In its final technical advice to the Commission on MiFID II and MiFIR of 19 December 2014, ESMA has provided revised guidance as to the legitimacy of inducements to be paid to/by a third person (see p. 127 et seq.). ESMA’s draft advice on 12 May 2014 on this issue led to a heated debate and largely critical feedback from the industry, in particular with respect to the treatment of research (in the context of dealing commissions) and the details of the “quality enhancement” test for non-independent advisers.
For the quality enhancement test, which needs to be met in order for a non-independent adviser to be able to receive and retain commissions from product manufacturers, ESMA first proposed a list of negative criteria, i.e. it set out instances in which the quality enhancement test would not be met. Inter alia, this should have been the case if the commissions were used to pay or provide goods or services that are essential for the recipient firm in its ordinary course of business.
In response to feedback to the consultation, alleging that this wording, alongside other tightened requirements in this context, would have resulted in a de facto ban on inducements (possibly beyond what the Level 1 Directive intended), ESMA has now dropped this language. However, ESMA has redrafted the remainder of its draft guidance text of May 2014, thereby maintaining the direction of travel and generally re-using similar language. What is now set out on p. 141 to 143 apparently still addresses the most crucial points, such as actual and to be evidenced enhanced level of services quality, or the aspect of requiring an ongoing service/benefit when receiving ongoing payments (in particular e.g. trailer fees). Furthermore, ESMA has also maintained the wording “without bias or distortion as a result of the commission being received”, which will have substantial ramifications for some existing fee arrangements.
Thus, product manufacturers and distributors throughout Europe, who have so far operated on the basis of a commission based advisory and sales model (which appears to apply for almost every EU jurisdiction other than the UK and The Netherlands) will need to review and, as appropriate, revise their business models. Cash flows will need to change, and new distribution and cooperation models will need to evolve.
Also, firms will need to review the way in which they pay for investment research and establish a budget and appropriate arrangements with brokers and third party research providers.