The implementation of the European Union's second Markets in Financial Instruments Directive by the European Securities and Markets Authority and national regulators has been a story of shifting goalposts and bad timing on the part of European officials, according to a withering report by the UK's Personal Investment Management & Financial Advice Association.

ESMA - the overarching EU super-regulator that dictates policy to the nations - has called for feedback about the way in which it has handed MiFID II. It refers to its entreaty as a "call for evidence on impact of the inducements and costs and charges disclosure requirements under MiFID II" and PIMFA handed in its response before the deadline of 6th September.

Costs and charges

MiFID II's "costs and charges disclosure" rules require firms to give their clients information about all costs and associated charges in good time before they provide them with this-or-that service. This regime has been one of the most  difficult, time-consuming and expensive parts of MiFID II for firms to plan for and obey and PIMFA does not believe that it has benefited HNW clients. The regime was supposed to let consumers know about all the costs they paid, some of which used to be 'hidden.' Although annual ex-post disclosures have helped HNWs a little, they can still not easily compare the costs of one firm with those of another, thanks in PIMFA's view to the framing of legislation and regulatory guidelines.

In this regard PIMFA contends that:

• Article 50 of EU Delegated Directive 2017/565 is unclear in both its overall intent and in its underlying details regarding the regime.
• ESMA’s questions and answers (a method by which ESMA tells firms what it wants without having to resort to rulemaking) have left some questions unanswered and given rise to further uncertainty in some cases. To make matters worse, ESMA published them just before (or in some cases after) MiFID II took effect.
• The implementation of the EU's Packaged Retail Investment and Insurance-based Products (PRIIPs) regulation alongside MiFID II has resulted in errors and inconsistencies in product data, while ESMA’s Q&A has tried to "introduce elements of the PRIIPs regime in a MiFID II context for which they were not designed" and this has caused immense problems. PIMFA does not want ESMA to create fresh chaos with further rule-changes, at least not in haste.

Ex-ante disclosures

ESMA has written recently: “it is now clear that the cost disclosures may not be done in a general way and have to be specific to a transaction.” Although this is what it thinks now, it has only taken this line since the end of March, some 15 months after MiFID II came into force. PIMFA, which represents many firms that were caught out, takes a dim view.

Moreover, according to the trade body, the stringency that ESMA has suddenly asked for in firms' disclosures is at variance with the Financial Conduct Authority's position. The regulator, it argues, "effectively endorsed the position set out in PIMFA’s guidance by confirming to firms that are providing generic [i.e. not stringent] ex-ante disclosures that they are complying with the rules.”

PIMFA goes on to say that ESMA's call for stringency here has made it more expensive for firms to do business off-line by telephone and post than online.

ITCs

For PIMFA, the most problematic element of the costs-and-charges regime is the calculation/presentation of implicit transaction costs. Firms first became aware of ESMA’s expectationsonly 6 before MiFID II's date of implementation. It argues, therefore, that there was never any realistic prospect of most retail firms complying with the guidelines on time and wants ESMA to withdraw its guideline, which came in the form of 'Q&A 12.' It adds that "the application of the PRIIPs ITC methodology to MiFID business undertaken for segregated retail portfolios is fundamentally wrong and that the guidance provided by Q12 of the ESMA Q&A should be re-thought as a matter of urgency."

Inducements

On a less contentious note, PIMFA states that the inducement provisions of MiFID II were implemented in the UK in such a way as to accommodate obligations introduced by the FCA’s Retail Distribution Review (RDR) in 2012. As a result, British firms are subject to more stringent requirements in relation to inducements than their counterparts elsewhere in the European Union.

Firms that manage portfolios for and advise (independently or otherwise) retail clients in the UK cannot (a) retain for themselves benefits provided by third parties (with the exception of minor non-monetary benefits or MNMBs)  and/or (b) receive third-party benefits in order to rebate them to the relevant clients. Firms that manage portfolios for and independently advise non-UK retail clients and/or professional clients cannot do this either, but they can receive such benefits as long as these are rebated to the relevant clients in accordance with specified conditions. Firms that provide other services (i.e. execution-only services or non-independent advice to non-UK retail clients and/or professional clients) can retain benefits provided by third parties as long as they comply with the conditions specified in Article 24(9) of Directive 2014/65/EU (i.e. MiFID II). However, in the UK, execution-only firms that are categorised as “platform service providers” are also banned from accepting distribution commissions from product providers.

Most PIMFA members do business predominantly with retail clients in the UK, so these additional restrictions ensure that there are very few third-party payments for them to tell their clients about. The one exception to this is where firms receive “legacy” commission arising from product sales that took place before the RDR took effect in 2012 and this is becoming less and less common as time goes on.