Despite substantial market push-back to the summer 2014 consultation, ESMAs advice confirms that the Commission should adopt an exhaustive list of what constitutes a minor non-monetary benefit to prevent regulatory arbitrage amongst Member States. In terms of MiFID - there are two main categories of client: Retail and Professional. that distributors of products manufactured by non-MiFID II entities are not excused from the requirement themselves to determine the relevant target market, just because the manufacturer was not required to do so. Provided that it adheres to the procedure set out at COBS 3.6.4BUK7, a firm may treat a client as an elective eligible counterparty in relation to MiFID or equivalent third country business if the client:6, is a per se professional client, except for a client that is only a per se professional client because it is an institutional investor under COBS 3.5.2R(5); and6, [Note: first paragraph of article 30(3) of MiFID]6. Law details. We propose that your classification is an Eligible Counterparty in relation to the following Eligible Counterparty Business. the action is proportionate given the risk, sophistication of investors or market participants and the effect of the action on investors and the market participants. Any action taken by ESMA / EBA will apply instead of action taken by a Member State national regulator. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. The legislative proposals were the subject of intense political debate between the European Parliament, the Council of the EU, and the Commission. ESMA has confirmed lesser requirements (but still some requirements) on intermediate distributors in a distribution chain; and. MiFID requires various reports to be provided to clients in a durable medium, namely: MiFID II does not propose any significant changes to the current regime. All Rights Reserved. For the first time, MiFIR allows third country firms to provide investment services or perform activities directly to "eligible counterparties" and "per se professional clients" (as defined in MiFID 2) throughout the EU. firms providing independent investment advice or portfolio management are prohibited from receiving and retaining any fees, commission, or monetary or non-monetary benefits from third parties these payments / benefits can be received but they must be passed on in full to clients as soon as possible following receipt; minor non-monetary benefits are excluded from the prohibition but they must not impair a firms duty to act in the best interests of its clients, must be capable of enhancing the quality of client service and must be disclosed; firms not providing independent investment advice or portfolio management must comply with the existing inducement rules from MiFID for all types of third party payments; firms are unable to set off any payments from fees owed to them by clients; clients need to be accurately and, where relevant, periodically informed about all the fees, commissions and benefits the firm has received in connection with the investment services provided; and. ESMA may develop additional guidelines particularly around the warning that is given to customers when an appropriateness assessment concludes that a product or service may not be appropriate. In 2013 ESMA did, however, publish Guidelines on remuneration policies and practices for investment firms. Full details on the cookies we use are set out in our Cookies policy. They may be set by us or by third party providers whose services we have added to our pages. Under MiFID, "eligible counterparty business" is essentially excluded from the majority of investor protection requirements. ESMAs summer 2014 consultation proposed to significantly extend the requirements in relation to complaints handling and its technical advice confirms this. Directive on Markets in Financial Instruments repealing Directive 2004/39/EC and amending Directive 2011/61/EU and Directive 2002/92/EC. MiFID II was approved by the European Parliament in 2014 and entered into force on January 3, 2018. Section 2 sets out the differences in regulatory protections that apply to an eligible counterparty as compared to a professional client, again in relation to MiFID or equivalent third country business. 71(5) Where a client requests to be treated as an eligible counterparty, in accordance with [COBS 3.6.4AR], the following procedure shall be followed: (a) the investment firm shall provide the client with a clear written warning of the consequences for the client of such a request, including the protections they may lose; (b) the client shall confirm in writing the request to be treated as an eligible counterparty either generally or in respect of one or more investment services or a transaction or type of transaction or product and that they are aware of the consequences of the protection they may have lost as a result of the request. However, the application of these requirements to a non-EU broker depends on the precise regulatory perimeter in different EU member states. Trading venues and systematic internalisers must also publish information annually on quality of execution for certain types of financial instrument. German) as opposed to referring to the style of communication. Although not consulted upon last summer, ESMAs technical advice also introduces a specific procedure to apply when eligible counterparties request treatment as such. In principle, a Member State could adopt less strict criteria for the opting up of municipalities and local authorities. it prohibits firms remunerating or assessing the performance of staff in a way that conflicts with the clients best interests rule or which incentivises staff to sell particular products or services. clients. Under MiFID, "eligible counterparty business" is essentially excluded from the majority of investor protection requirements. that firms be proactive in checking that their products function as intended, rather than being reactive and waiting for detriment to occur; firms who both manufacture and distribute products are only required to conduct a single assessment of the needs and characteristics of the target market for whom relevant products will be manufactured, and to whom they will be distributed. In its December report, ESMA has confirmed that same language means spoken language (i.e. As of December 1st 2020, Commerzbank AG is registered as aSystematic Internaliser (SI) under the MiFID II/ MiFIR regime in the following asset classes: Bonds (BOND) - venue MIC: CBKG Firms (where applicable) are currently required to keep records in a significant number of areas, including in relation to: The records are required to be kept for a period of 5 years or for the duration of the client relationship (if longer). Disclosure requirements (i.e. Eligible Counterparties The Client categorization determines the level of protection the Client is entitled to receive from the Bank when the latter is providing Investment Services. In addition, ESMA has found that intermediaries do provide personal recommendations through the use of distribution channels (e.g. A firm may obtain a prospective counterparty's confirmation that it agrees to be treated as an eligible counterparty either in the form of a general agreement or in respect of each individual transaction. 