Recent progress on MiFID II, including a key vote by Members of European Parliament (MEPs) and publication of a Delegated Directive, shows that despite the obstacles it is unwise for banks, investment managers or commodity firms to ease off on implementation plans. As a clearer roadmap is now in place, firms should take the opportunity to explore common elements between inter-related rules such as the Market Abuse Regulation and PRIIP KID (Packaged Retail Investment and Insurance-Based Investment Products, Key Information Document). And use this time to fully understand the implications of the necessary changes – a luxury that was not available with the original deadline.
After a series of missed milestones, in November 2015, the European Commission proposed that the implementation date be pushed back to January 2018. Changing the implementation date requires additional legislation, which the Commission published in February 2016 and which MEPs have since been discussing. On 7 April 2016, the MEPs in the ECON Committee voted through their amendments, which means the next stage of agreeing the delay can now progress. As well as agreeing to the 2018 deadline, MEPs also voted to include a delay for countries to transpose the rules into national law and also some minor amends to fix unforeseen problems in the primary legislation.
Then on the 8 April 2016, the European Commission published the first of the long awaited technical texts, which will provide the detail and specific requirements which firms need to begin implementing. The published text – which forms only a fraction of the complete MiFID II Level 2 technical texts – covers safeguarding of assets, product governance and inducements (in both the retail and wholesale markets). It takes the form of a directive rather than a regulation, so allows Member States some room for interpretation. However, the European Securities and Markets Authority (ESMA) is expected to issue guidance or FAQs on a number of areas, including product governance. Therefore, the scope for divergent national approaches may be limited.
Even in those countries which already have national rules in these areas, the new requirements cover more instruments, greater evidence of governance and controls and increased disclosure on information flow.
The provisions on safeguarding of assets are largely drawn from the MiFID I Implementing Directive, so may be the least challenging for firms to implement. However, as previously highlighted by ESMA, the degree to which MiFID I has been implemented fully by Member States and firms varies. Therefore, these provisions will require some firms to be put new procedures in place.
The rules on product governance cover all types of financial instruments, including securities, derivatives and funds. Manufacturers must put in place design and monitoring procedures and there will be increased information flow between manufacturers and distributors. The themes of inducements and conflicts of interest are clearly seen in the provisions. A particular area of intense industry debate is how to describe the "identified target market" of a product.
The rules on inducements articulate what is meant by "enhancing the quality of service" for the client. They are less onerous than those proposed by ESMA but could cause fundamental changes in industry practice, especially where regulators take an active approach to enforcement.
They also cover the payment for investment research. Investment managers must either pay for research themselves or establish a research payment account, which is funded by agreed charges to clients and operates to an agreed budget. Commission sharing arrangements will be able to continue but will require review and amendment and brokers will need to cost research when bundled with execution.
Expected within the coming weeks are further delegated acts covering investor protection, trading venues and data publication, with the more problematic Regulatory Technical Standards (RTS) expected by the summer. Here, ESMA has until June to rework the technical approach to pre-trade transparency and commodity position limits after both the European Commission and MEPs rejected the draft texts. Any further delays to the technical texts or indeed hold ups to passing the legislation to enact the deadline delay, could cause further problems.