European Union: Inducements And Other Matters

Last Updated: 6 July 2016
Article by Joe Beashel

On 7 April 2016 at the European Commission ("Commission") published as awaited delegated directive (the "Delegated Directive") under (Directive 2014/65/EC)  MiFID 2 related to safeguarding financial instruments and funds belonging to clients, product governance obligations and rule applicable to the provision and reception of fees, commissions or any monetary or non-monetary benefits (inducements). At the most basic level investment firms must not be biased or distorted in the provision of services by inducements.

The draft Delegated Directive follows on from advices provided by the European Securities and Markets Authority ("ESMA") in late 2014 and is one of over two dozen such additional measures which are being included to supplement the text of MIFID 2.

The Draft Delegated Directive

The clarity provided by the Delegated Directive in respect of fees and inducements will be welcome for market participants in ensuring that anything that is provided is in accordance with the requirements. The recitals to the Delegated Directive specifically the scope, minor / brief summaries of "own opinions" related to current economic statistics or simple provision of opinions on company results shall not constitute a non-monetary benefit.

On the other hand if any non-monetary benefit involve a third party allocating resources to an investment firm shall not be considered minor and could be contrary to the requirement to act in a client's best interests. There are also requirements to ensure that research payment accounts are appropriately constructed and operated so that they are not driven by amounts of executed transactions but are rather related to specific research charges aligned to a budget.

Inducements in Focus

The primary responsibility of the Directive requires investment firms "paying or being paid a commission or providing or being provided with a non-monetary benefits in connection with the provision of an investment service or ancillary service" to ensure that the requirements set out in MIFID II are addressed.

Inducements are designed to enhance the quality of the service. If it is justified, on the basis of additional or higher levels of service to the relevant client that it is in proportion with the level of inducement received. The criteria in considering a fee, commission or non-monetary benefit:

  • Providing non-independent investment advice related to product that is not closely linked to the investment firm providing the service;
  • Non-independent advice in addition to either an (at least) annual suitability assessment of the financial instruments in which the clients have invested, or the non-independent advice in addition to an ongoing service which could suggest an optimal asset allocation; and
  • Access to a wider range of financial instruments to which the investment firm does not have close links and that are produced from third party providers.

The key assessment is whether there is an ongoing benefit to the client and secondly that the provision of services to the client are not distorted as a result of the inducement. In all cases where an investment firm continues to pay or to receive an inducement the requirements set out above must be assessed.

Evidence of inducements paid or received must always be recorded. This is complied with by keeping an internal list of all files, fees, commissions and non-monetary benefits and secondly by recording how the inducements and to the quality of the service provided to the clients. Inducements must not impair a firm's overriding duty to act honestly and professionally in accordance with the best interests of the client.

Disclosure Requirements

An investment firm must always disclose to the client information on inducements in accordance with MIFID II. There are increased disclosure requirements based on the nature of the inducement received. For example, minor non-monetary benefit may be described in a generic way. It follows that a more extensive benefit must be described and set out proportionately.

Where it is not possible to provide an exact amount in relation to the inducement received, an investment firm shall provide the method of calculation of the amount and, at least, annually for so long as ongoing investment inducements are received by an investment firm. The firm must inform its clients on an individual basis of the exact amount of payments made or received in respect of inducements.

Inducements in respect of investment advice on an independent basis or portfolio management services

Investment firms must return to clients any fees, commissions or monetary benefits paid by a third party as soon as possible after receipt in respect of the independent advice or portfolio management services. Firms are required to set up and implement the policy to ensure that the amounts are correctly allocated and transferred to each individual client. Information must be sent by the investment firm too clients through periodic reporting statements detailing the benefits transferred to them.

Firms providing investment advice on an independent basis or portfolio management services shall not accept non-monetary benefits that do not quality as acceptable minor non-monetary benefits.

Minor non-monetary benefits include:

  • Generic information and documentation relating to a financial instrument that is non-personalised;
  • Distribution of information papers by a corporate issuer or potential issuer to promote a new issuance that is similarly available to the public and that the relationship and any payments between the issuer and the investment firm are fairly disclosed in the material (see note below);
  • Conferences, seminars and other training benefits;
  • Reasonable hospitality such as food and drink during a meeting, conference seminar, of a reasonable value; and
  • Member States may also define certain non-monetary minor benefits that do not impair compliance with investment firms, duty to act in the best interest of a client and can enhance the quality of the service provided to a client. We have not had an indication of what these might be from an Irish perspective.

In all cases, minor non-monetary benefits shall be reasonable and proportionate and of a scale that they are unlikely to influence a firm's behaviour in any way that is prejudicial to the interest of the client. It is important to note that in minor non-monetary benefits, must be disclosed to clients in advance of the provision of services.

Investment Research

Research shall not be considered to be an inducement provided the following conditions (if any) are met:

  • The investment firm pays, from its own resources, for the research;
  • The payments come from a separate research payment account. If the research is paid for by a client the research payment account is funded by a specific research charge to the client;
  • The investment firm shall be responsible for the research payment account;
  • The quality of the research is regularly assessed on robust criteria so that it is likely to contribute for better investment decisions; and
  • In operating the research payment, investors firms must provide information to clients on the budgets amounts for research and the estimated research charge for each client. A similar research exists in respect of setting out annual information on the total costs incurred for their party research.

There is also a general requirement to provide more specific information upon request on the summaries of amounts paid and the benefits to the firm of that research. Any rebates or residual funds must be clearly set out. Research budgets must be driven by actual client needs and not linked to values or value of transactions. In collecting research changes along with other changes or transactions commission shall clearly set out that the charge relates to research and is in compliance with the above criteria.

A consideration for investment firms in providing estimates is that the charge for research to clients cannot exceed the research budget. The research charges can be spread over a defined period. Furthermore, increases can only occur if clear information has been shared with clients. Any surplus can be off-set against future research changes or rebated to the client.

Research budgets are the responsibility of senior management. Appropriate internal controls (including a written policy) must be maintained to ensure it is managed in the client's best interests. Audit trails are required to ensure internal research is not funded and that the research provided is of value to clients. The policy document must also consider appropriate allocations in the case of portfolio clients. All costs relates to execution must also be specified for each client.

Key Departures from previously issued ESMA guidance

  • The Delegated Directive has made it explicit that it will apply to UCITS Management Companies and if AIFs when such entities are authorised to perform specific investment services such as the management of portfolio investments, investment advice and safe keeping.
  • The research account and research as set out above are a material departure from the previously issued guidance.
  • ESMA did not include any third party material in its list of acceptable benefits in its technical advice.
  • By contrast, the Delegated Directive allows for "written material from a third party that is commissioned and paid for by a corporate issue or a potential issue or to promote a new issuance by the company, or where the third party firm is contractually engaged and paid by the issuer to produce such material on an on-going basis, provided that the relationship is clearly disclosed in the material and that the material is made available at the same time to any investment firms wishing to receive it".

Summary

The Delegated Directive has in the main confirmed the position as had been previously advised by ESMA. We have set out instances where this has not been the case and where perhaps further consideration should be given to the measures in advance of the implementation date. The text in the Directive mirrors the previously applicable regime but the Delegated Directive adds a level of detail and provides for more restrictions that had previously been the case.

The Delegated Directive will now be considered by the Council of the European Union and the European Parliament and shall enter into force 20 days after publication in the official journal provided that no objections are forthcoming from the Council or the Parliament.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Dillon Eustace
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Dillon Eustace
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions