European Securities and Markets Authority updated Q&A on MiFID II and MiFIR investor protection and intermediaries topics

The European Securities and Markets Authority (ESMA) updated its Q&A on MiFID II and MiFIR investor protection and intermediaries topics at the end of March 2021. The update concerns one of the conditions specifying when an inducement can be considered as designed to enhance the quality of the relevant service to the client.

ESMA asks and answers Question 8 in Chapter 12:

“How should the condition be applied that the inducement is justified by the provision of an additional or higher-level service to the relevant client, proportional to the level of inducements received, as referred to in Article 11(2)(a) of the MiFID II Delegated Directive?”

Article 11(2)(a-c) lays down the conditions to be met in order for inducements to be considered to be designed to enhance the quality of the relevant service to the client. The condition laid down in Article 11(2)(a) has three important elements. The enhancement must be 1) an additional or higher-level service, 2) provided to the relevant client and 3) proportional to the level of inducements received.

ESMA discusses these three elements in turn:

1. An additional or higher-level service

An enhancement should go beyond aspects of the firm’s organization, or the services that are legally required or are essential for its functioning. Examples of this would include free access to market data or research, and or the free provision of digital tools and apps aimed at helping clients to monitor their investments. The provision of educational material e.g. free access to trainings, seminars or conferences could also be considered an enhancement, as well as the provision of non-independent advice on, and access to, a wide range of suitable financial instruments.

2. Provided to the relevant client

The provision of quality enhancing services to the relevant client means that the services should be actively and effectively offered and brought to the attention of the relevant client. For example, this means that if a firm offers the client the possibility of a yearly meeting, but does not actually invite the client to a date and time, this is not an “actively and effectively offered” enhancement.

ESMA says that the quality enhancement can also be provided to a relevant segment of clients, taking into account factors including the service provided and the channels used. Also the segment of clients must be sufficiently homogeneous, i.e. the quality enhancements are relevant for all clients that belong to this segment.

3. Proportional to the level of inducements

Services should not be regarded as a quality enhancement if the value-added is not proportional to the level of inducements received. It is important to underline that it is the level of inducements received by the firm that is of relevance, not the client’s investment amount. ESMA expects firms to be able to demonstrate that the quality enhancements provided to the client are proportional to the level of inducements received.

The topic of inducements has generated much conversation, especially in relation to the protection of investors. The Netherlands and the UK have gone as far as banning inducements in relation to retail investment products. Some have argued however, that a ban on inducements across the European Union might not have the desired effect. Possible outcomes among others include increasing restrictions on access to advice for retail investors, as well as limiting what funds are available to them. It was with such possibilities in mind that ESMA recommended to the Commission in April 2020, to rely on alternative options to improve investors’ understanding of inducements and the functioning of MiFID II.

For comprehensive and bespoke legal advice on 50+ jurisdictions, learn more about our Cross-Border Legal Advice Service