The European Commission (Commission) has contacted the European Securities and Markets Authority (ESMA) and, more recently, the European Banking Authority (EBA) for advice on the implementation of the Recast Markets in Financial Instruments Directive (MiFID 2) and the measures to be made under the Markets in Financial Instruments Regulation (MiFIR). ESMA responded on 22 May 2014 by issuing a consultation paper and discussion paper. The EBA has yet to respond. The Level 2 process for MiFID 2 and MiFIR, which comprise the MiFID II pieces of primary legislation, is therefore underway with MiFID 2 and MiFIR expected to come into force by the end of 2016.
MiFID II represents the response to the Commission’s review of the Markets in Financial Instruments Directive (MiFID). MiFID governs those firms that provide investment services and products in the European Union (EU)1. It also sets out the framework for regulating securities and investment markets and market infrastructure in the EU. In addition to expanding MiFID’s scope, in particular, with respect to commodity derivatives, MiFID 2 brings structured deposits within MiFID’s remit and, in this respect, applies some of the investor protection obligations to credit institutions (the Structured Deposit Provisions).
What is covered under the MiFID 2 definition of a structured deposit?
MiFID 2 does not define a structured deposit. However, the IOSCO definition in its Point of Sale disclosure in the insurance, banking and securities sectors consultation paper is useful:
“deposits with interest rates derived from or based on a single security, a basket of securities, an index, a commodity, debt insurance and/or a foreign currency. In simpler terms, a structured deposit is essentially a contract between the investor and the issuer, usually a bank, which promises to repay capital at a certain time plus interest based on a formula.”
As is the case with other MiFID financial instruments, the holder of a structured deposit takes market risk, in addition to credit risk on the credit institution which accepts the deposit.
Who is subject to the Structured Deposit Provisions?
The Structured Deposit Provisions will apply to credit institutions authorised under the Member State rules giving effect to the CRD IV, which provide structured deposits. It will also apply to investment firms authorised under MiFID, which sell or advise clients in relation to structured deposits. (Unlike a credit institution authorised under the Member State Rules giving effect to the CRD IV, a MiFID investment firm is unable, itself, to provide structured deposits.)
Which parts of MiFID 2 apply to structured deposits?
Unlike the position with respect to the financial instruments identified in MiFID 2, Schedule 1, Part 2, MiFID does not apply as a whole to structured deposits. Instead Article 1.4 specifies the following provisions as applying to credit institutions and MiFID investment firms with respect to structured deposits, i.e. the Structured Deposit Provisions:
- Article 9(3): investment firm management body oversight, accountability, governance , and avoidance of conflict;
- Article 14: verification of membership of an authorised investor compensation scheme;
- Article 16(2),(3) and (6): organisational requirements relating to compliance with obligations, conflicts of interest and the fulfilment of supervisory tasks and enforcement by the competent authority, which in the United Kingdom is the Financial Conduct Authority for both credit institutions and MiFID investment firms;
- Articles 23-26: concerning conflicts of interest, the provision of information to clients, the assessment of suitability and appropriateness and reporting to clients and the provision of services through the medium of another investment firm;
- Article 28: rules relating to client order handling;
- Article 29 (excluding Article 29(2)): obligations of investment firms when appointing tied agents;
- Article 30: transactions executed with eligible counterparties;
Articles 69-80: relating to the designation of and supervision by competent authorities, cooperation between member states, sanctions for infringement, reporting of breaches, rights of appeal, and mechanisms for extra-judicial consumer complaints.
Will the EBA have any powers of product intervention with respect to structured deposits?
Yes. The EBA, similarly to the European Supervisory Authority (ESA) for credit institutions, is given product intervention powers with respect to structured deposits. As mentioned above, the Commission has requested technical advice on possible delegated acts relating to MiFID 2 and MiFIR.
What is the nature of the advice which the Commission is seeking from the EBA?
The Commission has indicated that, as MiFIR establishes an identical framework for EBA intervention powers in respect of structured deposits as there is for ESMA, the factors and criteria to be taken into account for the exercise of product intervention powers for structured deposits should be similar (if not identical) for both bodies with respect to financial instruments. The Commission states it is therefore essential that ESMA and the EBA work together when providing technical advice to the Commission on product intervention powers.
The Commission has requested the EBA to provide its technical advice six months after entry into force of the MiFID 2 and MiFIR. It is anticipated that this will be December 2014.