Markets in Financial Instruments Directive (MiFID) Review
The ESBG gives high priority to investor protection. All investors should be able to have access to the best possible advice. The quality of advice provided to a client is not dependent, however, on whether or not the adviser accepts inducements.
Updated: May 2016
ESBG considers that the outcome of the legislative process on MiFID II is clear: the legislators decided to give credit institutions a choice on their remuneration model. They can keep their continental model where the infrastructure is financed by inducements, or decide to provide independent advice and remunerate the advisor with client fees. However, ESBG is concerned that level 2 may threaten this decision as it may inappropriately restrict the number of inducements that respect the criteria of "quality enhancing" in such a way that it would jeopardise the whole inducement model and would prevent institutions from providing the service that they used to provide to their clients. In other words, credit institutions should have a real choice when considering whether to provide independent or non-independent advice, and not between a direct ban model and an indirect ban model. It should be explicitly clear that, besides the access to a wider product range or the provision of advice on an ongoing basis, the access to - and support of - a wide distribution net should be recognised as a relevant quality enhancement criterion in itself.
It is paramount that the fact legislators decided to preserve the existing Continental model where investment advice infrastructures are financed by inducements received from third-parties is acknowledged. A ban on inducements would have a direct detrimental effect for the retail investor, as has been witnessed in the UK following the implementation of the Retail Distribution Review fully banning inducements. Most retail banks no longer offer basic investment advice; instead, they offer private banking services accessible to a small share of the population. MiFID level 2 should not create a situation where it would go against the spirit of MiFID II by overly-restricting the continental model of remuneration until it struggles to exist. In this context, special attention should be paid to the content of the delegated acts that the European Commission will adopt.
The Markets in Financial Instruments Directive Review was the occasion to tighten the rules protecting retail investors when seeking advice from an advisor. In particular, it introduces the concept of independent and non-independent advice, depending in particular on the remuneration model. There was an underlying question of the legitimacy of the inducement model where advisors are remunerated by the manufacturers of the investment products throughout the discussions within the European Parliament and the Council. Ultimately, the presumption that with inducements come conflicts of interest has led to a ban on inducements in the case of portfolio management, but the current continental model of remunerating financial advice through inducements was ultimately conserved. The legislators acknowledged that the possible conflict of interest it creates can be managed while still allowing for high-quality advice and because of the enormous drawbacks that would result from a full ban as is witnessed in the United Kingdom.
Following the adoption of the final version of MiFID by the European Parliament on 15 April 2014, the European Securities and Markets Authority (ESMA) issued technical advice to the European Commission for possible delegated acts in December 2014. In this technical advice, ESMA defines the inducements that can qualify as enhancing the quality of the advice, the only ones allowed under MiFID II. Since then, the European Commission has been publishing its delegated acts, broadly in line with ESMA's advice.
MiFID (Directive 2004/39/EC) replaces the Investment Services Directive (ISD) which was adopted in 1993. It was agreed unanimously by the Member States and by a large majority in the European Parliament, and came into force in 2008. The Review of this text has just been agreed upon and its implementation is foreseen as of 2016.
MiFID is a cornerstone of the EU's regulation of financial markets. It seeks to improve the competitiveness of EU financial markets by creating a single market for investment services and activities, and ensuring a high degree of harmonised protection for investors in financial instruments, such as shares, bonds, derivatives and various structured products. It has brought greater competition across Europe in the provision of services to investors and between trading venues.