15 August 2014

BaFin: Overview of the provisions of MiFID II

MiFID II is supplemented by the Markets in Financial Instruments Regulation (MiFIR), which comes into force in Member States with immediate effect. It, too, will not come into operation until 3 January 2017. ESMA will flesh out the details of MiFID II and MiFIR by means of Technical Standards. In order to prepare for this, it published a discussion paper and a consultation paper in May 2014.

The material changes to the content of MiFID introduced by MiFID II and MiFIR may be divided into two main blocks: one on intermediary and investor protection related topics and one on market and trading related topics:

• Independent investment advice: MiFID II prohibits investment firms from accepting payments of fees, commissions or other monetary benefits for independent investment advice or portfolio management. This prohibition includes in particular any remuneration that firms are paid by a third party, such as the issuer of a financial instrument, as sales commission.
• Payments of fees, commissions and benefits: While investment firms may no longer accept any sort of fees, commissions or benefits for independent investment advice or portfolio management, they are allowed to do so for other (ancillary) investment services – but only if the payments are capable of enhancing the quality of the relevant service to the client. Furthermore, firms are obliged to clearly disclose to their clients what payments they do accept.
• Product governance: Issuers of financial instruments are now obliged to identify a target market and to test the performance of a financial instrument under various market conditions (scenario analysis). Investment firms must, among other things, operate a proper system for managing conflicts of interest, which typically exist in the designing of investment products, and improve their transparency on costs. In so doing, they also have to take account of the needs of the target market for which the product is intended. Firms must monitor the distribution of the product by the issuer and are obliged in certain situations to take appropriate measures (post-sale obligations). 
• Product intervention: Subject to certain conditions, MiFID II and MiFIR give national competent authorities (NCAs) and ESMA the express power to intervene in respect of products. They may prohibit or limit the marketing, distribution and sale of financial instruments.
• Recording requirement: MiFID II requires investment firms to record electronic communications with their clients and to make these available to them and to NCAs upon request. This applies not only to telephone conversations but to any kind of electronic communication. All communications between investment firms and their clients relating to the reception, transmission and execution of client orders will have to be recorded.

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