This document summarises some key points regarding the implementation of the Markets in Financial Instruments Directive (MiFID) and other European legislation, into the national legal system with regard to enhancing investor protection and holding all market agents accountable without prejudice to the consultation of the national and international legislation in force.
The following information uses nontechnical language and is intended for retail investors only regardless of their level of investment or legal knowledge. It is not a technical document, nor is it intended to be exhaustive in relation to all the matters concerned in the transposition of the Directive.
Publication date: 01.08.2018
A – GENERAL ISSUES ON MiFID
1. What is MiFID II?
2. Why did the need arise for MiFID's revision?
The first Financial Instruments Markets Directive (MiFID I) emerged in 2004 as a response to the developments that to date had been observed in the financial markets and showed an increasingly profound presence of investors in the financial markets for savings. The increase in the number of investors, coupled with an ever broader and more complex range of financial instruments and services, highlighted the need to create a European legal framework capable of providing a high-level of investor protection and allowing greater legislative harmonisation for investment firms in the European single market.
Nevertheless, the financial crisis that started in 2007 revealed that protection level provided for in MiFID I was insufficient given the level of added complexity and sophistication that occurred over recent years in the markets and the financial instruments and services.
MiFID II therefore strengthens the applicable regulatory framework for markets in financial instruments - including over-the-counter (OTC) trading - in order to increase transparency, strengthen investor confidence and protection, limit unregulated areas, ensure that supervisory authorities are suited with more adequate powers for the performance of their mission, and in promoting greater accountability of all agents.
3. What is new about MiFID II apropos MiFID?
MiFID II focuses on the central theme of reinforcing retail investor protection. In addition to reinforcing the information to be provided to clients - either pre-contractually or post-contractually – the duties incumbent on financial intermediaries (FIs) to better know their clients have been reinforced to determine the products and services that best suit their profile. FIs should also ensure that their employees have the correct knowledge and skills to provide information to clients.
The new Directive and related regulation, in its transposition and implementation into the national legal legislation, requires IFs adopt internal procedures and policies that prevent and minimise conflicts of interest. For example, FIs are required to implement an performance assessment and employee compensation policy that does not conflict with the duty to act in the interests of their clients. Limits are also placed on cross-selling of financial products and services, for example by prohibiting cross-selling that include deposits, trading of deposits in connection with the purchase of financial instruments, insurance contracts and other financial or savings products that do not guarantee the invested capital at all times.
FIs are now required to have a governance policy of the products they produce or distribute, and they are required to define the characteristics and typology of clients that shape the target market of each product and cannot market financial instruments outside the target market that has been identified.
4. Is the Directive already in force in Portugal?
The European Directives are not applied directly in the Member States but their transposition into national law is mandatory. Law No. 35/2018 of 20 July, which, among other European diplomas, transposes the MiFID II in Portugal, states that the law enters into force on the first day of the month following its publication in the Diário da República (Official Gazette), i.e. on 1 August. This does not invalidate that some of its rules may come into force later, where provided for in the diploma.
B – INVESTOR CATEGORIES
5. What categorisation can clients or investors have?
Investors may be classified as professional, retail or eligible counterparties. The financial intermediary must establish in writing, an internal policy that always allows for knowing the nature of each client. The financial intermediary may, on its own initiative or at the client's request, treat a professional investor as a retail investor and treat an eligible counterparty as a professional or retail investor. Similarly, the retail investor may request the financial intermediary, to be treated as a professional investor and shall make such request in writing and specify which services, financial instruments and transactions does he/she wish to be treated as a professional investor.
6. Do investor information duties vary depending on the nature of the client?
Yes. The extent and depth of the reporting duties of financial intermediaries to investors is greater, the lower the investor's knowledge of and experience in investing is. For this reason, retail investors receive particular attention not only in receiving information from the intermediary, but also in assessing the suitability of financial instruments. In the provision of the portfolio management service, for example, the financial intermediary is obliged to make a periodic assessment of the suitability of the transaction or service and to provide the client with an up-to-date report on the operation or service on how said matches the client's preferences, goals, and other specific characteristics.
C – INVESTMENT ADVICE
7. What is investment advice?
Investment advice is a service that provides tailored advice for an effective or prospective client, either at the client's request or at the consultant's initiative in respect of operations relating to specific financial instruments.
