On 17 December 2013 the Financial Markets Amendment Decree 2014 (the "Amendment Decree 2014"), containing amendments to a number of existing decrees, was finally published. Among other things, the Amendment Decree 2014 imposes the long-announced ban on inducements for investment firms. In its final form, the inducement ban deviates in two respects from the draft version submitted by the Dutch Minister of Finance to the market for consultation on 3 April of this year. Firstly, the ban is limited to investment services to non-professional clients. Secondly, the transitional provisions differ from those originally proposed. This newsletter will discuss the details of the definitive inducement ban, which will enter into force on 1 January 2014.
Table of contents:
- Which investment firms / territorial scope?
- Which investment services and ancillary services?
- Which financial instruments?
- Which fees/inducements?
- Which clients?
Scope of the inducement ban
The inducement ban for investment firms is set out in the Market Conduct Supervision (Financial Institutions) Decree (Besluit Gedragstoezicht financiële ondernemingen Wft). It regards further substantiation of the contents of the general duty of investment firms, to act honestly, fairly and professionally in accordance with the best interests of the client, when providing investment or ancillary services.
The inducement ban has a broad scope. The Amendment Decree 2014 provides that an investment firm may not pay or receive, directly or indirectly, any fee in connection with the provision of an investment service or an ancillary service to a non-professional client. Only a direct payment by the client to the investment firm for the investment service or ancillary service performed is permitted. In other words, the point of departure is that the non-professional client himself pays directly for the services he has received.
Which investment firms / territorial scope
The inducement ban applies to virtually all investment firms that are active on the Dutch financial market. There is only one exception: EEA-authorised investment firms providing services in the Netherlands under a European passport and on a cross-border basis (i.e. without having a Dutch branch office). All other investment firms serving the Dutch market are subject to the ban, irrespective of whether they provide their services based on a Dutch licence or on an exception to or exemption from the requirement to obtain such a licence, or through a branch office in the Netherlands on the basis of a European passport.
Which investment services and ancillary services?
The inducement ban applies with respect to the following investment services:
- receiving, passing on and/or executing orders (execution-only services);
- providing investment advice; and
- individual portfolio management.
The ban does not apply to investment services consisting of the underwriting of financial instruments and/or the placing of financial instruments whether on or without a firm commitment basis, but only if the following conditions are met:
in the case of placement services, the client is informed in a comprehensive and understandable manner prior to the provision of the relevant service of the existence, nature and amount of the fee or, where the amount cannot be ascertained, the method of calculating that amount;
the payment of the fee enhances the quality of the relevant service to the client; and
the payment of the fee does not impair compliance with the investment firm's duty to act in the client's best interests.
The above conditions resemble the current rules on inducements based on the Markets in Financial Instruments Directive (2004/39/EC, "MiFID"), which are also known as the "inducement norm".
According to the Dutch Minister of Finance, the reason for excluding placement services from the inducement ban is that these services are rendered in the context of the primary market (i.e. when issuing financial instruments), and not the secondary market. In the Minister's view, the fees received by the investment firm in this context constitute remuneration for the preparation of the prospectus and research reports, the structuring of transactions and the taking over of risks. These fees are excluded from the ban if they do not relate to investment services to non-professional clients in the secondary market.
Which financial instruments?
The inducement ban will apply to all types of financial instruments and will not be limited to participations in investment institutions.
The ban will cover all types of inducements paid or received by an investment firm. The broad definition of an "inducement" in the Dutch Financial Supervision Act (Wet op het financieel toezicht, "DFSA") will remain unchanged. According to that definition, an "inducement" is a fee or remuneration, in any form, for the provision of an investment service or an ancillary service. Examples are distribution fees, return commission and referral/introduction fees in relation to an investment service.
In contrast to the consultation version, the scope of the definitive Amendment Decree is limited to the provision of investment services to non-professional clients within the meaning of MiFID.
For the provision of investment services to professional clients, the abovementioned inducement norm will continue to apply. The inducement norm will also continue to apply to the provision of services to eligible counterparties, except where execution-only services are concerned. As is now the case, execution-only services provided to eligible counterparties will not be subject to any inducement rules.
The general exceptions to the inducement ban are very limited. The ban will not apply to:
inducements which are paid directly by the client or by a person acting in the name of the client;
business gifts not exceeding EUR 100 on an annual basis; and
inducements that enable or are necessary for the provision of the relevant service. This category must be interpreted very strictly. Examples of fees that fall within this category are legal fees, settlement fees and custody fees.
The inducement ban is based on Article 19 of MiFID which requires investment firms to act honestly, fairly and professionally in accordance with the best interests of their clients when providing investment services and/or, where appropriate, ancillary services to such clients. The Dutch inducement ban for investment firms goes substantially further than the current inducement rules based on Article 26 of the MiFID Implementing Directive (2006/73/EC).
In the discussions regarding the revision of MiFID (i.e. MIFID II), the Dutch Minister of Finance indicated that he would strive for the implementation at European level of a ban on inducements for investment firms. As the introduction of such a total ban at European level is currently not feasible in the short term, the Minister decided to take action at national level by issuing the Amendment Decree.
The Minister bases the changes to the inducement rules on Article 4(1) of the MiFID Implementing Directive. Pursuant to this provision, EU Member States may retain or impose requirements additional to those in the MiFID Implementing Directive only in those exceptional cases where such requirements are objectively justified and proportionate so as to address specific risks to investor protection or to market integrity that are not adequately addressed by the directive, and provided that one of the following conditions is met:
the specific risks addressed by the requirements are of particular importance in the circumstances of the market structure of that Member State;
the requirement addresses risks or issues that emerge or become evident after the date of application of the MiFID Implementing Directive and that are not otherwise regulated by or under Community measures.
The Minister believes, in short, that that the current rules for inducements provided for in Article 26 of the MiFID Implementing Directive have proven to be inadequate and are insufficiently attuned to the specific circumstances of the market structure in the Netherlands. According to the Minister, Article 4 of the Implementing Directive therefore authorises him to impose more far-reaching measures in the form of an inducement ban at national level.
Pursuant to Article 4, the Netherlands is required to notify the European Commission of the Dutch inducement ban and explain the reasons for it. The Minister did this on 28 November 2013.
The inducement ban will take effect on 1 January 2014. This means that the ban will apply to the provision of investment services or ancillary services from that date.
The transitional rules in the definitive Amendment Decree are, however, substantially different from those in the consultation version. The Decree establishes two different transitional regimes flows with respect to existing positions in financial instruments:
- For the provision of investment services or ancillary services with respect to transactions in financial instruments other than participations in open-end investment institutions that were carried out before 1 January 2014, the "old" inducement rules (i.e. the abovementioned inducement norm) will continue to apply. This regime will therefore apply to e.g. structured products.
For the provision of investment services or ancillary services with respect to transactions in participations in open-end investment institutions, the rule is that inducements received or paid until 1 January 2015 are permitted provided that:
- the inducements are passed on in full to the client; and
- the abovementioned inducement norm is observed