The Markets in Financial Instruments (MiFID) Act, which transposes the Markets in Financial Instruments Directive (MiFID II 2014/65/EU) and implements the EU Markets in Financial Instruments Regulation (MiFIR 600/2014), was voted into law on 15 May 2018 and published on 30 May 2018.
The MiFID Act entered into force on 4 June 2018. Most issues relating to markets in financial instruments are covered by the first part of the act, while the provision of investment services will continue to be governed by the Financial Sector Act 1993, as amended by the second part of the MiFID Act.
Articles 1 to 65 of the MiFID Act implement the market infrastructure rules of MiFID II and MiFIR in order to ensure more transparent, safer and sounder markets. Among other changes, the act introduces organised trading facilities into Luxembourg law.
Article 90 of the MiFID Act applies the opt-in provided for by Article 39 of MiFID II. Thus, a third-country firm that wishes to provide investment services or perform investment activities for retail clients or professionals on demand in Luxembourg will be required to establish a branch in Luxembourg. The branch must be established in accordance with the MiFID II conditions, as transposed into law by the MiFID Act.
In addition, the MiFID Act provides that, in the absence of an equivalent decision by the European Commission, investment firms targeting professionals or eligible counterparties must hold an EU passport or meet the three conditions set out in the MiFID Act.
Article 87 of the MiFID Act introduces three new types of status for financial sector professionals to implement the new market structure rules under MiFIR including:
- an approved publication arrangement;
- a consolidated tape provider; and
- an approved reporting mechanism
Article 100 of the MiFID Act introduces the concept of independent advice. Investment firms that provide investment advice may market themselves as providing independent investment advice. In order to do so, the firm must comply with a set of rules to ensure independence.
Under Articles 99, 100 and 102 of the MiFID Act, investment firms cannot pay or receive any fee or commission or provide or be provided with any monetary benefit in connection with the provision of investment services or ancillary services, to or by any party except their clients or persons acting on behalf of their clients, other than where the relevant payment or benefit fulfils the following criteria:
- The payment or benefit must be designed to enhance the quality of the relevant service to the client. This criterion is met when the quality of the relevant service to the client:
- is justified by the provision of an additional or higher level of service to the client, proportionate to the level of inducements received;
- does not directly benefit the recipient investment firm or its shareholders or employees without tangible benefit for the client; and
- is justified by the provision of an ongoing benefit to the client in relation to an ongoing inducement.
- The payment or benefit must not impair the investment firm's duty to act honestly, fairly and professionally in accordance with the best interests of its clients. This is not the case when the receipt of a payment or benefit creates a distortion or bias in the provision of services to the client.
Fees that by their nature do not conflict with the investment firm's duty to act honestly, fairly and professionally in accordance with the client's best interests are therefore allowed.
When providing discretionary portfolio management services and independent investment advice to clients, investment firms cannot receive any benefit or commission that may be considered an inducement. If they do so, the benefit or commission must be returned to the client.
In any case, the investment firm must disclose to the client in advance the existence, nature and amount of any inducements.
Under Article 100 of the MiFID Act, certain information must be provided to the client before the provision of investment services, including:
- the target market;
- information on the financial instruments in question and the associated risks;
- information on costs and charges;
- information relating to the provision of investment advice;
- inducements; and
- cross-selling practices.
Under Article 100 of the MiFID Act, investment firms must not remunerate their employees in a way that is contrary to their duty to act in the client's best interest.
Investment firms must also be able to demonstrate to the Luxembourg financial sector regulator (CSSF) that their employees have the necessary knowledge and skill to provide investment advice and information on financial instruments. The CSSF will publish on its website the criteria used to assess such knowledge and skill. In addition, the CSSF has already set out the knowledge and skill criteria in Circulars 17/665 and 17/670 and a MiFID II Training Programme, which is specifically designed to meet these criteria, has received CSSF accreditation.
Under Article 98 of the MiFID Act, manufacturers must identify a potential target market for each financial instrument that they design. Financial instruments are designed through a product approval process. All relevant information must be made available to the distributor.
In addition, distributors must have in place adequate product governance arrangements to ensure that financial instruments are sold according to the needs, characteristics and objectives of the identified target market. They must also have adequate procedures in place to ensure the sufficient exchange of information with the manufacturer.
The application of certain provisions of the MiFID Act has already been detailed through CSSF circulars and FAQs. Further circulars and FAQs are expected to follow.
The MiFID Act provides clarity on third-country rules for foreign investment firms that wish to provide investment services to professional clients and eligible counterparties in Luxembourg. In the absence of an equivalent decision by the European Commission, foreign investment firms should refer to national law. Article 32-1 of the Financial Sector Act sets out the applicable criteria for the provision of investment services in Luxembourg.
Finally, the MiFID Act inducement rules are no more stringent than MiFID II. However, as in the directive, clarity is still lacking on certain points and the position of the CSSF has not yet been provided.
For further information on this topic please contact Josée Weydert, Jad Nader or Virginie Dobritch at NautaDutilh Avocats Luxembourg Sàrl by telephone (+352 26 12 29 1) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The NautaDutilh Avocats Luxembourg Sàrl website can be accessed at www.nautadutilh.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.