Draft EU Rules on Investor Protection under MiFID II Adopted by the European Commission

The European Commission adopted a Delegated Directive on aspects of the revised Markets in Financial Instruments Directive covering rules for the safeguarding of client financial instruments and funds, product governance requirements and inducements. 

The rules for the safeguarding of client financial instruments and funds, include, amongst others: (i) a requirement to appoint one individual with overall responsibility for safeguarding client instruments and funds; (ii) a requirement to consider and demonstrate the appropriateness of concluding title transfer collateral arrangements with non-retail clients; (iii) due diligence requirements when financial instruments held on behalf of a client are deposited with a third party; (iv) rules on using more than one third party when depositing client instruments; (v) restrictions on the funds deposited with group entities to 20 percent of all funds; and (vi) requirements on the use of client financial instruments, including obtaining the client's prior express consent. 

The product governance rules apply to firms that create, develop and issue products (i.e., manufacturers) and to firms that distribute products (i.e., distributors). The rules will apply to all products sold on the primary and secondary markets. A proportionate approach is to be adopted, depending on the complexity of the product, including the nature of the instrument, service and the target market. For complex products, including instruments subject to bail-in, the target market will need to be identified in more detail than required for simpler products. 

Under MiFID II, the ability of firms to receive or pay inducements is to be more restricted more than under the existing MiFID regime. The adopted Delegated Directive details further the conditions that must be met for a firm to receive or pay an inducement. It requires firms to hold evidence that any fees, commissions or non-monetary benefits paid or received by the firm are designed to enhance the quality of the relevant service to the client. Finally, it imposes disclosure requirements on firms that do receive or pay inducements. 

The adopted Delegated Directive is subject to approval by the European Parliament and the Council of the European Union before it can enter into force. As a directive, EU Member States will need to transpose the rules in the adopted Delegated Directive into national laws. It is proposed that Member States should apply those laws from the date of application of MiFID II, which is currently January 3, 2017. However, a legislative proposal published earlier this year proposes to postpone the application date until January 2018.  

View the draft Delegated Directive.