What is changing under MiFID II?
The answer to this question will depend on the category of client to which the communication is to be made. The high-level MiFID I requirement to ensure that all communications addressed to clients or potential clients, including marketing materials, are fair, clear and not misleading, and to ensure that marketing communications are identifiable as such, will remain under MiFID II. However, the detailed rules will change very significantly, particularly when communicating with professional clients. These changes will need to be implemented at the same time as conducting full scale product governance reviews and inserting the many additional disclosures required under MiFID II on matters such as costs and charges, which will be addressed in future alerts.
Thankfully the application of the PRIIPs Regulation will be delayed by one year, aligning its commencement with the entry into force of MiFID II so that firms will not need to comply until January 2018, rather than January 2017. It should be possible, therefore, to have a single comprehensive regulatory review of marketing and other communications, rather than taking it in two stages.
Key changes for communications addressed to retail clients
Firms will be required to comply with a few additional requirements (set out in the near-final Level 2 measures), including requirements to:
- always give a fair and prominent indication of any relevant risks when referencing any potential benefits of a service or financial instrument. Under MiFID I an indication of risks is only required where potential benefits are emphasised;
- ensure font size of risk warnings is at least as prominent as the predominant font in the communication and the layout ensures such prominence;
- ensure that information is presented in the same language as all other information to that client, unless the client has requested otherwise; and
- ensure that future performance information is based on performance scenarios in different positive and negative market conditions and reflects the nature and risks of the specific types of instruments included in the analysis.
Key changes for communications addressed to professional clients
Essentially, when communicating with professional clients the rules will become much more prescriptive and firms will be required to comply with the detailed requirements applicable to retail clients (set out in the near-final Level 2 measures), including, in addition to the points mentioned above, specific rules on:
- the analysis and presentation of comparative information;
- the provision of past performance information on a financial instrument, financial index or investment service (such as ensuring it is not the most prominent feature of the communication, providing information for at least 5 years (or the shorter period since launch) in complete 12 month periods, and giving prescribed warnings and disclosures, including in particular the effect of commissions, fees and other charges, where gross performance is stated);
- the provision of simulated past performance (including the need to base it on actual past performance of one or more financial instruments or indices which are substantially the same as those underlying the relevant instrument and apply the past performance rules to that underlying data, as well as giving prescribed warnings);
- the provision of future performance information (such as not basing it on simulated past performance, disclosing the effect of commissions, fees and other charges on gross performance and applying relevant positive and negative performance scenarios in different market conditions reflecting the nature and risks of the relevant instrument, as well as giving prescribed warnings); and
- statements that must be included when information provided to clients refers to a particular tax treatment.
Key changes for communications addressed to eligible counterparties
No specific changes are proposed for communications concerning eligible counterparty business, but it is worth noting that Recital 86 to the MiFID II Directive re-emphasises that the fair, clear and not misleading rule applies to all client categories, including eligible counterparties.
What should firms be doing to address these changes?
All firms should review their policies and procedures to ensure that, following the implementation of MiFID II on 3 January 2018, all marketing materials and other communications to be made to clients and potential clients will be reviewed to ensure compliance with the MiFID II requirements before they are sent. Communications to all client categories will need to comply with the fair, clear and not misleading rule. However, the most significant change in our view is that MiFID II extends to professional clients most of the specific requirements that under MiFID I only apply to retail clients. Firms that confine their client base to professionals and have previously been able to ignore many of the more detailed and prescriptive rules are likely to find that they need to do a great deal of additional work to ensure they can comply from 3 January 2018.