8. What additional investment advice duties result from MiFID II?
The general principle is to strengthen the pursuit of the client's interest. That is, the service provider is obliged to always act in the client's best interests, even if those interests overlap those of the consultants. MiFID II increases the information duties to be provided to the client, not only pre-contract (see answers to questions 11 and 17), but also post-contract. In addition, the new Directive aims, in the field of consultancy, to increase the transparency and quality of the service provided and to mitigate any conflicts of interest. Thus, while on the one hand there is a better distinction between the concepts of independent and non-independent consulting, on the other, there is a greater focus on the conduct code and the appropriate professional skills of employees (knowledge and experience). Entities should regularly assess and meet additional employee training needs, and remuneration should not be predominantly correlated with business criteria and should also include qualitative requirements.
9. What differentiates independent investment advice?
Independent investment advice implies that three conditions are met: 1) the assessment of a sufficiently diverse range of financial instruments available on the market; 2) the advice of financial instruments issued and traded by itself and by third parties; and 3) the non-acceptance or receipt of any remuneration, commission or benefit paid or granted by a third party, except for non-cash benefits of an insignificant amount.
If the financial intermediary provides independent and non-independent investment advisory services, it should do so separately, through functional and hierarchically separated physical facilities and structures.
10. What differentiates investment advice from that of simple marketing of a financial instrument?
In investment advice there is a subjective element, as it implies the existence of an opinion of the service provider, which includes the service provider's analysis of the financial instrument itself, as well as its suitability to the special circumstances of a specific client (suitability). In the marketing of financial instruments, the information provided does not imply the existence of a value judgment - only information is provided on the characteristics of the financial instrument (appropriateness).
D - SUITABILITY ASSESSMENT
11. Who assesses the suitability of a financial instrument to that of the client's knowledge and experience?
The financial intermediary assesses the suitability of the recommendations.
12. May the client self-assess the financial instrument's suitability?
No. The process and responsibility for assessing the suitability of a particular financial instrument is not transferable to the client.
13. What type of information should the financial intermediary request from the client to carry out the suitability assessment of the investment?
The financial intermediary shall request from the client, information on its investment knowledge and experience regarding the type of instrument or service concerned, in order to to assess whether the client understands the risks involved. In providing portfolio management or investment advisory services, the financial intermediary shall also obtain from the client information on its financial position, including: the ability to withstand losses; the investment objectives; and risk tolerance. Only when in possession of this information can the financial intermediary recommend the service and financial instruments deemed most appropriate to the client (effective or potential) and, in particular, more proportional with their level of risk tolerance and ability to sustain losses.
14. If the client does not provide the Financial Intermediary (FI) with the necessary information to assess the appropriateness of the investment, can the investment recommendation occur?
If the financial intermediary does not obtain the information required for assessing the suitability of the service or operation concerned, or if the information is inadequate, it may not perform or recommend such service or operation to the client.
15. May the client subscribe to a financial instrument even if the FI considers that the financial instrument is unsuitable?
The client may, although there is a risk that the financial instrument may not be suitable to the characteristics of the investor as diagnosed by the financial intermediary.
16. Is the suitability assessment report only required if the investment recommendation gives rise to a transaction or subscription of the financial instrument?
No. In its MiFID II investor protection Q&As (hereinafter, ESMA Q&As
), the European Securities and Markets Authority (ESMA) states that the suitability report must be submitted to the client whenever there have been investment recommendations, regardless of whether or not they resulted in an operation or subscription of a financial instrument or financial service. Providing advice does not oblige the client to make any investment.
17. When the advice is to "do not buy" or "sell" a financial instrument, is it mandatory to deliver the suitability report to the client.
Yes. According to ESMA's Q&As
, financial intermediaries providing advisory services are always required to provide the client with a report, regardless of the type of recommendation they make, including "do not buy", "keep" or " sell" a financial instrument.
18. When should the financial instrument suitability assessment document be delivered to the client?
The suitability assessment document of the recommended instrument or service must be delivered to the client on a durable medium prior to any recommended operation. If the service is provided through a means of distance communication that does not allow the suitability assessment document to be sent in advance, the financial intermediary may provide it immediately after the transaction is made, provided that the following two conditions are met: 1) the client gives permission to receive the document without undue delay after the completion of the transaction; and 2) the financial intermediary gives the client the possibility of deferring the execution of the transaction in order to receive the suitability assessment document in advance.
19. What information should the financial instrument suitability assessment document contain?
The financial instrument's suitability assessment document for a retail investor specifies at least:
- whether the advice was provided at the initiative of the financial intermediary or the client;
- whether the advice was given as independent investment advice or not;
the type of advice given to the investor and how it corresponds to the investor's preferences, objectives and other characteristics, including information on personal circumstances, including financial situation, ability to bear losses, risk tolerance and investment objectives; and the specification of financial instruments or investment advice services.
