On 29 March 2021 and on 28 May 2021, ESMA updated its Questions and Answers (“Q&As“) concerning investor protection and intermediaries topics under Directive 2014/65/EU of 15 May 2014 on markets in financial instruments (“MiFID II”) and Regulation (EU) 600/2014 of 15 May 2014 on markets in financial instruments (“MiFIR”).
The updated version of the Q&As on MiFID II and MiFIR investor protection and intermediaries’ topics includes two new Q&As.
Inducements
In Question 8 of Chapter 12 related to inducements (updated on 29 March 2021), ESMA provides guidance on the application of three important elements contained in Article 11(2) (a) of the MiFID II Delegated Directive (2017/593/EU) (the “MiFID II Delegated Directive”), notably:
- an additional or higher-level service;
- provided to the relevant client;
- proportional to the level of inducements received.
ESMA makes clear that the above requirements apply together with the other requirements referred to in Article 11(2) of the MiFID II Delegated Directive, which specify when an inducement can be considered as designed to enhance the quality of the relevant service to the client.
According to ESMA, an “additional” or “higher level” service requires that the quality enhancement goes beyond aspects of the firm’s organisation, or services that are legally required, or that can be considered as essential for its functioning. Thus, the provision of services consisting merely in providing regulatory documents, such as a prospectus or a KID (Key Information Document), or disclosure documents, such as costs and charges disclosures, are not considered as “additional” or “higher level” services for the purposes of justifying an inducement, because such aspects are required by law. On the other hand, the provision of educational material or services aimed at increasing the financial knowledge of the client, such as free access to trainings, seminars or conferences or access to staff bringing specific expertise on special matters, is an example of provision of quality enhancing service.
Furthermore, the “additional” or “higher-level” service should be actively and effectively offered and brought to the attention of the relevant client. At this point, ESMA makes clear that the quality enhancement can also be provided to a segment of clients, provided that this segment is sufficiently homogeneous, i.e. the quality enhancements provided must be relevant for all clients that belong to this segment.
The third element laid down in Article 11(2) (a) of the MiFID II Delegated Directive requires that the added value is proportional to the level of inducements received. ESMA emphasizes that the determining factor is the level of inducements received by the firm, rather that the client’s investment amount. In particular, all firms shall be able to demonstrate that the quality enhancements provided to the client are proportional to the level of inducements received.
Although the assessment whether a particular service complies with these elements is ultimately assessed on a case-by-case basis, ESMA considers that firms shall take into account the guidance provided in the new Q&A, in order to ensure a consistent application of the requirements.
Information on costs and charges
In Question 34 of Chapter 9 related to information on costs and charges (updated on 28 May 2021), ESMA clarified that where a firm provides both investment advice and RTO/execution services related to the same transaction(s), the ex-ante cost and charges information to be provided to the client should cover the costs and charges associated with:
- the service, including the transaction costs to be incurred by the client if the recommended transaction were carried out; and
- the financial instrument(s).
In ESMA’s view, the requirement to inform the client about all costs and associated charges in good time before the provision of investment advice applies irrespective of whether the client will be subsequently provided with an RTO or execution service relating to the same transaction(s).
However, when both investment advice and RTO/execution services are provided, ex-ante cost and charges information already disclosed to the client in the context of investment advice, do not need to be provided a second time in the context of the subsequent RTO or execution service, if the following conditions are met:
- both services relate to the same transaction(s);
- both services are provided within a reasonably short time period; and
- the ex-ante cost and charges information is still accurate and complete at the time of the provision of the subsequent RTO or execution service.
