3] to examine whether some regulatory issues should be subject to a new legislative initiative – particularly in order to reach the objectives set by the von der Leyer Commission on a new “digital and sustainable finance strategy for the EU”. 

I-               Priority topics identified by the Commission for the revisal of MIFID II/MIFIR

The public consultation paper is divided in two main sections. The first one covers general questions on the overall functioning of MiFID II/MiFIR whereas the second section addresses both “priority” and “non-priority” issues and topics identified by the Commission (see below).

Source : KL/DPS SAS

For priority topics only, the Commission suggests different policy options to be challenged by the respondents. 

II-             Investor protection measures: focus on the most impacting Commission’s proposals for investment firms 

·      Total banning of inducements paid by third parties to financial advisers?

Following the examples of the UK and Dutch national laws, the Commission is considering on an outright ban on inducements paid by third parties (i.e. investment product manufacturers or intermediaries) and not by the final clients to investment advisers acting for such clients. The rationale is that some consumers’ associations (for instance BEUC) advocate that the MIFID II inducements regime is not sufficiently dissuasive to prevent conflicts of interest in the distribution process. 

Nonetheless, some research works and studies conducted in these countries have shown that “some groups of consumers are struggling to pay directly for financial advice. If these groups don’t get financial advice because they won’t pay advice directly to the advisor, this could cause severe financial problems. In the Netherlands, estimates are that in 2015, 15% of households were facing problematic debts (SCP, 2016).” [4]

Such debates may also impact the current regime of inducements for other investment service notably for portfolio management.

Additionally, the Commission is examining the relevance of introducing at EU level a mandatory certification, potentially based on examination for staff providing investment advice, to address the issues resulting from diversified national educational and professional systems. 

·      Semi professional new category of client 

The Commission is considering the introduction of a new client category of “semi professional”, which would capture high net worth or sophisticated investor types in order to make easier for these categories of retail investors to participate in the capital markets, which could involve a tailor-made investor protection regime for these clients. 

Instead of the creation of a new regime for semi-professional investors, the Commission is considering lowering the quantitative threshold for a professional client’s investment portfolio from €500,000. 

The creation of such new, fourth, category of client may be incentivized by market players to ease the access of certain new innovative and sustainable financial products, but it remains difficult to assess, at this stage of the EU decision making process, whether the MiFID rules (i.e. suitability and appropriateness, costs and charges and product governance) attached to this new semi-professional category will actually be adapted to the people profile it is supposed to cater for.

·      Simplification of product governance rules 

While the Commission recognizes significant steps in improving investor protection and transparency have been made since the entry into force of MIFID II and the Packaged Retail and Insurance-based Investment Products (Priips) regulation, it considers there still a room for a more differentiated approach on consumer profiling.

Governance rules consists mainly in identifying a target market (as well as a negative target) and elaborating a distribution strategy for each investment product, to ensure the way it is manufactured and distributed meets the client’s needs. 

Therefore, the Commission is asking from stakeholders whether governance rules should be either recalibrated (i.e. only for sophisticated products or only for mass retail products) or on the contrary extended to other products. 

Additionally, the consultation paper addresses the selling of a financial product to a negative target market which is not prohibited under MiFID II and requests feedback to evaluate whether the selling to a negative target market should be subject to both a written information and a consent collect of the client.

Whatever the final results of the public consultation process, surely investment firms will pay attention to the fact that such “simplification work” will not lead them to devote new substantial resources and compliance workstream for non-evidenced reforms of their current IT, distribution and management processes and will adversely impact the investors at the end[5].

·      Ex-ante cost disclosures 

The Commission notes that a “wide range of stakeholders” consider ex ante disclosures to be a needless administrative burden, since certain categories of clients are aware of the current market and pricing conditions. The Commission is therefore consulting on whether professional and eligible counterparties clients could opt out unilaterally from ex-ante cost information obligations and whether there should be conditions attached to this. 

·      EU wide data base for the benchmarking of investment products

The Commission is assessing the relevance of the introduction of an EU-wide database for investment products to improve the comparison of investment in terms of costs and other product information. In this context, the Commission is seeking views on which products it should prioritize for their inclusion in an EU-wide database managed by ESMA.

The public consultation will run until 20 April 2020. While this consultation is not a full review of MiFID II/MIFIR, it will lead undoubtedly to important changes under MIFID III/MIFIR II. Investment firms should monitor and anticipate them by actively participating to the consultation process. 

[1] In accordance with Article 92 of MiFID II and Article 52 of MIFIR.

[2] The Commission’s consultation takes place in parallel with ESMA’s public consultation on several other issues pertaining to MiFID II and MiFIR and focused on (i) impacts on position limits on commodity derivatives markets, (ii) transparency regime for equities and equity-like instruments, (iii) double volume cap mechanism and trading obligation for shares, (iv) systematic internalisers in non-equity-instruments, (v) provision of investment services by third country firms… 

[3] See for instance Commission’s consultation on the digitalisation of marketing and distance selling on financial services.

[4]https://www.researchgate.net/publication/327933069_A_commission_ban_for_financial_advice_Lessons_learned_from_The_Netherlands

[5] ESMA’s report on investment products costs and performance states that costs of compliance for costs disclosures and inducements under MiFID II are on investor’s returns.