UK: The EU's MiFID 2: Communicating With Clients

Last Updated: 17 February 2015
Article by Emma Radmore

The EU's MiFID 2: Communicating with Clients

The EU's Markets in Financial Instruments Directive reform package, comprising a new Markets in Financial Instruments Directive and a new Markets in Financial Instruments Regulation — collectively known as MiFID 2 — will introduce significant changes for investment firms and other financial markets participants when it is implemented by EU member states starting in January 2017 (see Special Report by Emma Radmore and Juan Jose Manchado, of Dentons UKMEA LLP, London, at WSLR, October 2014, page 3).

This article, the first in a planned series by Dentons UKMEA LLP focussing on specific elements of MiFID 2, examines changes MiFID 2 will make to the way in which firms deal at a high, overall level with their customers and clients, and what firms will have to do to make sure they comply with the new standards.

It also considers what changes the U.K. Financial Conduct Authority (FCA) will have to make to its rules to implement MiFID 2.

What's Wrong with MiFID 1?

Recital 86 of the MiFID 2 Directive recognises a key objective of MiFID 2 is to protect investors, and says measures to do so should be proportionate to each category of investor — that is, retail, professional and counterparties (ECPs). But it also makes it clear that the principles of acting honestly, fairly and professionally and the obligation to be fair, clear and not misleading apply to the relationship with any client. While firms should in reality always have applied these standards, there will now be a greater onus on evidencing that they have done so in communications with non-retail customers.

Chapter 2 of FCA's Conduct of Business Sourcebook (COBS) is currently largely disapplied 1) to ECP business and 2) to all non-MiFID business with professional clients. FCA will need to make some changes to implement MiFID 2.

It will be interesting to see whether FCA continues to distinguish between MiFID and non-MiFID business, where by doing so it can create a lighter compliance regime for non-retail clients. Even if it does, the changes to client categorisation discussed below, and to some extent the increase in scope of MiFID business, would be likely to mean firms would need to comply with the higher standards for a larger proportion of business.

Overall Standards

Information — Generally

Several articles of MiFID 2 apply to the overall standards for communicating with clients.

Recital 103 of MiFID 2 states that ECPs should be regarded as acting as clients, but Recital 104 accepts the onus of conduct of business rules should be on those that are in most need of protection. That said, it notes the financial crisis has shown limits in non-retail clients' ability to appreciate the risks of their investments, and therefore says there is a need for better calibration of requirements that apply to different types of clients. As a result, it says there is a need to extend some information and reporting requirements to cover ECPs. It specifically notes the need for this in respect of client money and assets and reporting of complex instruments and transactions. This recital also says that municipalities and local public authorities must not be treated as per se professionals or ECPs, but that they may ask to opt up to professional status.

Article 24 requires, among other things, that:

  • firms act honestly, fairly and professionally in accordance with the best interests of clients;
  • all information, including marketing communications, addressed to clients or potential clients should be fair, clear and not misleading, and marketing communications should be clearly identifiable as such;
  • appropriate information should be provided in good time to clients or potential clients with regard to the investment firm and its services, the financial instruments and proposed investment strategies, execution venues and all costs and related charges; and
  • required information be presented in a comprehensible form such that clients or potential clients are reasonably able to understand the nature and risks of the investment service and specific type of instrument being offered, so they can take investment decisions on an informed basis. This information can be provided in a standardised format.

It allows the European Commission to make delegated acts, including on the conditions with which information must comply to be fair, clear and not misleading, and details on content and format of information to clients on key matters. One factor the Commission should consider when making delegated acts is the retail or professional nature of the clients or, for the information to be provided and its form, whether they are ECPs.

Client's Best Interests and Exclusion of Liability

In terms of overall requirements, and what FCA currently requires, Chapter 2.1 of COBS states:

  • a firm must act honestly, fairly and professionally in accordance with the best interests of its client (the "client's best interests" rule);
  • a firm must not, in any communication relating to designated investment business, seek to 1) exclude or restrict, or 2) rely on any exclusion or restriction of, any duty or liability it may have to a client under the regulatory system; and
  • in order to comply with the client's best interests rule, a firm should not, in any communication to a retail client relating to designated investment business, 1) seek to exclude or restrict, or 2) rely on any exclusion or restriction of, any duty or liability it may have to a client other than under the regulatory system, unless it is honest, fair and professional for it to do so.

Information for Clients

COBS requires a firm to provide appropriate information in a comprehensible form to a client (for all retail clients and all MiFID business for clients, but not for ECPs) about:

  • the firm and its services;
  • designated investments and proposed investment strategies, including appropriate guidance on and warnings of the risks associated with investments in those designated investments or in respect of particular investment strategies;
  • execution venues; and
  • costs and associated charges

so that the client is reasonably able to understand the nature and risks of the service and of the specific type of designated investment that is being offered and, consequently, to take investment decisions on an informed basis. Firms can provide this information in a standardised format.

