1. MIFID II – EUROPEAN DEVELOPMENTS
1.1 Directive amending the MiFID II Directive published in the Official Journal of the EU
On 11 February 2021, the Council of the European Union adopted a Directive (2021/338/EU) amending the MiFID II Directive (2014/65/EU) as regards information requirements, product governance and position limits, to help the recovery from the COVID-19 pandemic (Amending Directive).
The Amending Directive simplifies information requirements in a targeted manner, while safeguarding investor protection. The changes reduce the information on costs and charges that must be provided to professional investors and eligible counterparties. Paper-based investment information will also be phased out, except for retail clients if they ask to continue to receive it. It will also allow banks and financial firms to bundle research and execution costs when it comes to research on small and mid-cap issuers. This should help to increase research on such issuers and their access to funding. Other changes include adaptations to the position limit regime for commodity derivatives to support the emergence and growth of euro-denominated commodity derivatives markets.
The areas addressed by the Amending Directive form part of the European Commission's (Commission) Capital Markets Recovery Package. In addition, the Amending Directive extends the transposition deadline for the CRD V Directive (2019/878/EU) to 26 June 2021.
On 26 February 2021, the Amending Directive was published in the Official Journal of the EU and entered into force on 27 February 2021.
Member states are required to transpose the Amending Directive into national law by 27 November 2021. The measures will become applicable on 27 February 2022.
The Amending Directive can be accessed here.
1.2 ESMA reminds firms of the MiFID II rules on reverse solicitation
On 13 January 2021, the European Securities and Markets Authority (ESMA) issued a statement to remind firms of the MiFID II requirements on the provision of investments services to retail or professional clients by firms not established or situated in the EU (Statement).
The Statement provides that it has come to the attention of ESMA that, following the end of the United Kingdom (UK) transition period on 31 December 2020, there have been some questionable practices by firms of reverse solicitation, where the product or service is marketed at the client´s own exclusive initiative. Some firms appear to be trying to circumvent MiFID II requirements by including general clauses in their terms of business or through the use of online pop-up "I agree" boxes whereby clients state that any transaction is executed on the exclusive initiative of the client.
In the Statement, ESMA highlights that the provision of investment services in the EU without proper authorisation in accordance with EU and national law applicable in Member States exposes service providers to the risk of administrative or criminal proceedings, and investors may lose protections granted to them under relevant EU rules, including coverage under the investor compensation schemes in accordance with the Investor Compensation Schemes Directive (97/9/EC).
The Statement can be accessed here.
1.3 ESMA publishes consultation on MiFID II appropriateness and execution-only requirements
On 29 January 2021, ESMA published a consultation paper on draft guidelines regarding certain aspects of the MiFID II appropriateness and execution-only requirements (Consultation Paper). The Consultation Paper will be of particular relevance to investment firms and credit institutions providing investment services and activities, investment firms and credit institutions when selling structured deposits and external alternative investment fund managers (AIFMs) when providing investment services.
The Consultation Paper contains draft guidelines which have been created by ESMA in order to clarify and promote convergence in relation to the application of certain aspects of the appropriateness and execution-only requirements. In addition, the Consultation Paper takes into account the results of supervisory activities conducted by national competent authorities (NCAs) on the application of the appropriateness and execution-only requirements, in particular resulting from the 2019 common supervisory action (CSA) on appropriateness.
When formulating the draft guidelines (set out in Annex III of the Consultation Paper) ESMA has used its MiFID II suitability requirements guidelines as a starting point, adjusting key aspects, such as 'know your product' and 'know your client', to the appropriateness and execution-only requirements. Furthermore, certain guidelines that were not relevant for the appropriateness assessment have been deleted, while others have been added on aspects not relevant for the suitability assessment.
ESMA has stated that it will also undertake a review of the guidelines on suitability after the ongoing CSA on the application of those requirements has been completed.
The deadline for comments on the Consultation Paper is 29 April 2021. ESMA expects to publish the final report and guidelines in Q3 2021.
A link to the Consultation Paper can be found here.
Please see the Dillon Eustace briefing paper entitled "ESMA consults on MiFID II appropriateness and execution-only requirements" for further information, which can be accessed here.
1.4 ESMA launches a common supervisory action with NCAS on MiFID II product governance rules
On 1 February 2021, ESMA launched a CSA with NCAs on the application of MiFID II product governance rules across the EU.
The CSA will be conducted during 2021 and will allow ESMA and the NCAs to assess the progress made by manufacturers and distributors of financial products in the application of key requirements. The CSA will analyse:
- how manufacturers ensure that financial products' costs and charges are compatible with the needs, objectives and characteristics of the target market and do not undermine the financial instrument's return expectations;
- how manufacturers and distributors identify and review the target market and distribution strategy of financial products; and
- the information exchanged between manufacturers and distributors and how frequently this is carried out.
The CSA contributes to fulfilling ESMA's mandate on building a common supervisory culture among NCAs to promote sound, efficient, and consistent supervision throughout the EU. ESMA's promotion of supervisory convergence is done in close cooperation with NCAs.
The press release can be accessed here.
1.5 ESMA publishes its annual report on the application of waivers and deferrals for equity instruments
On 2 February 2021, ESMA published its annual report on the application of waivers and deferrals for equity instruments under the Markets in Financial Instruments Regulation (600/2014) (MiFIR)(Report).
The Report includes an analysis based on waivers for equity and equity-like instruments and provides:
- The distribution of waiver types is similar to 2018 and the UK is the country that submitted the highest number of waiver notifications;
- The large in scale (LIS) waiver is the most used and shares are the instrument type for which waivers are requested most frequently;
- The volume under the waivers, both in turnover and number of transactions, is mainly executed in shares. Exchange traded funds (ETFs) are the instruments with the highest percentage of dark trading with respect to the overall volume traded in those instruments, with most of the turnover executed in the dark trading relating to the LIS waiver, while in terms of transactions the majority is executed under the reference price waiver; and
- NCAs are broadly applying the same regime across the different types of equity instruments.
ESMA will publish the next annual report in the second half of 2021 covering the analysis of the application of the waivers and deferral regimes in 2020.
The Report can be accessed here.
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