ESMA proposes changes to MiFID II inducements and costs and charges disclosure regimes

On 1 April 2019 the European Securities and Markets Authority (ESMA) published its final report to the European Commission (EC) setting out its technical advice on the impact of the inducements and costs and charges disclosure requirements under MiFID II (Directive 2014/65/EU).

ESMA expresses some concerns over the efficacy of the current inducements disclosure regime and proposes some changes designed to improve clients’ understanding of inducements. ESMA considers but rejects certain more fundamental changes, including the introduction of a more general inducements ban and the creation of a new sub-category of sophisticated retail clients.

ESMA finds that the costs and charges disclosure regime generally works well and helps investors make informed investment decisions, but recommends that certain requirements should be scaled back for eligible counterparties and professional clients.

Disclosure requirements for inducements under Article 24(9) MiFID II:

Overall, ESMA finds that the impact of the MiFID II inducement disclosure rules has not been as positive as expected and has not facilitated the development of independent investment advice (with clients remaining reluctant to pay separately for such advice).

In terms of specific changes proposed, ESMA recommends that the EC take the following steps to improve client understanding of inducements:

  • clarify that the ex-ante and ex-post disclosures (where applicable) should always be made on an ISIN-by-ISIN basis;
  • introduce the obligation to include a simple, consistent explanation of the meaning of “inducements” (for instance, third-party payments) in all inducements disclosures; and
  • strengthen the MiFID II requirements around quality enhancing services by requiring firms to notify clients of the specific services the firm could be benefitting from (but reject the introduction of a closed list of quality enhancing services without further market impact assessment).

Other key areas considered by ESMA in the report are as follows:

  • A complete ban on inducements for all MiFID investment services was considered but not recommended at present. Instead, ESMA recommends that the EC assesses the potential impact of a ban and possible mitigating measures, including by consideration of more extensive inducements bans introduced in the UK and the Netherlands.
  • It is not appropriate for a new category of clients (“sophisticated retail clients”) to be created for the purposes of the inducements regime.
  • Placing agent fees or underwriting fees should only be disclosed where the firm also, respectively, provides an investment service to the investor buying the financial instruments it is placing, or sells the financial instruments issued to investors in addition to underwriting.
  • For level playing field reasons, the disclosure requirements should be extended beyond MiFID financial instruments to capture comparable investment products (in particular certain insurance products).
  • Further analysis of potential measures to tackle investor protection issues arising in bank-led closed-distribution models is recommended.

Costs and charges disclosure requirements under Article 24(4) MiFID II:

On costs and charges, ESMA is of the view that the disclosure regime generally works well, and helps investors make informed investment decisions. The main change recommended by ESMA is the reduction of mandatory disclosures for eligible counterparties and professional clients, as follows:

  • Eligible counterparties should be allowed to opt out of the entire costs and charges disclosure regime, and the obligation to provide the illustration of the impact of costs on return should never apply.
  • Professional clients should be given flexibility to opt out of the costs and charges regime entirely for investment services other than portfolio management and investment advice.
  • For retail clients or professional clients receiving portfolio management and investment advice services, the existing regime should continue to apply (subject to recommended clarifications).
  • ESMA once again rejects the creation of a sub-category of retail clients for “sophisticated retail clients”, as described above.

With regard to the current regime, ESMA believes this has proven effective so should remain in place, subject to certain recommended amendments:

  • Certain ESMA Q&As should be incorporated into the MiFID II Delegated Regulation (2017/565/EU) to foster convergence across member states.
  • Ex-post disclosures should show both total costs and costs on an ISIN-by-ISIN basis (but with more optionality for portfolio management clients). Implicit costs should be included.
  • Firms should monitor and track clients’ portfolios on a day-to-day basis so that they can show actual costs incurred by a client in ex-post disclosures as accurately as possible.
  • For telephone transactions requested by the client, where not possible to provide the ex-ante costs disclosure before the completion of transactions, disclosures may be provided immediately afterwards.
  • As with the inducements rules, the costs and charges disclosure regime should be harmonised across MiFID instruments and other substitutable products (e.g. insurance).
  • Electronic communications should become the default “durable medium” for communicating with clients (rather than requiring consent to electronic disclosure). Personalised client consent to best execution and conflicts of interest policies should also be abolished provided that they are freely available on the firm’s website.

Potential impact on firms:

The implementation of the changes recommended by ESMA will require legislative action by the EC. No indicative timetable is given and under current circumstances this could take some time to implement. The EC may also reject or diverge from the technical advice in various respects, or commission further review. It is also unclear whether and in what respects these recommendations or any subsequent legislative revisions at EC level may be taken forward by the UK.

Nevertheless, investment firms should be aware of this technical advice, as the changes recommended could, if taken forward, impact the ways in which firms communicate with and apply the rules to their client base, and the information they are required to gather and provide to clients, both for MiFID instruments and other comparable investment products. The advice also gives some indicators of ESMA’s expectations on points such as ISIN-level inducement disclosures and disclosure of implicit costs.

Firms should also be aware of ESMA’s rejection of a more flexible regime for sophisticated retail clients that cannot be opted up to professional status, and alive to the possibility that certain key areas remain under consideration, including the possibility of a more extensive inducements ban.


Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Katherine Dillon
Katherine Dillon
Of Counsel, London
+44 20 7466 2522
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789
Katie McGrory
Katie McGrory
Associate, London
+44 20 7466 2669

Australia: Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Report) was released to the public on 4 February 2019. The Federal Government has agreed to take action on all 76 recommendations contained in the Hayne Report, and in a number of areas has indicated it intends to go further, including conducting an immediate review of financial counselling services.  Herbert Smith Freehills have prepared a briefing paper which identifies the following key themes and reforms contained within the Hayne Report:

  1. Governance overhaul – Boards will need to exercise greater scrutiny over their governance systems, policies and procedures;
  2. Conflicts – a number of the changes proposed are designed to alter the objective from one of ‘managing’ to one of ‘eliminating’ conflicts of interest;
  3. Individual accountability – the proposed changes to remuneration and accountability regimes are significant, with individuals to be held to account more than ever before for the adequacy of complex systems, policies and procedures;
  4. Principles not prescription – the Hayne Report observes that prescriptive laws which are vast and complex may be less effective than statements of broad matters of principle, suggesting that now may be an apt time to revisit the current approach to regulation of the provision of financial services within Australia;
  5. Enforcement revolution – above all, the Hayne Report recommends greater personal accountability coupled with stronger regulators with an incentive to investigate and hold wrongdoers to account, making for an ‘enforcement revolution’. Organisations which do not proactively seek to identify and address inadequacies in their systems will likely find themselves redirecting resources toward activities which will do little to enhance their reputations or shareholder wealth.

The briefing paper considers in detail the key changes recommended in the Hayne Report and what these changes will mean for businesses and the Australian financial services landscape.