Clear, Fair and Not Misleading Information

COBS 4 deals primarily with "financial promotions" but also applies overarching standards to all communications. It requires a firm to ensure that a communication or a financial promotion is fair, clear and not misleading. It excludes from the scope of this rule certain financial promotions, including non-retail financial promotions and other "excluded" promotions (that is, those which a person not authorised under the Financial Services and Markets Act 2000 (FSMA) could legally make). COBS stipulates that the fair, clear and not misleading rule applies in a way that is appropriate and proportionate considering the means of communication and the information the communication is intended to convey. So, it says, a communication addressed to a professional client may not need to include the same information, or be presented in the same way, as a communication addressed to a retail client. More detailed requirements apply to communications which are financial promotions, which must also be clearly identifiable as such (although, again, certain promotions are excluded from this requirement).

COBS 4 then addresses requirements for communications with retail clients by stating that a firm must ensure that information:

  • includes the name of the firm;
  • is accurate and in particular does not emphasise any potential benefits of relevant business or a relevant investment without also giving a fair and prominent indication of any relevant risks;
  • is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received; and
  • does not disguise, diminish or obscure important items, statements or warnings.

It allows firms some leeway. In deciding whether, and how, to communicate information to a particular target audience, a firm should consider the nature of the product or business, the risks involved, the client's commitment, the likely information needs of the average recipient, and the role of the information in the sales process.

When communicating information, COBS states a firm should consider whether omission of any relevant fact will result in information being insufficient, unclear, unfair or misleading. It also says firms must ensure that promotions are consistent with other information provided to retail clients.

ESMA's Technical Advice

The European Securities and Markets Authority (ESMA) noted in its consultation that led to its final technical advice to the European Commission on MiFID 2, published on December 19, 2014, that MiFID 1 also set the fair, clear and not misleading test and required marketing communications to be clearly identifiable as such. The key difference is that MiFID 1 imposes these conditions only for retail clients.

In providing its technical advice, ESMA considered the intent behind the change, and has now advised that:

  • Information addressed to retail or potential retail clients:
    • must give a fair and prominent indication of any relevant risks when referencing any potential benefits of an investment service or financial instrument;
    • must use a font size in the indication of relevant risks that is at least equal to the predominant font size used throughout the information provided, as well as a layout that ensures prominence of the indication;
    • must be consistently presented throughout all documents the client receives in one language, unless the client has agreed to receive information in different languages; and
    • must be up to date and relevant to the method of communication used.
  • Information addressed to professional or potential professional clients, however:
    • must not reference any potential benefits of an investment service or financial instrument without also giving a fair and prominent indication of any relevant risks;
    • must not disguise, diminish or obscure important items, statements or warnings; and
    • must be accurate and up to date, and relevant to the method of communication used.

As for ECPs, ESMA says its advice does not apply to communications with ECPs, but notes MiFID 2 requires all communications with ECPs to be fair, clear and not misleading.

This is a good example of where the ESMA advice is confusing. Read literally, it does not apply the requirements for information to professional clients to communications with retail clients. In reality, though, this is because Article 27 of the MiFID 1 Implementing Directive, which is the basis for the COBS rules above, already requires this for retail clients, and ESMA does not intend this to change.

Likely FCA Rule Changes

FCA will need to make some fundamental decisions.

On the one hand, it will need to amend some of its COBS rules, which it currently disapplies to non-retail communications, to apply to all communications. On the other hand, it will also need to decide, more fundamentally, whether to keep its current distinction between MiFID and non-MiFID business, which has allowed it to apply a lighter touch to business which falls under COBS but not under MiFID.

When making its decisions and its rule changes, it must also bear in mind the changing scope of MiFID 2 and the changes to client categorisation. Some business which is currently regulated by FSMA but is not MiFID 1 business will be within the scope of MiFID 2 — this will be addressed in a later article in this series — and therefore FCA will not have discretion to disapply rules. The changes to the client categorisation rules that MiFID 2 will bring (discussed below) will mean some clients who are per se professional clients under MiFID 1 will be retail clients under MiFID 2.

Client Categorisation

The main change MiFID 2 makes is to stress that municipalities and local public authorities are not ECPs, nor are they automatically (per se) professional clients. Firms can opt these clients up from retail to professional status. To do so, however, requires the agreement of the client.

Also, MiFID 2 has introduced the possibility for EU member states to adopt specific criteria for assessing the expertise and knowledge of these bodies, which can be alternative or additional to the criteria used for other clients who are opting up. So, in future, it may not be so easy for firms to treat these entities as professional clients or ECPs.

