Overview of the amendments proposed on MiFID and MiFIR
At the end of 2021, the European Commission presented a Regulation proposal (2021/0385) to amend the MIFIR Regulation (600/2014 EU) aiming at improving the transparency of market data, the elimination of obstacles to the emergence of a consolidated system of publication, the optimisation of trading obligations, and the prohibition of receiving payments for the transmission of customer orders. At the same time, the Commission also presented a Directive proposal (2021/0384) which modifies the MIFID II Directive 2014/65/EU with purely incidental changes necessary to ensure consistency between the two standards. The two submitted proposals will be examined by the European Parliament in the first few months of 2023.
The ECON Committee of the European Parliament is now examining these proposals for the EU Commission and has tabled several amendments. In particular, with regard to MIFID II, amendment no. 37 was presented, in relation to art. 24 "General principles and information to clients”, proposing a ban on inducements. Indeed, this amendment states that when investment firms provide investment advice, portfolio management or mere execution services, they can only be remunerated through a fee from the client and cannot solicit or accept any other payment or benefit in relation to such services. This also applies regardless of whether the intention is to refund the payments or pass on the benefits to the retail client.
The amendment also provides that companies cannot accept or receive commissions or any benefits paid or provided by third parties in relation to the provision of services to customers.
Furthermore, the tabled amendment No. 38, to art. 25 "Assessment of suitability and appropriateness and reporting to clients", requires Member States to establish and publish effective control mechanisms to assess the professional knowledge and skills of employees of investment firms, based on at least 35 hours of professional training per year, taking into account the nature of the products sold, the type of distributor, the role they play, and the activities performed within the investment firms.
To ensure that individuals can adequately identify the clients’ sustainability preferences and provide adequate advice on financial instrument sustainability risks, at least 10 hours of this professional training should be devoted to sustainability issues.
In this regard, FECIF is organising targeted meetings with the members of the European Parliament, in particular of the ECON Commission, to present the position of the European Federation of Financial Advisors and Financial Intermediaries, which is against the prohibition of inducements.
At the moment, the outcome of the debate on these very important amendments is uncertain.
The European Commission, as part of its annual programme, announced that it will publish the Retail Investment Strategy for Europe which should address and reform numerous crucial aspects of investment services and, in particular, of investment advice.
The Commission proposal, which follows two consultations launched in 2021 and 2022, aimed at gathering stakeholder views on investment services regulated by the MiFID II Directive, aims to simplify, improve, automate and standardise the way that investors’ profiles are currently valued.
The Commission's work is making use of a very in-depth study, called “Disclosure, inducements, and suitability rules for retail investors”, from which numerous indications and proposals emerged regarding the regulation of inducements in investment services, with particular reference to consultancy in investment matters.
The study was carried out through data collection that focused on 15 EU Member States (Austria, Czechia, Germany, Greece, Spain, Finland, France, Ireland, Italy, Latvia, Luxembourg, Netherlands, Poland, Romania and Sweden), selected to cover a broad range of retail investment product adoption levels, market characteristics and geographic diversity. The research was designed to capture the entire decision-making process of the retail investor, from seeking information, reviewing disclosure documents, to the passing of an appropriateness assessment and a test on client needs.
The aim of the study is to analyse the investment environment in which investors find themselves, with an assessment of the costs of financial products, current practices in terms of advice and supply of products.
According to the results collected by the European Commission’s “Disclosure, inducements, and suitability rules for retail investors study”, it appears clear that advisors are the most important driver of retail investors’ decisions.
From the transparency point of view, the information regarding the advisor status as independent or not independent, or the inducements topic (a concept that retail investors do not fully understand) is not perceived as relevant by retail investors, according to the European Commission study. This result shows the importance of improving financial education, that should be the main priority in this phase.
At the same time, the study demonstrates what retail investors indeed demand and what should therefore be the focus of regulation:
- Good advice, which can be achieved by enhancing advisors’ knowledge and competence requirements and requiring an ethical commitment to act in the client’s best interest (Art. 24.1 MiFID II).
- Clear and precise information on costs of the advice, among which are inducements and the scope of the advice, in order to understand if it comprises all the products available in the market or only the ones available in the portfolio of an investment firm.
FECIF believes that the inducement discipline, correctly applied with the due protection of the investor, encourages the provision of high-quality services to the client. Inducements allow access to a wide range of financial instruments suitable for the client in an open architecture manner, and the assessment, at least on an annual basis, of the continuing suitability of the financial instruments in which the client has invested, in order to achieve an optimal asset allocation for the client.
There is also great difficulty for clients in being able to accept "fee-based" remuneration. Furthermore, even in the case of independent advice, this could create an additional cost in addition to the implicit cost of financial products available in the market, identical or similar in the various EU countries.