On 3 October 2017, ESMA (European Securities and Markets Authority) published the latest update of its Question and Answers on MiFID II and MiFIR investor protection and intermediaries topics (No. ESMA 35-43-349).
The publication Questions and Answers, (hereinafter, “Q&A”) is intended to be continually edited and updated, as new questions are received.
This document deals with practical application of MiFID II and MiFIR, and covers topics related to investor protection in practice. It provides the answers raised by the general public, market participants and competent authorities in relation to the interpretation and application of MiFID II and MiFIR provisions in practice.
Published updates refer to the following topics:
- Best execution;
- Recording of telephone conversations and electronic communications;
- Post-sale reporting;
- Information on cost and charges; and
- Client categorization.
Among the above mentioned topics, clarifications provided on “INFORMATION ON COST AND CHARGES” (as regulated by articles 24 of MiFID II (Directive 2014/65/EU) and 50(1) of MiFID II Delegated Regulation (2017/593) seem to be of interest. In particular for the structured products industry, for the purposes of investor’s protection.
Question 16. How is Recital 79 of the MiFID II Delegated Regulation “The costs and charges disclosure is underpinned by the principle that every difference between the price of a position for the firm and the respective price for the client should be disclosed, including mark-ups and markdowns.” to be interpreted with regard to the position of the firm?
- ESMA pointed out in its publication “Q&A”,that when the investment firm offers (ex-ante) or sells (ex-post) the financial instrument to the client, it should offer the current (fair market) value of the financial instrument, regardless of fluctuation on the market.
Question 17. How should investment firms identify and disclose mark-ups and structuring costs embedded in the transaction price (Recital 79 of the MiFID II Delegated Regulation)?
- In practice, where there is ‘netting’ of costs, this should not be excluded from the obligation to provide information on costs and charges. As a result, mark-ups and structuring costs embedded in the transaction price need to be identified and disclosed to clients by the investment firm.
- In this case investment firm should identify additional costs by calculating the difference between the price of the position for the firm and the price for the client.
Question 18. How should an investment firm assess, in accordance with Article 50(1) paragraph 3 of the MiFID II Delegated Regulation that an eligible counterparty does not intend to offer the financial instruments to its clients?
- The obligations set out in Article 24(4) MiFID II details the requirement to provide information on all costs and charges to all clients and potential clients. Investment firms providing investment services to eligible counterparties shall have the right (in accordance with Article 50 of the MiFID II Delegated Regulation) to agree to a limited application of the detailed requirements set out in Article 50, except when, irrespective of the investment service provided, the financial instruments concerned embed a derivative and the eligible counterparty intends to offer them to its clients.
- According to the ESMA interpretation, published in “Q&A”, investment firms are expected to apply the full cost and charges disclosure regime as the default option, firms may only apply the limited flexibility allowed under Article 50(1) (as further explained under recital 74) when there is an agreement to do so and the eligible counter party has indicated that it does not intend to offer the financial instrument to its clients.
- ESMA expects investment firms to have procedures in place to record eligible counterparties’ agreement and intention not to offer such financial instruments to their clients.
Question 19. Which specific limitations to the cost transparency regime may professional clients and eligible counterparties agree on?
- ESMA emphasizes that Article 24(4) MiFID II requires that the information provided to clients, includes (but is not limited to) information on all costs and charges, information relating to both investment and ancillary services, the financial instrument recommended or marketed to the client and any third-party payments.
- In addition, the information shall be aggregated and where the client so requests, an itemized breakdown shall be provided.
- The information about costs and charges shall be provided to the client in good time before the investment service is provided and where applicable, on a regular basis (at least annually).
Legália will monitor future developments on these topics and is available to provide you with any clarification or support in this respect.