In the case of investment advice, the document
shall also specify whether the client will be provided with a periodic
assessment of the suitability of the recommended financial instruments; the
frequency and scope of this assessment; and how the update of recommendations
will be communicated to the client.
20. Does the suitability report have to specify when the advice was given to the client?
Yes. The suitability report shall contain the date and time of day the investment advice was given to the client. Companies should also keep track of the date and time the suitability report was delivered to the client. This issue is especially relevant in cases where there is a remote interaction with the client. Note that financial intermediaries have a duty to keep the suitability report.
E – DUTY TO INFORM INVESTORS
21. What client information duties are financial intermediaries obliged to provide?
The financial intermediary must provide the client (actual or potential) with all information necessary for informed investment decision-making. The extent and depth of reporting duties of financial intermediaries to investors, is greater, the smaller the investor's knowledge of and experience in investing is. Information to the client includes, inter alia: investor categorisation; the origin and nature of any interest that the financial intermediary or the persons acting on its behalf have in the service to be provided in order to avoid conflicts of interest; the proposed financial instruments and investment strategies, including whether the financial instrument is intended for professional or retail investors, taking into account the identified target market; the financial intermediary's order execution policy; the protection of the client's assets; the existence (or absence) of any guarantee or equivalent protection fund covering the services to be provided; and the costs involved.
22. May the information be provided verbally to the client?
No. The information about services and/or financial instruments should be provided in writing albeit in standardised form.
23. What costs are covered in the client information duties?
Information on the costs of the service and the financial instrument covers information relating not only to investment services, but also to ancillary services, such as the costs of the investment advisory service (if any), the costs of the financial instrument recommended or sold to the investor and the payment mode, including to third parties. These costs include, for example, custody or management fees.
The information provided should aggregate all costs and charges that do not result from the market risk underlying the instrument or service, in order to enable the client to know the total cost and its impact on return on investment. At the client's request, the information can be categorised by cost typology. Cost information should be provided to the client periodically - at least once a year - during the term of the investment.
24. Are there additional reporting duties for financial intermediaries when the investment service is proposed or provided in conjunction with another service or product, as part of a single package or as a condition for providing a service or product (cross-selling)?
Yes. The financial intermediary must inform the investor of the possibility of purchasing the different components separately and provide separate information on the costs and charges inherent in each component of the package. In addition, it shall provide an adequate description of the different components and how their interaction changes the risks of each one of them, should the risks arising from the services provided collectively be different from the risks arising from each separate component.
25. Can deposits be traded in packages that include other financial instruments (cross-selling)?
For retail investors, the possibility of cross-selling that include deposits is limited and the marketing of deposits associated with the purchase of financial instruments, insurance contracts and other financial savings or investment products that do not continually guarantee the invested capital, is prohibited.
F – RECORDING COMMUNICATIONS WITH INVESTORS26. Can the financial intermediary record communications with the client without giving said prior notice of this circumstance?
No. As regards services of the reception, transmission and execution of client orders, the financial intermediary may not provide investment services or carry out investment activities by telephone to clients without having informed said of the registering or recording of the telephone communications.
27. What kind of electronic communications must be recorded?
Any telephone conversation or electronic communication that may result in transactions - including receiving, transmitting and/or executing client orders - are covered by the recording rules, even though such conversations or communications do not result in transactions or the provision of services relating to orders from clients. In its Q&As
, ESMA clarifies that the term 'electronic communications' encompasses many communication categories, including video conferencing, fax, email, SMS, chat, instant messaging and information exchange via mobile phone applications.
28. Do relevant telephone conversations and electronic communications have to be recorded from start to finish?
According to ESMA's understanding, embodied in the mentioned Q&As
, MiFID II requires the complete recording of telephone conversations and electronic communications. Only with the entire recording is one able to see whether the conversation actually led to a transaction.
29. Can the client require the financial intermediary to access communications recordings? This access includes internal communications occurring at the financial intermediary.
The client may request recordings of communications with the financial intermediary. ESMA understands that this requirement includes internal conversations held between employees or contractors that are related to the client's order.
30. Can financial intermediaries charge clients for requesting recordings of telephone conversations and electronic communications?
The Directive is absent on the issue of fees or other costs when clients request access to recordings of telephone conversations and electronic communications with their financial intermediary. However, ESMA considers that if the intermediary imposes a fee, it should be reasonable and should not impede the client from requesting such information.
G –INFORMATION FOR THE INDUSTRY
The CMVM has been responding in recent months to several issues posed by the industry. You can consult said here:
H – ADDITIONAL INFORMATION