ESMA consults on transaction reporting and OTFs

ESMA recently announced consultations on MiFIR transaction reporting and reference data and the functioning of organised trading facilities (OTFs). These consultations form part of ESMA’s review obligations under MiFID II and will help the European Commission understand the impact of MiFID II on the market. ESMA has stated that it intends to publish its final review reports on these issues during the first quarter of 2021. These reports are likely to inform the ongoing discussions in relation to potential further changes to MiFID II.

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MiFID II: ESMA guidance on compliance function requirements


ESMA published, on 5 June 2020, new final guidelines on certain aspects of the compliance function requirements under the recast Markets in Financial Instruments Directive (MiFID II)[1].

The new guidelines replace those issued in 2012, and have been updated in accordance with MiFID II requirements – specifically article 16(2) of MiFID II and article 22 of the MiFID II Delegated Regulation[2].

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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


Two years after MiFID II and MiFIR started to apply, the MiFID review process has begun, with both the European Commission and the European Securities and Markets Authority (ESMA) having recently published consultations on the framework.

European Commission consultation

The European Commission has launched a public consultation on the review of the MiFID II/MIFIR regulatory framework.  This consultation uses a questionnaire format divided into two main sections.  The first section covers general questions on the overall functioning of MiFID II/MiFIR, with the second section covering specific questions on “priority” and “non-priority” topics (see below). Continue reading

FCA review of MiFID II research unbundling rules

MiFID II overhauled the way in which firms pay for, price and provide research – in large part, aiming to reduce conflicts of interests and ensure that firms are acting in the best interests of clients. Sell-side brokers are now required to unbundle research from other services (notably execution) and buy-side firms are required to purchase research from their own resources or by using a separate research payment account (RPA) funded by clients.

In the lead-up to the introduction of MiFID II, these proposed changes were an area of key focus and hot debate. Over a year later, the FCA has published its findings following a review of the implementation and impact of those new rules.

Overview of the FCA’s findings

In general terms, the FCA found that there had been “positive changes in behaviours by firms” in response to the new MiFID II rules and that, overall:

  • most firms have absorbed the costs of research themselves, resulting in significant savings for investors;
  • buy-side firms are still able to access the research they need – the FCA found only “limited evidence of a decline in research quality and coverage“;
  • buy-side research evaluation models and sell-side pricing models differ – the FCA expects firms to “refine models to ensure they are acting in the best interests of their clients” and will monitor the market for “potential competition concerns“; and
  • some firms are unclear about how the new rules apply to certain circumstances, eg in relation to trade association events, marketing research services or contributions to consensus forecasts – the FCA clarified its expectations in its findings.

Some key areas of attention

The FCA provided more detailed discussion on a number of specific areas in its findings. Some of the key areas are addressed below, although firms affected by the research unbundling rules should consider the FCA’s findings in full.

  • Evaluating and deciding payment for research: the FCA identified various more “sophisticated” models that firms are using for valuing research and deciding payments for research, and sets out a summary of some of those models in its findings. Buy-side firms may find these examples instructive when refining their research valuation models.

The FCA identified that some asset managers are focussing “too much on measuring quantity, using a fixed rate card with prices based on volume” rather than focussing on quality, and stressed that:

Assessing research quality and value requires judgement. As long as firms can show their approach is rational and consistent, we would not expect them to assign specific payments to every single interaction, or justify small variations between similar providers. But we would query extremes in payments or other patterns that have little or no clear justification. This could indicate that research providers are offering inducements or that asset managers are not sufficiently managing conflicts of interest.

  • Clarifying non-monetary benefits: the FCA found that some asset managers were taking cautious approaches to the inducements rules, for example “blocking all marketing material or free trials from new research providers“, “not accepting ‘issuer-sponsored’ or house-broker research“, or “refusing to attend trade association member events“.

Although inducements should always be assessed on a case-by-case basis, the FCA clarified its general expectations in these areas. In particular:

    • trial periods are acceptable as long as they “meet the relevant conditions“;
    • issuer-sponsored materials are generally “acceptable ‘minor’ benefits“;
    • reasonable marketing material, or attending ad hoc meetings where research products are promoted” is acceptable, and “[s]erving or accepting refreshments at events like these does not breach inducement rules, though unduly lavish hospitality could“; and
    • “[g]enerally, trade association events can be treated outside the inducements framework” – the FCA emphasised that members typically pay their own fees to attend such events.
  • Delegation arrangements: as part of its review, the FCA also identified that some buy-side firms did not have appropriate control over external services providers for delegation or outsourcing arrangements, and that some firms were making the external services providers “completely responsible for compliance” without retaining oversight – which is not consistent with the FCA’s rules on outsourcing. The FCA stressed that it expects “firms delegating portfolio management services to seek an equivalent level of client protection under delegation arrangements as those required by MiFID II“.
  • Intragroup research sharing: the FCA found that firms are not routinely sharing research between entities in the same corporate group. Cases where the FCA did identify research sharing typically involved limited material and / or research flowing to and from entities (ie research flows ‘both ways’). The FCA considers that this is reasonable, as long as it does not influence how firms place orders or their ability to act in the best interests of their clients.
  • Competition concerns: various firms, in particular independent research providers (IRPs), have raised competition concerns. Some IRPs indicated that multi-service firms were cross-subsidising research and other firms were taking an over-cautious approach to the new rules (including limited take-up of the FCA’s 3 month trial period for research). Some IRPs indicated that, as a result, they are finding it difficult to compete. The FCA noted that this would be an area of focus in its further work in 12 to 24 months’ time.
  • FCA’s 3 month trial period: importantly, the FCA indicated that it would not extend the 3 month trial period to 6 months. Some IRPs had suggested the 3 month period was too short – but the FCA found that there was not sufficient evidence that extending it would “materially improve uptake by asset managers” and that, in any event, extending the trial period might stop the benefit from being classified as “minor” (for the purposes of the new ‘minor non-monetary benefits’ rule).

Next steps

The FCA acknowledged that implementation of the research unbundling rules is still in its early stages and highlighted that it intends to undertake further work in 12 to 24 months’ time. In the meantime, firms should consider the FCA’s findings – in particular, in relation to research valuation and pricing models – and ensure they are acting consistently with the FCA’s expectations. Implementation of the research unbundling rules by firms – in a way that is consistent with the FCA’s expectations – is likely to be a key focus of the FCA in the future.


Clive Cunningham

Clive Cunningham
Partner, Corporate, London
+44 20 7466 2278

Mark Staley

Mark Staley
Senior Associate, Corporate, London
+44 20 7466 7621

Harry Millerchip

Harry Millerchip
Associate, Corporate, London
+44 20 7466 6447

Regulators extend transitional direction powers in line with Brexit delay

The Financial Conduct Authority (“FCA”), Bank of England (“BoE”) and Prudential Regulation Authority (“PRA”) yesterday announced measures to extend certain UK-specific Brexit transitional relief provisions for a further six months until 31 December 2020, in line with the extension of Exit Day until 31 October. This is generally in line with industry expectations and does not signal any material changes to the regulators’ policy or approach. (It should be noted that these timelines are separate from the 3-year maximum period applicable under the (separate) Temporary Permissions Regime (“TPR”), which remains unchanged in terms of overall maximum duration).

The FCA has issued a statement confirming its intention to extend the proposed duration of the directions issued under its temporary transitional power (“TTP”) to the 31 December 2020, reflecting the six-month extension of Article 50. The TTP is intended to minimise disruption for firms and other regulated entities if the UK leaves the EU without a withdrawal agreement. For those areas covered by the TTP, firms do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit.

The FCA’s statement clarifies that other than the additional time, the FCA’s approach to the use of the TTP remains unchanged from that previously communicated. Firms are reminded, in particular, that certain obligations will not be covered by the TTP: these include some significant areas such as reporting under EMIR and the MiFID II transaction reporting regime, which will present particular challenges for EEA firms operating in the EEA under the TPR. The FCA reiterates that it expects TPR firms to use the additional time between now and the end of October to prepare to meet these obligations and confirms that it will publish further information before exit day on how firms should comply with post-exit rules.

The PRA and BoE have published a related consultation paper, which provides an update on the BoE and PRA’s approach to the TTP. The consultation also briefly explains and consults on the proposals to amend further certain regulatory requirements to take account of changes to EU law taking effect between March and October 2019. On use of the TTP, the PRA and BoE confirm, consistent with the FCA, that the proposed adjusted fixed end date for the TTP directions will be 31 December 2020, and that the overall approach to use of the TTP remains generally unchanged from the approach previously outlined by the PRA and BoE.

PRA-regulated firms within the scope of the TPR are reminded that for the most part, the TTP will not apply to obligations arising in consequence of their status change upon entering the TPR. The PRA and BoE are also consulting on proposals to fix deficiencies arising from the UK’s withdrawal from the EU and to make consequential changes in light of the extension to the Article 50 period (in order to deal with EU binding technical standards (“BTS”) entering into force between March and October 2019). The PRA does not expect material changes to be required to address this. Changes required to take account of EU laws and regulations other than BTS remain the responsibility of HM Treasury, which is separately engaged on this exercise.  


Clive Cunningham

Clive Cunningham
Partner, London
+44 20 7466 2278

Katherine Dillon

Katherine Dillon
Of Counsel, London
+44 20 7466 2522