3.2. explain whether or not, and why, investment advice qualifies as independent in a clear and concise way - and the type and nature of any restrictions that apply; explain the range of financial instruments that may be recommended, as well as the firms relationship with issuers or providers of the instruments; if a firm provides a periodic assessment of suitability, the firm must explain to its client the: frequency and extent of such assessment, and what will trigger it; extent to which previously collected information will be subject to reassessment; and. ESMA has confirmed its earlier proposals that inducements need to be comprehensively disclosed and that summary disclosure is not sufficient. This represents a major impact in those Member States that do not already have national measures that permit their local regulator to ban products. MiFID II proposes restrictions on incentive schemes, internal rewards and sales targets for those firms operating in both the retail and professional markets as follows: Following its summer 2014 consultation, ESMA has now finalised its draft advice to the Commission which follow ESMAs principles in its Guidelines on remuneration (mentioned above): MiFID requires all information addressed to clients or potential clients to be fair, clear and not misleading and for marketing communications to be addressed as such. If you do not allow these cookies, you will experience less targeted advertising. the criteria for comparing various financial instruments should include all relevant aspects, and should ensure that neither the selection of instruments that may be recommended nor the recommendations are biased. This procedure will mean that eligible counterparties will need to be warned that they are losing protection and they must provide written confirmation that they are requesting this status (either generally or in relation to one or more specific trades / services / products) and acknowledge that they are aware of the consequences of the protections they may lose. Client Classification MiFID introduces a new client classification regime and distinguishes between three types of clients: "retail clients", "professional clients" and "eligible counterparties". Join our webinar on Thursday, 17 th February for further information about the key changes being introduced, their implementation in local regulation and how they will affect investment firms regulated by MiFID II. instrument does not include any explicit or implicit exit charges that have the effect of making the investment illiquid. 1 0 obj There are specific conditions that communications need to meet in order to be fair, clear and not misleading, which currently only apply to retail clients. Canada | ESMAs technical advice made certain changes from the summer 2014 proposals, in particular to clarify some aspects in relation to the criteria. Municipalities and local public authorities. There are no specific restrictions under MiFID in relation to remuneration although, as noted above, there are general requirements in relation to managing conflicts of interest. Bearing in mind that one of the objectives of MiFID II is to improve, where appropriate, the treatment of non-retail clients, ESMA has confirmed the proposals from its summer 2014 consultation to: (1) make targeted improvements to the current regime applicable to retail clients; and (2) extend some retail like obligations to communications with professional clients. This categorisation is necessary as investors do not all have the same level of knowledge and experience of financial instruments and the related risks. When executing client orders, investment firms can direct . Imposition of a 20% limit on intra-group deposits, unless the firm can demonstrate that this is disproportionate. The EBA carried out its own consultation in relation to structured deposits, so these have been excluded from ESMAs technical advice. ESMA has noted that it may develop further guidelines as part of its work on Level 3. As a client that has been classified as "Retail", you should have received a . It confirms the above, but extends the reporting requirement to also include periodic communications taking into account the type and the complexity of financial instruments involved and the nature of the service provided to the client. MiFID introduces a new client classification regime and distinguishes between three types of clients: "retail clients", "professional clients" and "eligible counterparties". This still leaves the exclusion for advice addressed to the public generally, but it may mean that where firms may have viewed that they do not give advice if they use particular distribution channels, they may now need to accept that they could be giving investment advice (i.e. The rules in COBS 3 . requirement for a written client agreement, in a durable medium, is extended from retail clients to also include new professional clients (i.e. On November 13, 2022, Groupe Slection inc. (Groupe Slection) filed an application under the Companies Creditors Arrangement Act (CCAA) in order to proceed with the restructuring while protected from its creditors (GS Application). ("MiFID II"), as implemented into UK law, and FCA rules. professional clients. ESMAs summer 2014 consultation made certain proposals in relation to the reporting requirements and these have been confirmed in its technical advice with some tweaks. shares admitted to trading on a regulated market, an equivalent third country market or a multi-lateral trading facility, where these are shares in companies (except shares in non-UCITS collective investment undertakings and shares that embed a derivative); bonds and other forms of securitised debt admitted to trading on a regulated market, an equivalent third country market or a multi-lateral trading facility and money market instruments (except those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved); shares or units in UCITS (except structured UCITS); structured deposits (except those that incorporate a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term); and, instrument does not incorporate a clause, condition or trigger that could fundamentally alter the nature or risk of the investment or pay out profile (i.e. There is an express statement that conflicts can arise from inducements and remuneration structures. consider and identify where conflicts may arise in the course of their business between: (a) the firm (including its managers, employees and tied agents) or any person directly / indirectly linked to the firm, and its clients; and (b) between different clients; keep (and regularly update) a record of these actual and potential conflicts; put in place organisational and administrative structures to prevent such conflicts from adversely affecting the interests of clients, and document this in a conflicts of interest policy; and. 9N,8rzn?]1dYH1dLzeR/N6i9$aVWsm1G- J#cPC*PcK1Q$1:'1>$;-2)e1{@f(\O2%3C{=0.wR*$rz?{Yj:{,k\Rn xa=(P^BJ`@l{ L7E'{z:^@wI/lg}FQX8:Zpt:~5" There are no strict timelines for paying over the commission but ESMA has confirmed that the transfer must occur as soon as reasonably possible. Requirements on investment firms to make information easily available to Member State national regulators, insolvency practitioners and those responsible for the resolution of failed institutions. ESMA has retained its proposal for firms to have a person responsible for oversight over the complaints function (which can be performed by compliance) (see our separate note on Corporate Governance). discussions on existing credit facilities, overdrafts and current accounts), an appropriateness analysis will always be required. Banks/credit institutions provide their counterparts with letters specifying the relevant classification under the MIFID. Canada | stream 3.5. below. The period for responding in relation to these draft technical standards was 2 March 2015. While these powers apply to instruments caught by MiFID II, they mirror product intervention powers being introduced in relation to insurance-backed investments under the Insurance Mediation Directive (IMD) as contained in the new EU Regulation for a key investor document in relation to packaged retail and insurance-backed investment products. otherwise be classified as an eligible counterparty pursuant to MiFID II Article 30(2). What is developing is a thick layer of additional EU requirements applicable to investment firms, some of which is clearly post-crisis reaction (for example, new product intervention powers, full prohibitions on some inducements, a tougher stance on execution-only business and a tighter client categorisation regime). Eligible Counterparties - the Bank provides them with the narrowest scope of protection. ESMA has confirmed that advisers / managers can still consider financial instruments that pay commission provided that any monetary benefits received in relation to those financial instruments are paid over to clients. (ii) above and Art. 3 0 obj In particular, the relevant requirements should relate to the safeguarding of client financial instruments and funds as well as information and reporting requirements concerning more complex financial instruments and transactions.. Amending and supplementary acts. MiFID II does not change the category of a client, or the various monetary thresholds and experience levels that eligible counterparties and professional clients are required to meet. if they have a security interest over them); and (iii) the market (or where the market value is not available, estimated) value of the instruments together with a clear indication that the absence of a market price is likely to be indicative of a lack of liquidity. ESMA is clarifying that Article 25(1) of the MiFID Implementing Directive not only applies to investment research but also to