As a general rule, MiFID II prohibits investment firms providing independent advice and portfolio management services from accepting inducements. In other cases, inducements remain authorised under certain conditions. MiFID II imposes additional requirements and clarifies the requirements regarding information about costs and charges related to investment services.
Context
All Member States are required to implement Directive 2014/65/EU of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (hereinafter "MiFID II") by 3 July 2016 at the latest with a view to its application in the Member States as of 3 January 2017. A series of "level 2" EU instruments are expected. On 19 December 2014, ESMA (the European Securities and Markets Authority) published a technical advice report to assist the Commission in drafting the MiFID II implementing directives.
MiFID II makes significant amendments to the MiFID I Directive. These include substantial changes to the inducements regime and to the disclosure requirements on costs and charges.
The Belgian legislator does not seem to be in a hurry to implement these new rules.
Changes to the inducements regime
The main change made by MiFID II with respect to inducements is the introduction of a partial ban on retrocession payments. Article 24(7) and (8) of MiFID II state that commissions or benefits provided by a third party are, in principle, prohibited in relation to the provision of independent advice and portfolio management services. When such commissions or benefits are provided, investment firms must immediately and fully return to the client any amounts or benefits received.
MiFID II has not substantially modified the rules that apply to inducement related to services other than independent advice or portfolio management. The rule laid down in Article 26 of the MiFID I Implementing Directive, slightly adapted, is included in Article 24(9) of MiFID II.
Article 24(9) of MiFID II provides that payments made to a party except the client by investment firms in relation to investment or ancillary services are, in principle, prohibited. These payments are, however, allowed when the following cumulative criteria are met:
- The payment is designed to enhance the quality of the relevant service to the client,
- It does not impair compliance with the investment firm's duty to act honestly, fairly and professionally in accordance with the best interest of its clients, and
- The existence, nature and amount of the payment must be clearly disclosed to the client prior to the provision of the relevant investment service.
As stated in Article 26 of the MiFID I Implementing Directive, these rules apply to commission and benefits provided by investment firms to third parties while providing investment services to clients.
Legal framework of the costs and charges transparency
Article 33 of the MiFID I Implementing Directive, implemented in Belgium by article 13 of the Royal Decree of 3 June 2007, already requires investment firms to provide retail clients with information on costs and charges, including the total price to be paid in connection with the financial instrument or the investment or ancillary service.
Article 24(4)(c) of MiFID II clarifies the existing provisions and sets additional requirements. Indeed, the current legal framework still leaves some grey areas, in particular as regards the identification of the costs and charges subject to the disclosure requirements. These ambiguities have fostered a variety of practices by investment firms, complicating the retail investor's proper understanding.
Scope extended to professional investors and eligible counterparts
In its December 2014 technical advice, ESMA proposes to extend the disclosure requirements on costs and associated charges to professional clients and eligible counterparts. However, they will be able to opt out from these information requirements, except when the services of investment advice or portfolio management are provided or, in general, when the financial instrument concerned embeds a derivative.
The costs and associated charges to be disclosed – details
The investment firm must disclose all costs and charges related to the investment or ancillary service and, where relevant, to the financial instrument it has "recommended or marketed to the client". ESMA favours a broad interpretation of these terms, which should, in any case, cover firms providing investment advice or portfolio management services. As a general rule, ESMA considers that investment firms should disclose all costs and charges related to the financial instrument, even when they are already obliged to provide the client with information about the costs of the financial instrument under other Union legislation (e.g. the KIID of the UCITS directive or the KID of the PRIIP regulation). In this respect, recital 78 of MiFID II states that the investment firm may, for the purposes of MiFID II, rely on the information as disclosed in other information documents if they disclose all costs and charges related to the financial instrument. That does not seem to be the case, in particular as regards transaction costs in the KIID.
Thus, only investment firms who are not currently obliged to provide the client with an information document and who have not actually marketed or recommended the financial instrument are exempted from the requirement to disclose all costs and charges related to the financial instrument.
When more than one investment firm provides investment services to the client, an investment firm should take into account the costs charged by other firms when it has recommended, marketed or otherwise directed the client to these other firms. This will be the case, for example, if a portfolio manager directs the client to a custodian or choses a custodian on his behalf.
Aggregation of costs and charges and cumulative effect
All costs and charges related to investment or ancillary services and to financial instruments charged by the investment firm (and, as the case may be, other investment firms) must be aggregated in order to allow clients to understand their cumulative effect on the return on their investment. This aggregation should be one single figure expressed in a cash amount and a percentage. At the client's request, the investment firm should, however, be able to provide an itemised breakdown. MiFID II allows Member States to develop standardised formats, but the information on the aggregated costs and charges should always be provided on a personalised basis.
In order to allow clients to understand the cumulative effect of costs on the return on the investment, investment firms should also provide them with an illustration (a graph, table or narrative) that helps them to understand this cumulative effect and the anticipated spikes and fluctuations in the costs.
Timing of disclosure
Aggregated information about costs and charges should be provided in due time before the provision of the investment or ancillary service, to enable the client to assess the appropriateness of investment choices. At this stage, the information about costs and charges related to the financial instrument can be provided on a generic basis, as long as this information is representative of the costs that the client would actually incur. Information about costs related to investment or ancillary services should be provided on a personalised basis.
When an investment firm has established a continuing relationship with its client, information about costs and charges should be provided on a regular basis, at least annually, during the life of the investment. This information should be provided on a personalised basis. The MiFID I Implementation Directive already establishes post-sale reporting obligations for certain ongoing investment services: order execution, portfolio management, and holding client financial instruments or funds. These current reporting obligations can be used as a basis for the new MiFID II requirements. A new requirement should, however, be adopted for ongoing investment advice.