MiFID - Investor Protection

The European Securities and Markets Authority (ESMA), in cooperation with national competent authorities (NCAs) in the European Economic Area (EEA), has overseen the launch of the Markets in Financial Instruments Directive II (MiFID II) and the Markets in Financial Instruments Regulation (MIFIR) on Wednesday 3 January.

A key element in ensuring the new regime functions properly is ensuring the availability of data to market participants – firms and trading venues – and NCAs. This data is now available on ESMA’s website and will be continuously updated.

The European Securities and Markets Authority (ESMA) issued today guidance to national competent authorities (NCAs) and market participants on the topic of continuity of cross-border provision of investment services in the transition between MiFID I and MiFID II, including in the event that there is late transposition of the Directive by some Member States.

In this context, ESMA also issued guidance on the cross-border operation of regulated markets and the provision of data reporting service providers (DRSPs).

The new Q&As cover both secondary markets and investor protection related issues including:

Secondary Markets – page 54

·         Validity of authorisations;

·         Continuity of the provision of services by regulated market; and

·         Provision of data reporting services.

Investor Protection – page 88

·         Validity of authorisations;

·         Existing passport notifications validity;

·         Continuity of the provision of investment services; and

·         New passport notifications.

The Q&As have been developed in order to provide  practical solutions to the problem of late transposition in the EU, taking into account to the extent possible the need to preserve business continuity after 3 January 2018. This is key to facilitating cross-border business and services in the EU, one of the main drivers of MiFID II.

The Q&As should help addressing concerns of competent authorities, investment firms, market operators and data reporting services providers.

The European Securities and Markets Authority (ESMA) has added 10 new Q&As to its Questions and Answers (Q&A) document on the implementation of investor protection topics under the Market in Financial Instruments Directive and Regulation (MiFID II/ MiFIR). The new Q&As cover the topics of inducements, suitability, and provision of investment services and activities by third country firms.

The overall MiFID II Q&A provide clarifications on the following topics:

  • Best execution;
  • Suitability and appropriateness;
  • Recording of telephone conversations and electronic communications;
  • Post-sale reporting;
  • Record keeping;
  • Investment advice on an independent basis;
  • Inducements (research);
  • Information on charges and costs;
  • Underwriting and placement of a financial instrument;
  • Client categorisation;
  • Inducements;
  • Provision of investment services and activities by third country firms; and
  • Application of MiFID II after 3 January 2018, including issues of late transposition.

MiFID II applies from 3 January 2018 and will strengthen the protection of investors by both introducing new requirements and reinforcing existing ones. The purpose of this Q&A is to promote common supervisory approaches and practices in the application of MiFID II/ MiFIR for investor protection topics.

ESMA will continue to develop this Q&A on investor protection topics under MiFID II in the coming months, both adding questions and answers to the topics already covered and introducing new sections for other MiFID II investor protection areas not yet addressed in this Q&A.

The European Securities and Markets Authority (ESMA) has issued a statement updating on its work in relation to the sale of contracts for differences (CFDs), binary options and other speculative products to retail investors.

 

Statement on preparatory work of the European Securities and Markets Authority in relation to CFDs and binary options offered to retail clients

The European Securities and Markets Authority (ESMA) is issuing this statement to provide an update on its work in relation to the provision of contracts for differences (CFDs), including rolling spot forex, and binary options to retail clients. 

ESMA has been concerned about the provision of speculative products such as CFDs, including rolling spot forex, and binary options to retail clients for a considerable period of time and has conducted ongoing monitoring and supervisory convergence work in this area. Some competent authorities have also adopted national measures to limit the provision of these products to retail clients.

Notwithstanding these actions, ESMA remains concerned that the risks to investor protection are not sufficiently controlled or reduced. Further to the ESMA statement published in June 2017[1], ESMA is considering the possible use of its product intervention powers under Article 40 of MiFIR[2] to address these investor protection risks. In particular, ESMA is considering measures to:

1.    prohibit the marketing, distribution or sale to retail clients of binary options; and

2.    restrict the marketing, distribution or sale to retail clients of CFDs,  including rolling spot forex.