recommendations. (A) Client Categorisation and Transactions with 'Eligible Counterparties' Key Points The existing classification of clients into retail clients, professional clients, and eligible counterparties is unchanged. a written complaints procedure for handling complaints; the ability for clients to be able to make a complaint without charge; communication requirements with client (i.e. ESMA has not provided any technical advice on any additional requirements in relation to the obligation to act honestly, fairly and professionally, or to communicate in a manner that is fair, clear and not misleading with eligible counterparties. (Professional clients are assumed to have sufficient knowledge and experience.). This prohibition is intended to ensure such payments and benefits are not inducements and, as such, do not introduce conflicts with clients interests. The type of clients it intends to serve according to the MiFID II client classification rules (retail clients, per se professional clients, professional clients on request or eligible counterparties). They are still able to elect to be treated as elective professional clients and opted up from retail client status. MiFID II also strengthens the current requirements in a number of ways: ESMAs summer 2014 consultation proposed, and its final report now confirms (with slight retractions), a number of additional requirements and clarifications to contribute to improving investor protection and the transparency of firms policies and procedures. ESMAs technical advice introduces some additional requirements to what was proposed last summer as follows: There are currently no mandatory requirements under MiFID to record telephone conversations or electronic communications, although Member States have the discretion to require it. An Eligible counterparty (ECP) is an entity that is authorised or regulated to operate in the financial markets that is not given investment advice. Eligible counterparty business refers to arranging and dealing activities when carried out by eligible counterparties. For product distributors, there are new requirements to ensure that the firms knowledge and understanding of the products allows them to match these to the needs of their clients which are primarily linked to training from product manufacturers on products and access to all information (including from product manufacturers) necessary to enable the distributor to sell the product appropriately. information must be consistently presented in the same language throughout all client facing material. MiFID II is proposing no changes to the various categories of clients that can elect to be eligible counterparties. Information about Directive 2014/65/EU including date of entry into force and links to summary and consolidated version. 2. there is a significant investor protection concern (or a threat to the orderly functioning of the market or stability of the financial system generally); existing regulatory requirements are not sufficient to address the issue; Member State national regulators have failed to address the issue; and. requirements for auditor confirmation that firms arrangements for compliance with the custody rules are adequate. It requires the highest level of protection. Eligible counterparties are, broadly speaking, financial institutions, insurers, pension funds and governments. information on future performance should be based on performance scenarios in different market conditions and should reflect the nature and risks of the specific types of instruments covered by the analysis. Background the FCA client classification requirements. meaningful analysis of complaints data by compliance to identify issues. A ban on custody liens enabling third parties to recover debts unrelated to the client or the provision of services to the client, except where this is required by law in a third country jurisdiction. [Note:article 4(1)(11) ofMiFID]If afirmprovides services relating to aCTF(except for apersonal recommendationrelating to a contribution to aCTF), thefirm'sclientis a 4(1) 2014/65]. ensuring the measures can be applied to different Member State legal / economic models so that they are proportionate. confirming that the responsibility to undertake the suitability assessment lies with the firm and that firms should not create any ambiguity about this; confirming that the suitability assessment does not just relate to recommendations to buy investments but also whether or not to hold or sell an investment; requiring firms to adopt policies and procedures to ensure that they understand the nature, features (including costs and risks) of instruments selected for clients and that they assess whether equivalent financial instruments could meet the clients profile. December 6, 2022. It has, however, noted that it may develop additional guidelines in future. It does, however, introduce the concept of independent advice (as opposed to non-independent (i.e. Yes No (1) Can you confirm your client is an undertaking, and: . A1 client can only be an eligible counterparty in relation to eligible counterparty business (PRIN 1 Annex 1 R is an exception to this).1. Content of reports for portfolio management, Reporting obligations re: portfolio management or contingent liability transactions, Statements in respect of client assets and funds. Originally, ESMA had proposed that market practice in a particular jurisdiction should also allow firms to disapply segregation requirements but in its final advice removed this. Elective Eligible Counterparties. Bearing in mind that the objective of MiFID II is to increase the protection of investors and reduce the areas of exemption, including strengthening the treatment of eligible counterparties ESMA proposed in its summer 2014 consultation, and has confirmed in its technical advice that the types of investors who can qualify as an elective eligible counterparty is to be restricted. ESMA has extended the requirement to publish annually the top five execution venues to reception and transmission of orders (RTOs) / firms placing orders with third parties for execution. They do not store directly information which allows us to identify you personally but are based on uniquely identifying your browser and internet device. In addition, ESMA has also indicated that it considers an extension of similar requirements to undertakings for collective investment of transferable securities (UCITS) and alternative investment funds (AIF) managers to be appropriate. 1. As it was already implemented in the MiFID II Level 1 text, the existing requirement to disclose unexecuted client limit orders to the public has been extended to capture the additional trading venues created by MiFID II. Requiring disclosure to clients of the risks of TTCAs. have organisational controls so that both types of advisory service and advisers are separated (including that the same adviser does not provide both types of advice), and to ensure that clients are not confused about which type of advice they are receiving. The national regulator of a Member State may prohibit or restrict: (1) marketing or distribution of a particular instrument (including structured deposits); or (2) any type of financial practice, in or from that Member State. 1 [ Note: article 30 (1) 5 of MiFID] Per se eligible counterparties Investment firms must take appropriate measures to prevent unauthorized use of client assets, including agreeing with clients the measures the firm will take in the event of a shortfall in the clients account, monitoring by investment firms of their ability to settle transactions and monitoring (and promptly requesting) undelivered securities that are outstanding on the settlement date. ESMA was not requested to provide any technical advice or recommend any delegated acts in relation to this point. In that MiFID Client Classification Letter, we inform you of your right to request a different classification. Requiring that firms monitor stock lending activities to ensure borrowers provide the appropriate collateral and the necessary steps are taken to maintain the balance with the value of client assets. There is a separate and distinct third category for a limited range of business: eligible counterparty (ECP). Markets in Financial Instruments (MiFID II) - Directive 2014/65/EU. where reports are provided on a periodic basis, any subsequent report needs to only address what has changed (in either the clients circumstances or the financial instruments) since the last report. firms should have effective organisational arrangements to ensure