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ESMA updates Q&A on inducements

01 April 2021
On 29 March 2021, the European Securities and Markets Authority updated its "questions and answers on MiFID II and MiFIR investor protection and intermediaries topics" in order to provide further clarification and guidance on "inducements".

On 29 March 2021, the European Securities and Markets Authority (the "ESMA") updated its "questions and answers on MiFID II and MiFIR investor protection and intermediaries topics" (ESMA35-43-349) (the "Q&A(s)") in order to provide further clarification and guidance on "inducements".

In particular, the Q&A(s) includes now one new "question and answer" (see paragraph 12, "question and answer" no. 8) concerning the conditions specifying when an inducement could be considered as designed to enhance the quality of the relevant service to the client.

In this regard, the new "question and answer" provides guidance on the application of three important elements contained in Article 11, paragraph 2, letter (a), of Directive (EU) 2017/593, in particular the condition that the inducement is justified by:

(i) the provision of an additional or higher-level service (1); 
(ii) the fact that the service referred to the point sub (i) is addressed to the relevant client (2);
(iii) the proportionality of the service referred to the point sub (i) to the level of inducements received (3).

In any case, ESMA specifies that such elements apply together with the other provisions set out in Article 11, paragraph 2, of Directive (EU) 2017/593, including the provision that an inducement "shall not be considered acceptable if the provision of relevant services to the client is biased or distorted as a result of the fee, commission or non-monetary benefit". 

References

(1) n this regard, l'ESMA specifies: "the reference to ‘additional’ or ‘higher level’ requires that the quality enhancement provided should go beyond aspects of the firm’s organisation or services that are legally required or that can be considered as essential for its functioning. […] For instance, the provision of non-independent advice on and access to a wide range of suitable financial instruments, including an appropriate number of instruments from non-affiliated third-party providers, can be considered as an ‘additional’ or ‘higher level’ service because a firm providing non-independent advice is not otherwise legally required to assess a sufficient range of instruments from different providers. […] Regarding essential aspects of the firm’s organisation or service, which therefore should not be considered as ‘additional’ or higher level’, examples would be common call-centres or general publicly available websites. ESMA considers that aspects such as these should not qualify as ‘additional’ or ‘higher level’ since the firm’s organisation or service cannot do without these aspects".

(2) In this regard, l'ESMA specifies: "services that can be considered as ‘additional’ or ‘higher level’ in theory, could still not be a quality enhancement for the client in question. Therefore, the ‘additional’ or ‘higher-level’ service should be provided to the relevant client. For instance, the provision of advice about the suggested optimal asset allocation of the client, not relating to specific financial instruments but to asset classes in general, might not always be relevant for clients receiving the services of reception and transmission and/or execution of orders without investment advice that prefer taking their own investment decisions. Equally, value-added tools to help clients take investment decisions that in theory might be considered as ‘additional’ or ‘higher level’, might not always be relevant for clients receiving investment advice that prefer relying on the investment advice provided by the firm to take their investment decisions with no need to use any additional tool. […] ESMA considers, as a good practice, that the quality enhancement can also be provided to a relevant segment of clients, provided that this segment is sufficiently homogeneous, i.e. the quality enhancements provided should be relevant for all clients that belong to this segment. When defining these client segments, factors to take into account include for example the investment or ancillary service provided, the distribution channel used, and the level of inducements received in connection with the service provided to the client. Importantly, a firm that provides different investment services and has different client segments should differentiate the quality enhancements according to the different client segments in its inducements policy".

(3) "The third element is proportionality. Services that can be considered as ‘additional’ or ‘higherlevel’, and that are provided to the relevant client, should not be regarded as a quality enhancement if the value-added is not proportional to the level of inducements received. It is important to underline that it is the level of inducements received by the firm that is of relevance, not the client’s investment amount. ESMA emphasises that this is equally relevant for the examples given in Article 11(2)(a) of the MiFID II Delegated Directive, firms should thus always assess the proportionality of the inducements received".

Authors: Luca Lo Po' and Claudio Saba.

Further Reading

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