Financial Services Regulation |  Oct 26, 2016

ESMA – Q&A on investor protection under MiFID II

Ahead of the deadline for the member states to transpose MIFID II into national legislation which is now set for 3 July 2017 deadline for the Markets in Financial Instruments Directive II (“MiFID II”), the European Securities and Markets Authority (“ESMA”) published a Questions and Answers document (Q&As) with the aim of promoting common supervisory approaches and practices in the application of MiFID by providing guidance with respect to the following investor protection topics:

Best execution

When executing orders, firms must take all reasonable steps (rather than sufficient steps) to obtain the best possible results on a consistent basis when executing client orders.

Firms are also required to check the fairness of the prices proposed to the client when executing orders or decisions to deal in Over the Counter Products. In order for firms to justify their prices, they must not only take account of external market data and external verifiable reference prices, but must also ensure that such price checks are carried out on a systematic basis.

Recording telephone conversations and electronic communications

Firms are required to put in place any arrangements to record any internal telephone calls or electronic communication relating to the handling of any orders and transactions. These records shall give evidence to prove the terms of any orders given by clients and its correspondence executed by the investment firms, and to detect any behavior of market abuse.

The MiFID II provides that firms are required to retain their records for five years, or, if requested by the competent authorities, seven years. Recordings may also be accessed by clients.

Record keeping

Any copies of records provided by the firm must be provided in an unencrypted form so that they can be easily analysed when requested by the client, competent authority, or other competent third party.

Investment advice on an independent basis

Where such a firm routinely recommends its own products or appears to have a systematic bias in advising its clients, the firm is expected to carry out internal assessments to determine the effects, if any, on clients’ interests.

Underwriting and placement of a financial instrument

Investment firms which provide advice on corporate finance strategy and also provide service of underwriting or placing of financial instruments must have arrangements to inform the client of various financing alternatives available within the firm, and those not offered by the firm.

Inducements (research)

Where a firm is using a research payment account, the research budget can be set for a group of client portfolios or accounts which have similar investment objectives and research needs. A firm should be able to demonstrate its approach to setting a budget for a given group of client accounts and that it is consistent with using the budget in the best interests of its clients.

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