compliance with the rules on recording telephone conversations and electronic communications, and should have an effective and appropriate written policy in this area; firms management body should have effective oversight and control over the policies and procedures in this area; all conversations and electronic communications that result or may result in a transaction are to be recorded, including conversations / communications within firms and where such communications are made in the course of providing investment advice. In relation to MiFID business or the equivalent business of a third country investment firm, a client can only be an eligible counterparty in relation to eligible counterparty business. Under MiFID, there is no distinction between different types of advice (e.g. These cookies do not store any information which allows us to identify you unless you are logged into your account. Investment firms must already comply with an obligation of best execution under MiFID, namely to take all reasonable steps to obtain the best possible result for their clients (taking account of factors such as price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order). The intervention powers appear to be based on the UKs existing product intervention regime although there are some differences. For the purpose of COBS 3.6.2 R (6), a financial institution includes regulated institutions in the securities, banking and insurance sectors. Classification questions relating to Elective Eligible Counterparties status. Record-keeping requirements, to make clear the ownership status of client assets, in respect of liens, security interests or other encumbrances granted by firms. Under MiFID, clients can be categorised as eligible counterparties, professional clients or retail clients. Consistent with this, MiFID II is proposing a new obligation on firms to communicate with eligible counterparties in a way that is fair, clear and not misleading. firms can adopt a proportionate, risk-based approach to monitoring phone records of transactions. illiquid assets); an adequate description of the legal nature of financial instruments which are comprised of two or more different financial instruments, their components and how their interaction affects their risks; and. ESMAs advice confirms the four criteria set out in the existing MiFID Implementing Directive as being appropriate to determine when a financial instrument is non-complex and adds two additional criteria, namely the: ESMAs advice also confirms that instruments explicitly excluded from the (narrowed) list of non-complex products in the above bullet point list should be automatically deemed to be complex. ESMAs advice confirmed its summer 2014 consultation, such that firms must properly explain the scope and the features of the advice given. ,.m^BT9p&1SLtM*DwiK:/&iop.%Sm%4ox$vY. Firms are not required to carry out this appropriateness assessment where the service being provided is execution only and the financial instruments are either listed shares, money market instruments, bonds or other forms of securitised debt, UCITS funds or other non-complex financial instruments. Clients may opt to have a different category after the initial classification . For retail portfolio management clients, the suitability report can form part of periodic reporting to the client. ESMA proposes to develop further Guidelines and Recommendations to supplement the list above over time. Despite market push-back, ESMA has retained its requirement that complaints handling guidelines apply to both retail and professional clients (both per se and elective professional clients). ESMAs advice includes that the following additional information is disclosed on financial instruments: ESMA considers that cost disclosure, together with the disclosure about risk, is an important element to improve the ability of investors to assess the products that are offered to them. MiFID II modifies the existing list of financial instruments where no appropriateness analysis is required as follows (which narrows the scope of execution-only business): In addition, it clarifies that where credit is provided (i.e. MiFID II reinforces the existing requirements but clarifies them in places and sets additional requirements. ESMA has clarified that no specific percentage of diversification will be set and that diversification is still required when the funds are held with a group entity (subject to the requirement below). Client Classification Yes There are new classifications (Eligible counterparties (EC), professional clients and retail clients). MiFID requires Member State national regulators to draw up a list of minimum records that should be retained, and ESMAs predecessor, CESR, provided recommendations in 2007 about what those minimum records should be. MiFID 2/MiFIR: passport available to access eligible counterparties and certain professional investors. In a clear post-crisis reaction, MiFIR sees the introduction of formal product intervention powers at an EU level, which complement the new product governance regime (see below in this note). What are the MiFID classifications? restricted) advice although the term restricted advice is not used in MiFID II). over-reliance on disclosure is to be considered a deficiency in the firms conflicts of interest policy, which ought to be addressed when the policy is periodically reviewed. endobj On 22 November 2021, ESMA published its draft Regulatory Technical Standards for commodity derivatives under MiFID II 'quick-fix'. investments that incorporate a right to convert the instrument into a different investment); and. and eligible counterparty. Find out more about www.allaboutcookies.org or view our cookie policy. to provide certain reports to eligible counterparties (see Reporting to clients discussed in this note). This includes requirements to: ESMA has confirmed that this applies to advice provided to both retail and professional clients. Please click OK to signify your consent to our use of cookies. However, a few bespoke changes are being made. Entry into application will follow 30 months after entry into force on January 3, 2017. Under the new regulation of MiFID II, investment firms must define and categorize their clients - natural or legal persons - to one of the three categories below; 1. In its final advice, ESMA has confirmed that the only retail-like obligations which it is extending to communications with professional clients are the following three items: ESMA has confirmed that its technical advice does not apply to eligible counterparties. Like investment research it refers to research or other information recommending or suggesting an investment strategy, and which is intended for distribution channels or for the public. In its summer 2014 consultation, ESMA had proposed quite detailed requirements in relation to how research could amount to a minor non-monetary benefit. These cookies allow us to count visits and traffic sources so we can measure and improve the performance of our site. oversight by compliance over the product development / governance process. In a small retraction, ESMA has acknowledged that it needs to be flexible so is proposing that the list can be supplemented by ESMA guidelines. 2 0 obj the internet). Following technical advice received from the European Securities and Markets Authority (ESMA) and a public consultation, the European Commission (the Commission) published legislative proposals in 2011 to amend MiFID by recasting it as a new Directive (MiFID II1) and a new Regulation (MiFIR2). The eligible counterparty classification is only relevant to certain types of activity - namely dealing on own account, executing orders, or receiving and transmitting orders - and is available to financial services firms, national . Under MiFID, eligible counterparty business is essentially excluded from the majority of investor protection requirements. Entry into application will follow 30 months after entry into force on 3 January 2017. . 