Client Agreements

Closely related, but separate, to the overall information requirements discussed above are the rules on client agreements.

MiFID 2 requires (as did MiFID 1) that each investment firm keeps a record including the document or documents agreed between the firm and the client that set out the rights and obligations of the parties, and the other terms on which the firm will provide services to the client. The MiFID 1 Implementing Directive required firms to enter into a basic written agreement with any new retail client, saying the agreement should set out the essential rights and obligations of the firm and the client.

ESMA suggested to require a written (or equivalent) agreement between firms and their professional clients. Its technical advice confirms this: saying that firms providing any new investment service, or the ancillary service of safekeeping and administration of financial instruments, to professional clients should enter into such an agreement. However, if the firm is providing investment advice, the obligation will apply only where the client receives a periodic assessment of suitability of the instruments the firm recommends to it. The advice then clarifies that firms should enter into a written agreement with retail clients when providing investment advice (except where it does not provide a periodic suitability assessment) or safekeeping and administration. But this is additional to the obligations firms have towards retail clients under the MiFID 1 Implementing Directive.

The advice clarifies the written basic agreement should include:

  • the nature and extent of any investment advice services to be provided;
  • if there is portfolio management, the types of financial instrument and the types of transactions in which the firm may deal for the client, and any in which it cannot; and
  • the main features of any custody services that will be provided.

ESMA states it wants to achieve a common minimum harmonisation for client agreements.

Changes to COBS

COBS 6 sets out the detailed rules for information that firms must communicate to clients. The chapter is detailed, and not only tracks the current MiFID requirements but also represents the U.K.'s main "gold plating" of MiFID 1, as it includes the requirements firms providing investment advice to clients must fulfil under the U.K. Retail Distribution Review. We will cover investment advice, disclosures and costs and charges in a separate article.

Chapter 8 of COBS addresses the need for a client agreement. This chapter applies to a firm in relation to designated investment business carried on for:

  • a retail client, and
  • in relation to MiFID or equivalent third country business, a professional client.

In practice, however, its detailed rules apply only to retail clients, in line with the current MiFID requirements. If a firm carries on designated investment business, other than advising on investments, with or for a new retail client, the firm must enter into a written basic agreement with the client setting out the essential rights and obligations of the firm and the client.

COBS 8 says the firm must provide that client with 1) the terms of any agreement relating to designated investment business or ancillary services, and 2) the information about the firm and its services relating to that agreement or to those services required by COBS 6, including information on communications, conflicts of interest and authorised status. It must do this in good time before a retail client is bound by the agreement or before the provision of those services, whichever is the earlier. It also lays down requirements on medium of communication and record keeping requirements. It clarifies that a firm can incorporate the rights and duties of the parties into an agreement by referring to other documents or legal texts, and reminds firms to be aware of other obligations in the FCA Handbook of Rules and Guidance which may be relevant. These include the fair, clear and not misleading rule, the rules on disclosure of information to a client before providing services and the rules on distance communications.

On the whole, most firms already provide clients with written agreements that cover what ESMA suggests, and more. However, this does not mean they will not need to build into their MiFID 2 preparations an overall review of all customer communications, including client agreements.

Conclusion

The attention the EU legislators and ESMA have given to what should be a straightforward, largely commonsense topic suggests the time firms will need to set aside to ensure their MiFID 2 compliance.

While, for U.K. firms, the changes to FCA rules may not seem significant (depending on whether FCA makes the minimum change to implement MiFID 2 or makes broader changes for greater consistency between types of firm, client and service), the devil is likely to be in the detail.

Firms should take the opportunity to review their client agreements and how they communicate required information. The checks they carry out in doing so should help them comply with the more detailed changes that MiFID 2 implementation and changes elsewhere in FCA rules will bring.

This article first appeared in the February 2015 edition of Bloomburg BNA.

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
Events from this Firm
28 Sep 2017, Seminar, London, UK

On 26 July the FCA published its long-expected consultation paper on the extension of the SMCR to all FCA-authorised firms. The so-called "core regime" introduces the key concepts of regulator-approved senior managers, firm-approved certification staff and conduct rules applicable to virtually all staff.

3 Oct 2017, Conference, Zurich, Switzerland

As the founding Partner of the Europe-Iran Forum, Dentons Europe will once again support this year’s event. This compelling event which explores all Iran-related topics will take place in Zürich on 3rd and 4th October.

4 Oct 2017, Conference, Munich, Germany

Dentons Global Real Estate Group is delighted to be exhibiting once again at EXPO REAL, the International Trade Fair for Property and Investment which takes place on 4-6 October, 2017 in Munich, Germany.

 
In association with
Related Video
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.