MiFID II and PRIIPs
It may come as a surprise, but the PRIIPs regulation and MiFID II do share important common areas, including disclosure, distribution and product governance requirements. Furthermore, all non-insurance based investment products falling under the scope of the PRIIPs regulation are also affected by MiFID II.
Common regulatory ground between MiFID II and PRIIPs
The methodology for the determination of investment costs under MiFID II is conform with that of the PRIIPs regulation. MiFID II requires that information about all costs and charges relating to both investment and ancillary services (i.e. costs and charges in connection with the investment service and the financial instrument, which are not caused by the occurrence of underlying market risk) are communicated to clients on a regular basis. The PRIIPs regulation stipulates that costs associated with an investment in the PRIIP, comprising both direct and indirect costs to be borne by the retail investor (including one-off and recurring costs) are included in the KID. Consistency between the information required under MiFID II and PRIIPs regulation is thus essential for the retail client, and investment firms should strive for proper coordination of the information processes.
Further agreement between MiFID II and PRIIPs: the target market
The concept of target market is present under both MiFID II and the PRIIPs regulation. The identification of a target market is required under MiFID II regarding the production and marketing of in-house developed financial instruments, and an investment firm is moreover required to sufficiently identify and understand the target market for non-in-house developed financial instruments offered or recommended to retail investors. The target market is an essential part of the review processes required as part of product governance under MiFID II, although it is not explicitly specified that the retail client should obtain information about the same. The identification of a target market is also compulsory under the PRIIPs regulation, where, in contrast to MiFID II, it is explicitly stipulated, that the customer is informed about the target market through its inclusion in the KID. The question remains whether the target market under MiFID II is to be regarded as identical to that under the PRIIPs regulation.
If considering the target market as identical under MiFID II and the PRIIPs regulation, it is of necessity that the processes under the two be duly coordinated, so that for example potential changes in the target market identified during a financial instrument review under MiFID II are appropriately reflected in the latest version of the KID required under the PRIIPs regulation.
The distribution and manufacturing of financial instruments are jointly offered by many financial firms. Since MiFID II stipulates similar requirements for distributors and financial instrument manufacturers, it is worthwhile developing a holistic view regarding the financial firm´s reporting processes, as the management body carries the ultimate responsibility for the truthful reporting under MiFID II.
The coordination among regulatory initiatives is to a certain degree insufficient, and the implementation of MiFID II and MiFIR is likely to further increase complexity.
Taking an isolated view in the implementation of new regulatory projects, although it may seem pragmatic, could lead to inconsistencies in Point-of-Sale connected processes. The crucial point being that clients, at the end of the distribution process, be provided with consistent, as well as regulatory conform, documentation.
Should the rearrangement of distribution processes not lead to stable end-to-end-processes through a consistent coordination of regulations, projects aiming at correcting potential mismatches will need to be implemented. The challenge primarily lies in the synchronization of the content, as well as the respective implementation deadlines, of new regulations.
We are happy to support you in the design and implementation of the required structures and processes, not only with a view to the requirements stipulated for financial instrument manufacturers, but also on the subject of integration of necessary adaptations in relation to investor suitability checks in the distribution processes.
Timeline and recent developments
Important dates in relation to MiFID II/MiFIR include:
22 May 2017: ESMA clarifies traded on a trading venue under MiFID II & MiFIR
31 May 2017: ESMA updates its MiFID II & MiFIR Q&As
2 June 2017: ESMA publishes final report on MiFID II & MiFIR product governance guidelines to safeguard investors
6 June 2017: ESMA updates MiFID II & MIFIR Investor Protection Q&A
19 June 2017: ESMA consults on draft standards for derivatives trading obligation under MiFIR
27 June 2017: ESMA issues final guidelines on trading halts under MiFID II
28 June 2017: ESMA updates co-legislators on MiFID II & MiFIR implementation
29 June 2017: ESMA published a statement updating on its product intervention work on CFDs and binary options
30 June 2017: ESMA provides market size calculations for MiFID II & MiFIR ancillary test
3 July 2017: ESMA provides interim transparency calculations for MiFID II & MiFIR
6 July 2017: ESMA updates market size calculations for MiFID II & MiFIR ancilliary tests
7 July 2017: ESMA published an updated Q&A in relation to MiFID II & MiFIR
11 July 2017: ESMA updates MiFID II/MiFIR Q&A on Investor Protection and Intermediaries
13 July 2017: ESMA publishes a Consultation Paper on guidelines on the assessment of suitability under MiFID II
Latest update: 14.07.2017