On 3 February 2020, ESMA published its Final Report with Technical Advice to the Commission on the effects of product intervention measures (Final Report).
In the Final Report, ESMA advises the Commission to extend the scope of its (and national regulators') power under MiFID to restrict or prohibit the sale, marketing or distribution of specified instruments by MiFID firms (Product Intervention Measure) to include UCITS managers and AIFMs.
MiFID Product Intervention Measure
Since the introduction of MiFID II/MiFIR in 2018, ESMA and EU national regulators have the power to exercise Product Intervention Measures to temporarily prohibit or restrict the marketing, distribution or sale of certain financial instruments by MiFID firms. ESMA exercised this power with respect to contracts for differences (CFDs) and binary options on three consecutive occasions between July 2018 and July 2019, following which most national EU regulators followed suit and introduced similar national product intervention measures. The Central Bank did so with effect from 2 July 2019, in relation to binary options, and from 1 August 2019, in relation CFDs, when it published measures either prohibiting (in the case of binary options) or restricting (in the case of CFDs) the sale, marketing and distribution of these instruments by MiFID firms to retail investors.
Extension of MiFID Product Intervention Measures to UCITS managers and AIFMs
UCITS managers and AIFMs (FMCs) are authorised and regulated under the UCITS Directive and AIFMD, respectively. FMCs are outside the scope of MiFID and therefore the Product Intervention Measures introduced first by ESMA and then by the Central Bank, do not apply to FMCs. This is the case irrespective of whether they have a top-up licence to carry out additional MiFID services as such licence would be granted pursuant to the terms of their governing legislation (either the UCITS Directive or AIFMD, neither of which provide for the application of MiFID-style Product Intervention Measures).
ESMA considers that this could reduce the impact of any Product Intervention Measures it or national regulators introduce to restrict or prohibit the sale, marketing or distribution of UCITS or AIF shares because such measures would limit MiFID firms (but not FMCs which are out of scope of MiFID).
ESMA also cites the possibility of regulatory arbitrage between FMCs with a MiFID "top-up" licence and firms authorised and regulated under the MiFID regime. Product Intervention Measures introduced in respect of specific instruments would limit MiFID firms but not FMCs with permission to carry out MiFID services/activities pursuant to an authorisation under the UCITS Directive or AIFMD.
ESMA believes these concerns may be addressed by giving it (and national regulators) a 'common toolkit across entities and instruments' which would allow for a 'level-playing field between MiFID entities and [FMCs]'. Specifically, ESMA recommends to the Commission that it, along with national regulators, should have the power to apply restrictions/prohibitions directly to FMCs.
The Commission will consider ESMA's request and prepare a report for consideration by the Council and the European Parliament. While there is merit in the basis for ESMA's recommendation, it will nevertheless be imperative, from a fund management perspective, that any amendments made on foot of those recommendations take account of the fundamental differences between the UCITS, AIFMD and MiFID regimes and the activities of the entities they govern. The scope of MiFID firms' activities is far broader and more diversified, in particular in comparison to that of a UCITS manager who would be severely impacted by a Product Intervention Measure such as that cited by ESMA in respect of the sale of UCITS shares. FMCs (without a MiFID "top-up" licence) engage in the sale of shares in UCITS and AIFs and not the instruments which may be held in the UCITS or AIF's portfolio. Recognition of this and how it distinguishes investment funds from MiFID firms engaged in the sale of instruments to be held directly by investors, not least from a risk perspective, will be of paramount importance for FMCs when it comes to any response to ESMA's request for an extension of its powers under the MiFID regime.