The EU’s MiFID 2: Communicating with Clients

The EU’s Markets in Financial Instruments Directive reform package, comprising a new Markets in Financial Instruments Directive and a new Markets in Financial Instruments Regulation — collectively known as MiFID 2 — will introduce significant changes for investment firms and other financial markets participants when it is implemented by EU member states starting in January 2017 (see Special Report by Emma Radmore and Juan Jose Manchado, of Dentons UKMEA LLP, London, at WSLR, October 2014, page 3).

This article, the first in a planned series by Dentons UKMEA LLP focussing on specific elements of MiFID 2, examines changes MiFID 2 will make to the way in which firms deal at a high, overall level with their customers and clients, and what firms will have to do to make sure they comply with the new standards.

It also considers what changes the U.K. Financial Conduct Authority (FCA) will have to make to its rules to implement MiFID 2.

What’s Wrong with MiFID 1?

Recital 86 of the MiFID 2 Directive recognises a key objective of MiFID 2 is to protect investors, and says measures to do so should be proportionate to each category of investor — that is, retail, professional and counterparties (ECPs). But it also makes it clear that the principles of acting honestly, fairly and professionally and the obligation to be fair, clear and not misleading apply to the relationship with any client. While firms should in reality always have applied these standards, there will now be a greater onus on evidencing that they have done so in communications with non-retail customers.

Chapter 2 of FCA’s Conduct of Business Sourcebook (COBS) is currently largely disapplied 1) to ECP business and 2) to all non-MiFID business with professional clients. FCA will need to make some changes to implement MiFID 2.

It will be interesting to see whether FCA continues to distinguish between MiFID and non-MiFID business, where by doing so it can create a lighter compliance regime for non-retail clients. Even if it does, the changes to client categorisation discussed below, and to some extent the increase in scope of MiFID business, would be likely to mean firms would need to comply with the higher standards for a larger proportion of business.

Overall Standards

Information — Generally

Several articles of MiFID 2 apply to the overall standards for communicating with clients.

Recital 103 of MiFID 2 states that ECPs should be regarded as acting as clients, but Recital 104 accepts the onus of conduct of business rules should be on those that are in most need of protection. That said, it notes the financial crisis has shown limits in non-retail clients’ ability to appreciate the risks of their investments, and therefore says there is a need for better calibration of requirements that apply to different types of clients. As a result, it says there is a need to extend some information and reporting requirements to cover ECPs. It specifically notes the need for this in respect of client money and assets and reporting of complex instruments and transactions. This recital also says that municipalities and local public authorities must not be treated as per se professionals or ECPs, but that they may ask to opt up to professional status.

Article 24 requires, among other things, that:

  • firms act honestly, fairly and professionally in accordance with the best interests of clients;
  • all information, including marketing communications, addressed to clients or potential clients should be fair, clear and not misleading, and marketing communications should be clearly identifiable as such;
  • appropriate information should be provided in good time to clients or potential clients with regard to the investment firm and its services, the financial instruments and proposed investment strategies, execution venues and all costs and related charges; and
  • required information be presented in a comprehensible form such that clients or potential clients are reasonably able to understand the nature and risks of the investment service and specific type of instrument being offered, so they can take investment decisions on an informed basis. This information can be provided in a standardised format.

It allows the European Commission to make delegated acts, including on the conditions with which information must comply to be fair, clear and not misleading, and details on content and format of information to clients on key matters. One factor the Commission should consider when making delegated acts is the retail or professional nature of the clients or, for the information to be provided and its form, whether they are ECPs.

Client’s Best Interests and Exclusion of Liability

In terms of overall requirements, and what FCA currently requires, Chapter 2.1 of COBS states:

  • a firm must act honestly, fairly and professionally in accordance with the best interests of its client (the "client’s best interests" rule);
  • a firm must not, in any communication relating to designated investment business, seek to 1) exclude or restrict, or 2) rely on any exclusion or restriction of, any duty or liability it may have to a client under the regulatory system; and
  • in order to comply with the client’s best interests rule, a firm should not, in any communication to a retail client relating to designated investment business, 1) seek to exclude or restrict, or 2) rely on any exclusion or restriction of, any duty or liability it may have to a client other than under the regulatory system, unless it is honest, fair and professional for it to do so.

Information for Clients

COBS requires a firm to provide appropriate information in a comprehensible form to a client (for all retail clients and all MiFID business for clients, but not for ECPs) about:

  • the firm and its services;
  • designated investments and proposed investment strategies, including appropriate guidance on and warnings of the risks associated with investments in those designated investments or in respect of particular investment strategies;
  • execution venues; and
  • costs and associated charges

so that the client is reasonably able to understand the nature and risks of the service and of the specific type of designated investment that is being offered and, consequently, to take investment decisions on an informed basis. Firms can provide this information in a standardised format.

Clear, Fair and Not Misleading Information

COBS 4 deals primarily with "financial promotions" but also applies overarching standards to all communications. It requires a firm to ensure that a communication or a financial promotion is fair, clear and not misleading. It excludes from the scope of this rule certain financial promotions, including non-retail financial promotions and other "excluded" promotions (that is, those which a person not authorised under the Financial Services and Markets Act 2000 (FSMA) could legally make). COBS stipulates that the fair, clear and not misleading rule applies in a way that is appropriate and proportionate considering the means of communication and the information the communication is intended to convey. So, it says, a communication addressed to a professional client may not need to include the same information, or be presented in the same way, as a communication addressed to a retail client. More detailed requirements apply to communications which are financial promotions, which must also be clearly identifiable as such (although, again, certain promotions are excluded from this requirement).

COBS 4 then addresses requirements for communications with retail clients by stating that a firm must ensure that information:

  • includes the name of the firm;
  • is accurate and in particular does not emphasise any potential benefits of relevant business or a relevant investment without also giving a fair and prominent indication of any relevant risks;
  • is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received; and
  • does not disguise, diminish or obscure important items, statements or warnings.

It allows firms some leeway. In deciding whether, and how, to communicate information to a particular target audience, a firm should consider the nature of the product or business, the risks involved, the client’s commitment, the likely information needs of the average recipient, and the role of the information in the sales process.

When communicating information, COBS states a firm should consider whether omission of any relevant fact will result in information being insufficient, unclear, unfair or misleading. It also says firms must ensure that promotions are consistent with other information provided to retail clients.

ESMA’s Technical Advice

The European Securities and Markets Authority (ESMA) noted in its consultation that led to its final technical advice to the European Commission on MiFID 2, published on December 19, 2014, that MiFID 1 also set the fair, clear and not misleading test and required marketing communications to be clearly identifiable as such. The key difference is that MiFID 1 imposes these conditions only for retail clients.

In providing its technical advice, ESMA considered the intent behind the change, and has now advised that:

  • Information addressed to retail or potential retail clients:
    • must give a fair and prominent indication of any relevant risks when referencing any potential benefits of an investment service or financial instrument;
    • must use a font size in the indication of relevant risks that is at least equal to the predominant font size used throughout the information provided, as well as a layout that ensures prominence of the indication;
    • must be consistently presented throughout all documents the client receives in one language, unless the client has agreed to receive information in different languages; and
    • must be up to date and relevant to the method of communication used.
  • Information addressed to professional or potential professional clients, however:
    • must not reference any potential benefits of an investment service or financial instrument without also giving a fair and prominent indication of any relevant risks;
    • must not disguise, diminish or obscure important items, statements or warnings; and
    • must be accurate and up to date, and relevant to the method of communication used.

As for ECPs, ESMA says its advice does not apply to communications with ECPs, but notes MiFID 2 requires all communications with ECPs to be fair, clear and not misleading.

This is a good example of where the ESMA advice is confusing. Read literally, it does not apply the requirements for information to professional clients to communications with retail clients. In reality, though, this is because Article 27 of the MiFID 1 Implementing Directive, which is the basis for the COBS rules above, already requires this for retail clients, and ESMA does not intend this to change.

Likely FCA Rule Changes

FCA will need to make some fundamental decisions.

On the one hand, it will need to amend some of its COBS rules, which it currently disapplies to non-retail communications, to apply to all communications. On the other hand, it will also need to decide, more fundamentally, whether to keep its current distinction between MiFID and non-MiFID business, which has allowed it to apply a lighter touch to business which falls under COBS but not under MiFID.

When making its decisions and its rule changes, it must also bear in mind the changing scope of MiFID 2 and the changes to client categorisation. Some business which is currently regulated by FSMA but is not MiFID 1 business will be within the scope of MiFID 2 — this will be addressed in a later article in this series — and therefore FCA will not have discretion to disapply rules. The changes to the client categorisation rules that MiFID 2 will bring (discussed below) will mean some clients who are per se professional clients under MiFID 1 will be retail clients under MiFID 2.

Client Categorisation

The main change MiFID 2 makes is to stress that municipalities and local public authorities are not ECPs, nor are they automatically (per se) professional clients. Firms can opt these clients up from retail to professional status. To do so, however, requires the agreement of the client.

Also, MiFID 2 has introduced the possibility for EU member states to adopt specific criteria for assessing the expertise and knowledge of these bodies, which can be alternative or additional to the criteria used for other clients who are opting up. So, in future, it may not be so easy for firms to treat these entities as professional clients or ECPs.

Client Agreements

Closely related, but separate, to the overall information requirements discussed above are the rules on client agreements.

MiFID 2 requires (as did MiFID 1) that each investment firm keeps a record including the document or documents agreed between the firm and the client that set out the rights and obligations of the parties, and the other terms on which the firm will provide services to the client. The MiFID 1 Implementing Directive required firms to enter into a basic written agreement with any new retail client, saying the agreement should set out the essential rights and obligations of the firm and the client.

ESMA suggested to require a written (or equivalent) agreement between firms and their professional clients. Its technical advice confirms this: saying that firms providing any new investment service, or the ancillary service of safekeeping and administration of financial instruments, to professional clients should enter into such an agreement. However, if the firm is providing investment advice, the obligation will apply only where the client receives a periodic assessment of suitability of the instruments the firm recommends to it. The advice then clarifies that firms should enter into a written agreement with retail clients when providing investment advice (except where it does not provide a periodic suitability assessment) or safekeeping and administration. But this is additional to the obligations firms have towards retail clients under the MiFID 1 Implementing Directive.

The advice clarifies the written basic agreement should include:

  • the nature and extent of any investment advice services to be provided;
  • if there is portfolio management, the types of financial instrument and the types of transactions in which the firm may deal for the client, and any in which it cannot; and
  • the main features of any custody services that will be provided.

ESMA states it wants to achieve a common minimum harmonisation for client agreements.

Changes to COBS

COBS 6 sets out the detailed rules for information that firms must communicate to clients. The chapter is detailed, and not only tracks the current MiFID requirements but also represents the U.K.’s main "gold plating" of MiFID 1, as it includes the requirements firms providing investment advice to clients must fulfil under the U.K. Retail Distribution Review. We will cover investment advice, disclosures and costs and charges in a separate article.

Chapter 8 of COBS addresses the need for a client agreement. This chapter applies to a firm in relation to designated investment business carried on for:

  • a retail client, and
  • in relation to MiFID or equivalent third country business, a professional client.

In practice, however, its detailed rules apply only to retail clients, in line with the current MiFID requirements. If a firm carries on designated investment business, other than advising on investments, with or for a new retail client, the firm must enter into a written basic agreement with the client setting out the essential rights and obligations of the firm and the client.

COBS 8 says the firm must provide that client with 1) the terms of any agreement relating to designated investment business or ancillary services, and 2) the information about the firm and its services relating to that agreement or to those services required by COBS 6, including information on communications, conflicts of interest and authorised status. It must do this in good time before a retail client is bound by the agreement or before the provision of those services, whichever is the earlier. It also lays down requirements on medium of communication and record keeping requirements. It clarifies that a firm can incorporate the rights and duties of the parties into an agreement by referring to other documents or legal texts, and reminds firms to be aware of other obligations in the FCA Handbook of Rules and Guidance which may be relevant. These include the fair, clear and not misleading rule, the rules on disclosure of information to a client before providing services and the rules on distance communications.

On the whole, most firms already provide clients with written agreements that cover what ESMA suggests, and more. However, this does not mean they will not need to build into their MiFID 2 preparations an overall review of all customer communications, including client agreements.


The attention the EU legislators and ESMA have given to what should be a straightforward, largely commonsense topic suggests the time firms will need to set aside to ensure their MiFID 2 compliance.

While, for U.K. firms, the changes to FCA rules may not seem significant (depending on whether FCA makes the minimum change to implement MiFID 2 or makes broader changes for greater consistency between types of firm, client and service), the devil is likely to be in the detail.

Firms should take the opportunity to review their client agreements and how they communicate required information. The checks they carry out in doing so should help them comply with the more detailed changes that MiFID 2 implementation and changes elsewhere in FCA rules will bring.

This article first appeared in the February 2015 edition of Bloomburg BNA. Written by Emma Radmore in Dentons' London office.

The text of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU is available at

The text of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 is available at

The text of ESMA’s December 2014 final technical advice on MiFID 2 is available at