5.1 Eligible counterparty business Local authorities and municipalities will not automatically be classified as professional counterparties, but may opt to be treated as such. MiFIR gives these powers to ESMA (in relation to financial instruments), to the European Banking Authority (EBA) (in relation to structured deposits) and to the national regulator of each Member State. The Member State national regulator may only take action if it is satisfied on reasonable grounds: Before exercising such power, the Member State national regulator must consult with the national regulators in other Member States that might be significantly affected by the intervention and take into account whether any action will have a discriminatory effect on services or activities provided from another Member State. by type, issuer, product provider); the financial instruments considered should not be provided solely by the firm or other entities that have close links with the firm, or entities with close legal / economic relationships (such as contractual relationships) such that independence is at risk of being impaired; and. q/f}\YRL'tR1EQ{x(F'D&X4pfc)'"x`^z?F2p7ClFe!mjPP7@t:qE %+ U Rntt7hA12~ Further, that these expressly excluded products should then not be able to be considered to be non-complex by going through the MiFID Implementing Directive criteria (set out above). DB has informed Client of its categorisation separately. product providers) - minor non-monetary benefits are permitted to be received / kept see Inducements discussed in this note. Eligible Counterparties. You can withdraw your consent by clicking manage cookies and following the instructions shown. In this regard, in its technical advice, ESMA has clarified that manufacturers who create products to be distributed by others, should identify the target market on a theoretical basis; that the obligations on distributors should apply to all distributors in a chain albeit that the distributor with the client relationship will have the ultimate responsibility to comply with the obligations. ESMA has confirmed its original proposals, namely that the reporting obligations apply to all clients (including professional client and eligible counterparties). 7Article 71(5) of the MiFID Org Regulation sets out the procedure to be followed where a client requests to be treated as an eligible counterparty. Clients can be informed about what payments have been received and paid over to them as part of their regular periodic reporting statements. Further to a recent ECJ court case, ESMAs commentary advises the Commission to consider whether the list of criteria should be exhaustive when ESMA is proposing to exercise the power, but makes clear its view that the list should be non-exhaustive for national regulators. to act honestly, fairly and professionally in their dealings with eligible counterparties; to communicate in a way which is fair, clear and not misleading; to provide certain information to eligible counterparties (see Information to clients discussed in this note); and. 2.-Professional clients. Can statements to law enforcement made by individuals who have not been informed of their legal rights become a voluntary confession? They are no longer permitted to be eligible counterparties or per se professional clients, so they are, in effect, deemed to be retail clients. To that extent, it is appropriate to extend some information and reporting requirements to the relationship with eligible counterparties. where advice might be needed on the rebalancing of a portfolio); and. In addition, ESMA re-emphasises that the primary focus should be on using the powers in a proportionate way. despite originally proposing to retain Articles 7 and 8 of the MiFID Implementing Directive, ESMAs advice is to amend them to extend and enhance the record keeping requirements for firms in relation to client orders, decisions to deal, transactions and order processing; the record keeping requirements in relation to client orders and decisions to deal are now extended also to decisions to deal originating from the activity of dealing on own account (and not just portfolio management, as currently). But there is no requirement for it to be labeled as investment research or presented as objective, nor need a recommendation fall short of being a personal recommendation if it were made by an investment firm to its client. The express, prior written consent of all clients is required for firms to enter into arrangements for securities financing transactions and should be clear, recorded in writing and affirmatively executed by the client. relationships with professional clients entered into after MiFID II comes into force); current exclusion from needing to provide a client agreement for advisory services is removed. ESMA has, however, gone further than its summer 2014 proposals by advising the Commission that inducements should be separately disclosed and priced albeit that minor non-monetary benefits can be disclosed in a generic way (and are, unlike other inducements, not required to be disclosed to clients on an annual basis). following concerns about the generic and standardised nature of many firms order execution policies, firms order execution policies must now be clear, easily comprehensible and sufficiently detailed so that clients can easily understand how firms will execute client orders. This power can only be used in certain circumstances, namely where: Each ban / restriction lasts for a maximum of three (3) months but can be renewed (if it is not renewed, it expires) and will be published on the website of ESMA or the EBA (as the case may be). All Member State national regulators, regardless of whether they are a principles-based, light touch regulator, will now have a relatively heavy-handed power to supplement their enforcement tools. ESMAs summer 2014 consultation proposed, and its final report confirms these proposals (with some tweaks), to enhance both the suitability assessment and suitability report requirements. ESMA is proposing that disclosure should be tailored to the clients to whom they are addressed i.e. Firms must summarise and publish annually their top five execution venues by trading volume for each class of financial instrument, as well as information on the quality of execution obtained. To access this resource, sign up for a free trial of Practical Law. As with the existing COB classification regime, MiFID attaches different regulatory protections to each of these categories - with the result that those falling . Therefore, ESMAs technical advice sets out a list of factors for each of the items below but, for flexibility, intends the list to be general in nature, non-exhaustive and to not include quantitative thresholds. ESMAs advice and commentary include the following: MiFID introduced high level requirements in relation to the organisation of firms and the handling of complaints raised by retail clients, their record-keeping and resolution. However, this is only an option in the context of business which is not governed by Directive 2014/65/EU of the European Parliament and of the ouncil of 15 May 2014 on markets in financial instruments . Global Director of Financial Services Knowledge, Innovation and Product, Washington DC *associate office **alliance, Environmental, social and governance (ESG), Information governance, privacy and cybersecurity, Communications fair, clear and not misleading, Investment advice definition and independence, Appropriateness and execution-only business, Recording of telephone conversations and electronic communications, roberto.cristofolini@nortonrosefulbright.com, floortje.nagelkerke@nortonrosefulbright.com, Anti-Facilitation of Tax Evasion Statement. as a Professional or an Eligible counterparty. Portfolio managers will need to report to the client where the value of the portfolio depreciates by 10%, and by further multiples of 10%. For product manufacturers, there are new requirements to maintain appropriate product governance policies and procedures as part of their organisational arrangements, including product approval processes, to ensure investment products are designed appropriately, consistent with the needs of identified target markets, distributed appropriately to the target market, the relevant risks are assessed, appropriate information is made available to distributors, and investment products are regularly reviewed to ensure that they are being sold appropriately and remain consistent with the identified target market. Although not contained expressly in the technical advice, ESMA has further clarified that the warnings are to be tailored not generic. Although ESMA originally consulted that firms should also consider whether lower cost or less complex products are more suitable, its final advice does not include this; for non-independent advisory firms, requiring that they should not make a recommendation in relation to their range of non-independent financial instruments if they are not suitable for clients; requiring firms to assess any switching of products to ensure that the benefits of switching outweigh the costs; in on-going advisory relationships or in portfolio management, requiring firms to have procedures for ensuring they maintain up-to-date information about the client; clarifying that it is up to firms to determine the extent of the information to be obtained from clients and to ensure the information is reliable; and. Institutional Shareholder Services (ISS) and Glass Lewis (GL) have published updates to their proxy voting guidelines that are focused on board diversity and other board composition issues as well as climate-related disclosure. We use cookies and other similar technology to collect data about you to allow us to deliver our online services, measure our website audience and improve your browsing experience. MiFID Protection Levels Law 47/2007 makes it mandatory to classify customers into three categories with three levels of protection: 1.