The German Federal Ministry for Economic Affairs and Energy published on 7 November 2018 a draft bill amending the current rules set forth for investment brokers and advisers which are exempted from the MiFID II requirements (“free agents”). Based on Article 3 para. 1 of MiFID II, Member States may choose not to apply MiFID II to any persons for whom they are the home Member State, provided that the activities of those persons are authorized and regulated at national level and those persons:
(a) are not allowed to hold client funds or client securities, and;
(b) are not allowed to provide any investment service except the reception and transmission of orders in transferable securities and units in collective investment undertakings and/or the provision of investment advice in relation to such financial instruments, and;
(c) in the course of providing that service, are allowed to transmit orders only to certain counterparties (e.g. authorized investment firms, credit institutions, branches of investment firms or of credit institutions authorized in a third country with comparably stringent prudential rules, collective investment undertakings authorized to market units to the public or investment companies with fixed capital, if their securities are listed or dealt on a regulated market in a Member State).
Agents falling under the aforementioned exemption are generally exempted from the MiFID II regime and only regulated by Section 34f of the German Industrial Code (Gewerbeordnung) and the Financial Investment Mediation Regulation (Finanzanlagenvermittlungsverordnung – FinVermV). Nevertheless, Article 3 para. 2 of MiFID II provides that the Member States shall submit free agents to certain requirements of MiFID II.
The draft bill therefore requires free agents, among other things, to provide information on all costs and associated charges relating to both the cost of investment broking or advice and the cost of the financial instrument brokered or recommended, including any third-party payments. With regard to product governance, free agents should be allowed to distribute the financial assets only within the target market. Concerning inducements the draft provides – in contrast to the MiFID II scheme – that free agents have to ensure that received or paid inducements must not be detrimental to the quality of the investment broking or advice and shall not affect the agent's obligation to act honestly, fairly and professionally in the best interests of the investor. The requirement that the received or paid inducement must enhance the quality of the respective investment service provided to the respective client, which is mandatory for MiFID firms, is however not applicable for free agents. Additionally, free agents must comply with the telephone and electronic recording obligations of MiFID II. Free agents have to tape all telephone or electronic conversations related to broking and advice on financial investments. The records must include those parts of the telephone conversations or electronic communications that relate to the service offered, the risks, the opportunities for returns or the design of certain financial assets or classes.
In the current draft no transitional rule is included. If this remains, the new regulation would apply immediately after entry into force.