On 15 April 2014, the European Parliament voted to endorse the upgrade of the MiFID II. Under MiFID II, financial services firms, including banks and investment firms, need to rethink their product governance, distribution and
financial markets activities.
The objectives of the revision of the MiFID are to strengthen the protection of investors and to make financial markets more efficient, resilient and transparent. The MiFID II package will apply to banks, investment firms, market operators, and entities providing post-trade transparency in the European Union.
In October 2011, the European Commission issued its proposed Review of the Markets in Financial Instruments Directive.
After more than two years of intensive work to define their positions, an agreement between the European Commission, the European Parliament and the Council of the European Union on the MiFID II package was reached in January 2014. The agreed text has now been endorsed by the European Parliament.The interpretation and practical implementation of key elements of MiFID II will depend on the clarifications developed by the European Securities and Markets Authority (ESMA). These so-called “Level 2” measures will be drafted by ESMA for public consultation, finalized by ESMA and then adopted by the European Commission.
The adoption of MiFID II follows the publication by ESMA of opinions on marketing and selling of complex products and on structured retail product governance practices.
In February 2014, ESMA issued its Opinion on MiFID practices for firms selling complex products and an Investor Warning on Risks of investing in complex products. In March 2014, ESMA issued an Opinion on Structured Retail Products – Good practices for product governance arrangements. Both of ESMA’s opinions are significant in the context of the interpretation of MiFID II provisions.
The legislative measures adopted consist of:
The key upgrades to the MiFID regime include:
ESMA MiFID practices for firms selling complex products
In February 2014, ESMA issued:
In these papers, ESMA is focusing on investor protection in the marketing and sale of complex products, in particular to retail investors.
In both papers, ESMA clarifies the MiFID definition of complex products or financial instruments. ESMA is of the opinion that products should generally be considered as “complex” when, for example, they:
Examples of complex products include:
ESMA’s MiFID practices for firms selling complex products outlines measures which should be implemented by firms selling complex products, including, inter alia:
ESMA opinion on structured retail product governance
In March 2014, ESMA issued an Opinion on Structured Retail Products – Good practices for product governance arrangements.
ESMA’s opinion includes a broad set of examples of good practices that firms, taking into account the nature, scale and complexity of their business, could put in place to improve their ability to deliver on investor protection.
“Structured retail products” (SRPs) are compound financial instruments that have the
characteristic of combining a base instrument (such as a note, fund or deposit) with an embedded derivative(s) that provides economic exposure to reference assets, indices or portfolios. They provide investors, at predetermined times, with pay-offs that are linked to the performance of reference assets, indices or other economic values.
According to ESMA’s opinion, depending on their role (manufacturing and/or distributing), firms’ product governance arrangements should cover the following areas:
In order to enter into force, the MiFID II package must be approved by the Council of the European Union and then published in the Official Journal of the European Union.
The MiFID II package applies as follows: