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MiFID II final agreement ABI analysis

On January 14, 2014, the European Parliament, Commission and the Council of the European Union reached a political agreement on the text for the revised Markets in Financial Instruments Directive (MiFID) and the new Regulation, MiFIR, collectively known as MiFID II. This was finally endorsed by the European Parliament on April 15, 2014, and can be found here.

This followed eight hours of discussions, months of prior talks, and came more than two years after the European Commission first proposed changes to MiFID.

Negotiators were under pressure to reach agreement in time to finalise the text ahead of the European Parliament elections in May.

Below, the ABI has outlined the key developments for members:

What is MiFID?

MiFID stands for “Markets in Financial Instruments Directive”, which was originally adopted in 2004. It governs the provision of investment services in financial instruments and the operation of stock exchanges and multilateral trading facilities (MTFs), and has long been regarded as not being fit for purpose.

In November 2011 the European Commission produced proposals designed to take into account developments in the trading environment since the implementation of MiFID in 2007. The new rules are expected to improve the way capital markets function to the benefit of the real economy by taking into account advances in technology and increasing transparency. They are intended to establish a safer, transparent and more responsible financial system and to restore investor confidence in the wake of the financial crisis.

How does it affect ABI members?

The Directive applies to the sales and trading of a variety of different investment products across the EU. ABI members as institutional investors and product providers will be directly affected by the new rules.

It is also of interest to any firms who sell Packaged Retail Investment Products, otherwise known as PRIPS, including those that have an insurance wrapper (with-profits, structured products, unit linked and index linked life insurance products, protection products with an investment component and UCITS).

What does it change?

MiFID II extends and enhances the original MiFID, in particular by enhancing governance and general operational requirements and includes rules on:

  • Sales of insurance PRIPS
  • Transparency
  • Investor protection
  • Transaction reporting
  • Corporate governance
  • Third-country requirements
  • Product intervention

Sales of insurance PRIPS: MiFID introduces an amendment to the 2002 Insurance Mediation Directive (IMD), bringing direct sales of investment PRIPS under the scope of a limited number of rules with the remaining conduct of business rules to be set out in IMD II.  The applicable rules concern management of conflicts of interest as well as general principles and information for consumers.  These rules do not apply to pension products.

Transparency: The new rules will ensure that dark trading of shares and other equity instruments which undermine efficient detailed requirements for any firm involved in high frequency trading and fair price formation will no longer be allowed. They also mandate new position limits and further reporting requirements for commodity market participants. Pre- and post-trade transparency regime for equities (a double volume cap on reference and negotiated price waivers- 4% per venue and 8% global) has been extended to non-equity instruments but waivers will be allowed for large orders, requests for quote and voice trading. Post-trade transparency will be required for all financial instruments but deferred publication will be allowed in some circumstances.

Investor protection:  Investment firms will have to meet stricter standards to ensure that investors can trust that they are being offered products which are suitable to them and that their assets are well protected. Investors will also be able to rely on independent and neutral advice and fee and remuneration structures must not conflict with this requirement. For example, a ban on inducements paid to independent financial advisors has been introduced, as well as and an obligation to design investment products to meet the needs of specified groups of clients.

Transaction Reporting: Trading venues will be obliged to publish all trade data in an approved format at a reasonable commercial price.

Corporate Governance: The new rules are aligned closely with the corporate governance requirements recently implemented in the UK under CRDIV (Fourth Capital Requirements Directive).

Third Country Requirements: Where a non-EU firm wishes to sell to retail customers in an EU market, that member state can insist on the establishment of a branch and national rules will continue to apply as currently. For professional and eligible counterparty customers, national rules will also apply for at least a three year transition period. During this time the European Commission will make an assessment of non-EU firm’s supervisory regime. If the Commission approves it, those firms will be allowed to passport their services across the EU (for professional customers and eligible counterparties only). In the absence of a positive assessment national rules will remain valid.

Product intervention: Enhanced ability for competent authorities and ESMA to temporarily prohibit or restrict the marketing of certain financial instruments or a certain type of financial activity or practice.

Read a detailed FAQ published by the European Commission.

What happens next?

MIFID II was published in the EU’s “official journal” on 12th June, leaving two years and 20 days for transposition (i.e. July 2016).

The European Securities and Markets Authority (ESMA) has been tasked with developing much of the necessary detail to put the recently agreed “Level 1” provisions into context, and was sent their instructions from the European Commission on April 23, 2014. A Consultation Paper to cover the main aspects of the package, and a Discussion Paper for the more complex technical rules (which will need more time to be developed) were published on 22nd May, with a deadline for response of 1st August. ESMA is hosting two days of hearings on 7th & 8th July to discuss the content of these papers, in particular markets issues, investor protection, and commodity derivatives. The ABI will be consulting with members on relevant aspects of these consultations, so please contact Pascale.Lamb@abi.org.uk if you wish to feed in views.

Firms should begin to consider their implementation plans in anticipation of being fully compliant with MiFID II by January 2017 when MIFID II is expected to come into effect.

The conduct of business rules for insurance PRIPs will be reviewed in the context of the IMD II negotiations, which are expected to take place later in 2014. The current direction of travel for these rules is to copy across the MiFID sales rules for insurance PRIPs.

For more information, see the European Parliament and European Council websites.

Last updated 01/07/2016