-Individual Retail Customer. ESMA has clarified within its advice, however, that the individual needs to have sufficient skill and authority. MiFID II product governance requirements apply irrespective of classification of client. Third country firms dealing with per se professional clients or eligible counterparties will, on the . The revised Markets in Financial Instruments Directive and associated Regulation (together, "MiFID II") are EU financial markets legislation that took effect from 3 January, 2018. The recitals note that the financial crisis has shown limits in the ability of non-retail clients to appreciate the risk of their investments. Governance arrangements in firms concerning custody, Title transfer collateral arrangements (TTCA), Securities financing transactions and collateralisation, Considering diversification of firms holding of client funds, Segregation of client assets in third countries, Preventing unauthorized use of client financial instruments, Availability of information to insolvency practitioners and others. ESMAs advice to the Commission includes: In relation to the new requirement that firms take all sufficient steps to obtain best execution, it had been hoped that ESMA would clarify the extent to which taking all sufficient steps is more onerous than the current MiFID requirement of taking all reasonable steps. ESMA and the EBA worked together to set out the factors which Member State national regulators should consider when determining if there are circumstances which require the use of product intervention powers. There are also general principles that firms have to satisfy when carrying out client orders, on aggregation and allocation of client orders. Implementing and delegated acts. MIFID pushes to Member States the job of further defining eligible counterparties in respect of net worth requirements, expanding the category to include entities located outside the EU and providing for procedures to limit the scope of eligible counterparty business. that there is a significant investor protection concern or a threat to the orderly functioning and integrity of financial or commodity markets or stability of the whole or part of the financial system in at least one Member State or a derivative has a detrimental effect on price formation in the underlying market; existing regulatory requirements do not sufficiently address the risks and the issue would not be better addressed by improved supervision or enforcement of existing requirements; and. <>/ExtGState<>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 595.32 842.04] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> Subtle changes to Mifid rules on client classification prove the EC is taking a clear stance on regulation, and isn't afraid to go beyond technical recommendations IFLR1000 The Deal Despite market push-back, ESMA has confirmed that complaints handling applies to potential clients as well as clients. Amendments. due to a perception that firms over-rely on disclosure, ESMA is proposing to make explicit the principle that disclosure is to be a last resort. Before doing so, Oppenheimer must satisfy various requirements set out in the FCA Rules, including a requirement All costs and charges should be aggregated so the client understands the overall cost as well as the cumulative effect on the return of the investment (with an itemised breakdown should a client request it). CLASSIFICATION AND AUTHORISATION 3.1. Information about costs and charges is to be provided, where applicable, at least annually post-sale. Firms providing advice (whether independent or not) or providing portfolio management services to clients must obtain the necessary information regarding the client's knowledge and experience, their financial situation and investment objectives so as to enable the firm to (in the case of advice) provide suitable personal recommendations to clients or potential clients or (in the case of portfolio management) to make suitable investment decisions on their behalf. MIFID II product governance (target market of professional investors and eligible counterparties only. disclosure should mention the specific conflict(s) that arises for that client type / category of service, as opposed to listing all conflicts that generally arise from the firms business across all client types and in respect of all services; in the disclosure, ESMA is proposing that firms must clearly state that the organisational / administrative arrangements established by them to prevent or manage that conflict are not sufficient to ensure, with reasonable confidence, that there will not be a risk of damage to the interests of the client; conflicts of interest policies must be reviewed and updated periodically (at least annually); and. If you make such request, we will treat you as such for all purposes (i.e. occasional reporting (other than for portfolio managers); reporting obligations in respect of portfolio management; additional reporting obligations for portfolio management or contingent liability transactions; and. Elective Eligible Counterparties qualifications . MiFID II imposes new requirements on firms and trading venues to produce public data about executed transactions. What is new is that these reports may also now need to go to eligible counterparties. MiFID II introduces a new EU-wide product governance regime which applies to both sides of the product development and sales process, namely to: (1) product manufacturers; and (2) product distributors (if different). All information these cookies collect is aggregated and therefore anonymous. MiFID II Hot Topic Best Execution Taking a look at the new regulatory requirements and which key challenges in . Its proposals effectively meant that, in practice, firms would be prevented from their current practices of receiving all but the most generic or widely distributed free research and would have to start to pay for it. By default, any client who does not fall within the Professional or Eligible categories is considered a MiFID Retail client. Statements must include: (i) a clear indication of which assets are subject to client asset protection and which are not (i.e. Regulatory protection should reflect the demonstrable risks faced by different types of investors, which vary according to the extent and sophistication of their financial knowledge. The final MiFID II and MiFIR texts were published in the Official Journal of the EU on 12 June 2014 and entered into force 20 days later on 2 July 2014. The category of retail clients captures every client that is not a professional client or eligible counterparty. periodic post-sale disclosure does not apply to firms that provide a one-off service. It does emphasise that Member State regulators must be able to use records to fulfill their supervisory tasks and perform enforcement actions under MiFID / MiFIR and market abuse legislation - and there is an express reference to records being used to demonstrate that firms have complied with their obligations around market integrity. Under MiFID, clients can be categorised as i) eligible counterparties ii) professional clients or iii) retail clients. MiFID I classifies clients into the categories of retail, professional and eligible counterparties. These circumstances exclude situations the eligible counterparty is on-selling products to its clients, or the relevant financial instruments embed a derivative. ESMA has also elaborated further on the level of detail that needs to be provided to complainants about firms complaints handling processes. ESMA has clarified that the restrictions apply to security interests and rights of set-off, as well as liens. Classification of a client as eligible counterparty does not apply . There are three types of client types: professional clients, retail clients, and eligible. the new concept of independent investment advice), the information requirements imposed also need to be extended. Where retail clients are concerned, best execution is considered in terms of the total consideration (being the price paid for the instrument and all associated costs including costs / commission charged by the firm). Eligible counterparties are in no need for protection by these rules. MiFID is the markets in financial instruments directive (Directive 2004/39/EC). the firm should not receive and keep any inducements / commission / monetary or non-monetary benefits from any third party (e.g. Eligible counterparties are, broadly speaking, financial institutions, insurers, pension funds and governments. Where required by Applicable Law, has categorised Client as a Professional DB Client or Eligible Counterparty under Applicable Law. organisational arrangements including requirements to make arrangements to safeguard the clients ownership rights, and to minimise the risk of loss or diminution of client assets; requirements relating to the registration of title to custody assets; requirements to keep accurate records and perform reconciliations; requirements for firms to perform due diligence on third parties with whom custody assets are deposited; restrictions on the use of client assets; and. xWn6}7Gi") The purpose of this classification is to provide the Client with adequate information regarding investment The overall theme is one of a small number of macro changes but a large number of micro changes which, together, will represent significant regulatory reform in this area. ESMA has clarified that record-keeping requirements should be complied with regardless of the technology used to keep the record. MiFID II extends some existing investor protection requirements to eligible counterparties. a sufficiently wide range of financial instruments available on the market must be considered; a sufficiently diverse range of financial instruments must be considered (e.g. - The financial counterparty is considered to be a FC+ and as such: it must immediately inform the ESMA and the relevant competent authority (notification); it must establish clearing arrangements within 4 months of the notification; These cookies may be set through our site by our advertising partners. There are no existing detailed provisions addressing product governance or sales processes in MiFID, although high level organisational requirements do exist. Eligible Counterparties means entities approved or regulated to operate in financial markets such as investment firms, credit institutions, insurance companies, UCITS and their management companies, other regulated financial institutions and in certain cases, other undertakings; Sample 1 Sample 2 Sample 3 Based on 3 documents However, ESMA has refrained from doing this expressly in its technical advice but has noted that all sufficient steps should result in the best possible result being received by the client. These cookies are necessary for the website to function and cannot be switched off in our systems. While acknowledging that these factors are intended to limit the otherwise relatively wide discretion of Member State national regulators to use the powers, ESMAs aim appears to be for the factors to be sufficiently flexible so as not to restrict a regime that needs to remain relatively dynamic. Subscribe and stay up to date with the latest legal news, information and events Norton Rose Fulbright 2022. While ESMAs summer 2014 consultation proposed that all venues or entities used for execution should be listed in the policies, its final advice has retracted from this. MiFID II also allows Member States the discretion to adopt specific criteria for the assessment of the knowledge and expertise of municipalities and local public authorities requesting to be treated as professional clients. Although ESMA has retracted some elements of its summer 2014 consultation, the main principle has been retained. (1) An eligible counterparty is a client that is either a per se eligible counterparty or an elective eligible counterparty. The implementing measures that will supplement MiFID II and MiFIR will take the form of delegated acts and technical standards. In addition, ESMA proposed that all policies that firms were required to maintain under MiFID II and the EU market abuse regime need to be kept in writing. MiFID currently requires firms, when providing investment services other than investment advice or portfolio management, to obtain information regarding their existing or potential clients knowledge and experience relevant to a specific service or product, to enable the firm to assess whether it is appropriate for the client. . 30 [2014/65]. For more information, on how these cookies work please see our, Consultation papers, Discussion papers, Policy statements, MiFID or equivalent third country business. inform retail clients, in good time before providing services, and in a durable medium, whether advice will be independent or non-independent; not describe their business as a whole as independent; and. Opt-up to Eligible Counterparty Status Where Oppenheimer has initially categorised you as a professional client, you may request re-categorisation as an eligible counterparty for business covered by this client category. ESMA / EBA ensures that the action will not detrimentally affect the efficiency of the market or detrimentally affect investors in a disproportionate manner to the benefits of exercising the power or create a risk of regulatory arbitrage. Due to responses on the meaning of appropriateness in this context, ESMA has clarified that it means having a robust link between the need to use the TTCA and the clients liability and is a distinct concept from the appropriateness assessment required to be carried out in relation to certain execution-only business. ESMA has also removed the requirements on firms charging both participants in a transaction to indicate this in their execution policy and specify the fees charged on each leg (potentially via a range or by specifying a maximum level of such fees); for retail clients, a separate sheet that summarises the best execution policy, focusing on the total known costs for execution, is to be provided; additional disclosure obligations on firms namely: (i) to provide clients with additional information about a firms policy when requested; (ii) to clearly indicate in the policy if the clients order may be executed outside a regulated market, multi-lateral trading facility or an organised trading facility; (iii) to include information in the policies about any third party payments received by firms in connection with the execution of orders; and (iv) to present the costs of any execution venues alongside other features of those venues so that the focus of the client is not solely on the cheapest venue; for the review of policies (annually or where there has been a material change), ESMA is proposing to clarify what constitutes a material change to ensure consistent interpretation by Member State national regulators, namely a significant event of internal or external change that could impact the parameters of best execution; to clarify how firms can satisfy best execution requirements when using a single venue or entity for execution; and. Levels of protection: 1.-Individual retail Customer by compliance over the product development / governance process discussed... Of intense political debate between the European Parliament in 2014 and entered into force links! Improve the performance of our site of TTCAs set by us or by party... Not consulted upon last summer, esmas technical advice, however, publish Guidelines remuneration... More about www.allaboutcookies.org or view our cookie policy retail and professional you are logged into your account major in. Although there are no existing detailed provisions addressing product governance requirements apply of!, such that firms have to satisfy when carrying out client orders, on rebalancing. New classifications ( eligible counterparties request treatment as such December report, esma had proposed quite requirements... Consultation in relation to these draft technical standards was 2 March 2015, esmas technical advice illiquid. 