Further guidance on the implementation of the Markets in Financial Instruments Directive II, known as MiFID II, is in the pipeline. The recent launch by the European Securities and Markets Authority (ESMA) of a public consultation on guidelines on the application of certain aspects of this legislative measure paves the way for more direction for investment firms which fall to be regulated by this EU directive.
MiFID II, which has now been in force since 2018, is built on the framework set by its predecessor, MiFID I, and has introduced a number of stringent requisites with which the investments industry is obliged to comply when providing services to investors or potential investors. Not only did it introduce significant product-governance requirements but also enhanced the measures which are intended to protect investors.
An important element of investor protection enhanced by MiFID II is precisely that relating to the appropriateness and execution-only framework in the case of the provision of services other than investment advice or portfolio management.
Investment firms providing non-advised services are required to request information on the knowledge and experience of clients or potential clients to assess whether the investment service or relevant product is appropriate for the client. Non-advised services refer to a situation where the service provider does not make a personal recommendation itself but merely provides generic information and allows the client to decide himself/herself as to how to proceed. In all such cases, where the service provider considers that the client does not have the necessary knowledge and experience to understand the risks involved in relation to the specific investment service or product offered or demanded, it is obliged to warn the client accordingly.
A warning is also required where a client or potential client does not provide the necessary information on his knowledge and experience, or where insufficient information is provided. Subject to the fulfilment of certain conditions, firms may provide non-advised services with respect to non-complex investment products without the need to conduct an appropriateness assessment. In such cases, the firm must warn the client that it is not required to conduct an appropriateness assessment and that he/she, therefore, does not benefit from the corresponding investor protection. The law also specifies the information to be asked from clients and sets out the record-keeping requirements.
ESMA has now launched a consultation on draft guidelines which have the objective of enhancing clarity and ensuring a harmonised application of these legal requirements.
It provides specific guidance on a number of aspects, including the information to be provided to clients as to the purpose of the appropriateness assessment and execution-only, the know-your-product and know-your-client aspects, as well as the extent of information to be collected from clients, and the assessment of the reliability of such information, among others.
The draft guidelines also clarify the type of record-keeping which is expected from service providers in terms of MiFID II in such situations. All stakeholders, particularly competent authorities and investment firms and credit institutions providing investment services and activities, as well as consumer bodies, investors and trade associations are being invited to submit their comments to ESMA by latest April 29, 2021. It is envisaged that the publication of the final guidelines will take place sometime in the third quarter of 2021.
The implementation of these guidelines should serve the purpose of ensuring the maximum protection for consumers who seek to invest in any particular investment product. A level playing field will also be secured via the consistent application of harmonised principles by all the players in the relevant market.
Mariosa Vella Cardona, freelance legal consultant