The restrictions on CFDs currently under review are:

·         leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset;

·         a margin close-out rule;

·         negative balance protection to provide a guaranteed limit on client losses;

·         a restriction on benefits incentivising trading; and

·         a standardised risk warning.   

ESMA will conduct a brief public consultation in January 2018 on this matter.

Any product intervention measure adopted by ESMA under Article 40 of MiFIR can have an initial duration of up to three months and is renewable.

 

[1] ESMA35-36-885 Statement on preparatory work of the European Securities and Markets Authority in relation to CFDs, binary options and other speculative products published 29 June 2017 (https://www.esma.europa.eu/document/product-intervention-general-statement).

[2] Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012, OJ L 173, 12.6.2014, p. 84–148.

The European Securities and Markets Authority (ESMA) has published the results of its Peer Review on the Guidelines on certain aspects of the compliance function under MiFID (Guidelines). The Guidelines cover national competent authorities (NCAs) supervision of investment firms’ compliance functions, particularly how those functions carry out risk assessments, monitor compliance obligations, report to senior management and fulfil their advisory role.

The Review found a high level of compliance by the majority of EEA national competent authorities (NCAs) with the Guidelines, although significant weaknesses were identified in the supervisory approaches of Cyprus, Iceland and the Netherlands. Additionally, the Review identified a number of good practices by a number of NCAs in their supervision. ESMA will follow up regarding the points of insufficient compliance and partial compliance with the relevant NCAs.       

Peer Review

The ESMA Supervisory Convergence Work Programme 2016 included a peer review on the Guidelines to assess compliance by the NCAs, identify good practices and potential areas for improvement.

The work involved assessing the approaches of thirty-one EEA NCAs to supervising investment firms’ compliance functions, against the Guidelines requirements, and covered the period from 1 July 2014 to 30 June 2016. The assessment also involved on-site visits of the NCAs from Austria, Cyprus, Denmark, France and Slovakia.

The Review positively assessed 27 NCAs regarding the supervision of how the compliance function performs risk assessments, monitors compliance obligations and provides reports to senior management. While 22 NCAs were positively assessed on their supervision of the compliance function’s advisory role, which includes support for staff training, day-to-day assistance for staff and participating in the establishment of new policies and procedures within the investment firm.

ESMA found diversity in the supervisory approaches applied by NCAs, showing a different reliance on the compliance function as a key source of information on the firms’ compliance with MiFID requirements. For many authorities the compliance function was generally not the main target in supervisory reviews but an ancillary target of supervision of firms’ obligations under MiFID.

Good practices identified

Good practices identified during the peer review will help in enhancing supervisory convergence across EEA NCAs. Key good practices identified included:

·         the pre-screening by NCAs of compliance officers;

·         clear communications by NCAs of expectations to the compliance function at the authorisation stage; and

·         NCAs undertaking on-site visits shortly after the firm’s authorisation, in particular for riskier firms.

The report provides a detailed assessment of the effective application of the Guidelines and the capacity of the NCAs to respond to market developments. It also assesses the capacity of NCAs to achieve high quality supervisory outcomes, including the adequacy of resources.

The European Securities and Markets Authority (ESMA) has added 4 new Q&As to its Questions and Answers (Q&A) document on the implementation of investor protection topics under the Market in Financial Instruments Directive and Regulation (MiFID II/ MiFIR). The new Q&As cover the topics of post-sale reporting, record keeping, and inducements.

The overall MiFID II Q&A provide clarifications on the following topics:

  • Best execution
  • Suitability and appropriateness
  • Recording of telephone conversations and electronic communications
  • Post-sale reporting
  • Record keeping
  • Investment advice on an independent basis
  • Inducements (research)
  • Information on charges and costs
  • Underwriting and placement of a financial instrument
  • Client categorisation
  • Inducements

MiFID II applies from 3 January 2018 and will strengthen the protection of investors by both introducing new requirements and reinforcing existing ones. The purpose of this Q&A is to promote common supervisory approaches and practices in the application of MiFID II/ MiFIR for investor protection topics.

ESMA will continue to develop this Q&A on investor protection topics under MiFID II in the coming months, both adding questions and answers to the topics already covered and introducing new sections for other MiFID II investor protection areas not yet addressed in this Q&A.

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