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In terms of MiFID - there are two main categories of retail clients every. Are addressed i.e for the website to function and can not be switched off in our cookies.... Months after entry into application will follow 30 months after entry into application follow... Advice also introduces a specific procedure to apply when mifid classification eligible counterparty counterparties of communication MiFID client Letter... Keep the record out in our cookies policy as investors do not have... Still able mifid classification eligible counterparty elect to be extended incorporate a right to request a different classification clients to whom they still! Eu Member states elective professional clients are assumed to have sufficient skill and authority manage cookies and the! Of investor protection requirements to the client Council of the risks of TTCAs channels (.! Appear to be provided to both retail and professional clients and opted from... Logged into your account different EU Member states discussed in this note a Member State /. Fulbright 2022 of non-retail clients to appreciate the risk of their legal rights become a voluntary confession, the... Proposed quite detailed requirements in relation to the clients to whom they are still to! All client facing material acts in relation to this point arise from inducements and structures. Makes mifid classification eligible counterparty mandatory to classify customers into three categories with three Levels of protection: 1.-Individual retail Customer may to! Be applied to different Member State legal / economic models so that they are still able to elect be! Distinction between different types of financial instrument have sufficient knowledge and experience of financial instruments ( II... Informed about what payments have been received and paid over to them as part of their investments in this.. Not only applies to advice provided to complainants about firms complaints handling and its technical advice confirms.. Should have received a perimeter in different EU Member states that do not store information... Be extended classification yes there are two main categories of retail clients captures every client that has retained. Not be switched off in our cookies policy Article 25 ( 1 ) of the EU, and counterparties... The European Parliament, the application of these requirements to: esma has further clarified the... National regulator can not be switched off in our systems their regular periodic reporting.. That the financial crisis has shown limits in the technical advice also introduces specific. In future proposing that disclosure should be tailored not generic after the initial classification the product development / governance.. Convert the instrument into a different investment ) ; and 25 ( )! This note, & quot ; is essentially excluded from the majority of investor protection requirements to: esma clarified! Sufficient skill and authority March 2015 ) can you confirm your client is an eligible counterparty ( ). Costs and charges is to be eligible counterparties received a of making the investment illiquid rules are adequate channels. Entered into force on January 3, 2017 MiFID Implementing Directive not only applies to investment but. Responding in relation to structured deposits, so these have been received paid! Municipalities and local authorities to eligible counterparties 2/MiFIR: passport available to eligible! Oversight by compliance to identify issues ( but still some requirements ) on intermediate distributors in distribution... Sign up for a free trial of Practical Law investment ) ; and proposing disclosure! Had proposed quite detailed requirements in relation to structured deposits, unless the firm should receive. On using the powers in a proportionate, risk-based approach to monitoring phone records of transactions challenges in business essentially... Has also elaborated further on the rebalancing of a portfolio ) ; and client as professional... Certain professional investors and eligible counterparties a proportionate way third country firms dealing with per se professional are... Opposed to non-independent ( i.e that permit their local regulator to ban products requirements in relation to draft... Based on uniquely identifying your browser and internet device by the European Parliament the... The majority of investor protection requirements measures that permit their local regulator to ban products and which key in. Conflicts can arise from inducements and remuneration structures to our use of cookies requirements should be to... Explain the scope and the related risks its December report, esma has confirmed its proposals. Range of business: eligible counterparty business & quot ; MiFID II Article (. And following the instructions shown period for responding in relation to structured deposits, so these mifid classification eligible counterparty been and... Categorisation is necessary as investors do not store any information which allows us count... Need to be comprehensively disclosed and that summary disclosure is not used in MiFID, can! Benefits from any third party providers whose services we have added to our pages instead of action taken by /... To referring to the style of communication set out in our systems the suitability can. Of intense political debate between the European Parliament in 2014 and entered into force and links to summary and version... Firms and trading venues and systematic internalisers must also publish information annually on quality of execution for certain types financial! 3 January 2017. analysis of complaints data by compliance to identify you personally but are based on precise... Esma proposes to develop further Guidelines and recommendations to supplement the list above over time this includes requirements:! Delegated acts and technical standards received a 2013 esma did, however a! An express statement that conflicts can arise from inducements and remuneration structures 2/MiFIR: passport available to access this,. Country firms dealing with per se professional clients are assumed to have sufficient and... To summary and consolidated version store directly information which allows us to identify issues in this note ) and. ) advice although the term restricted advice is not sufficient Article 30 2... On intra-group deposits, unless the firm can demonstrate that this applies advice! Have received a required by Applicable Law collect is aggregated and therefore anonymous appropriateness analysis will always required! Sign up for a limited range of business: eligible counterparty business essentially. Instruments ( MiFID II extends some existing investor protection requirements this note us to identify you unless you are into! And keep any inducements / Commission / monetary or non-monetary benefits from third... Esma re-emphasises that the individual needs to be eligible counterparties are in no need protection... A profile of your interests and show you relevant adverts on other sites Guidelines future. Them in places and sets additional requirements, so these have been excluded from majority. Handling and its technical advice, however, that the reporting obligations apply to firms provide... Extend some information and reporting requirements to: esma has further clarified the. Requested to provide any technical advice, however, a few bespoke changes are being made.m^BT9p 1SLtM! Of classification of a client as a client that is either a per se eligible counterparty business & quot retail. Terms of MiFID - there are no existing detailed provisions addressing product governance requirements apply of. Captures every client that has been classified as an eligible counterparty business refers to and. To complaints handling and its technical advice, esma re-emphasises that the are! These reports may also now need to go to eligible counterparties ( see reporting to of... Advice ( e.g benefits from any third party ( e.g information annually on quality of execution certain! Debate between the European Parliament, the application of these requirements to a minor non-monetary benefit types... Off in our cookies policy entered into force and links to summary and version... The Council of the advice given political debate between the European Parliament in and... ( e.g ) professional clients are assumed to have a different category after the initial classification esma! Are in no need for protection by these rules circumstances exclude situations the eligible business... A client that is not sufficient third country firms dealing with per se professional clients or eligible categories considered. The European Parliament in 2014 and entered into force on January 3,.!

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