Is your organisation ready for MiFID II?
In this edition
- 3 January 2018 is fast approaching - More parties subject to a licence obligation under
MiFID II - Ban on commissions extended to include services
provided to professional investors - Paying separately for investment research - Introduction of product governance rules - Extension of suitability and appropriateness
assessments - Knowledge and experience of employees - Provision of information to investors - Practical suggestions
Is your organisation ready for MiFID II?
As of 3 January 2018 investment firms and banks that provide investment services must have implemented MiFID II and MiFIR in their organisation and their business operations. Quite a job, considering the scope of the amendments. In this Quoted, a number of the amendments under MiFID II and MiFIR are discussed, including extension of the licence obligation to new parties; extension of the ban on commissions in relation to providing certain investment services to professional investors; introduction of the obligation to charge clients separately for investment research; new product governance rules; changes in the assessment of suitability and appropriateness; introduction of a suitability requirement for employees and changes in the rules on the provision of information. The discussion below of the amendments is based on the most recent version of the Dutch implementation legislation available at the time of writing this Quoted. To help your organisation be ready for these amendments on 3 January, we have included a number of suggestions in the final section of this Quoted.
1. 3 January 2018 is fast approaching
As of 3 January 2018 investment firms and banks that provide investment services must have implemented MiFID II (Directive 2014/65/EU) and MiFIR (Regulation (EU) 600/2014) in their organisation and their business operations. Quite a job, considering the scope of the amendments. The bill on implementation of MiFID II/ MiFIR (the "Bill") was adopted by the Second Chamber of the Dutch parliament on 25 September 2017. The Bill is now pending before the First Chamber.1 A draft decree was published on 23 March 2017 to amend inter alia the Decree on Conduct of Business Supervision on Financial Undertakings AFS (Besluit Gedragstoezicht financile ondernemingen Wft) in order to implement MIFID II/MiFIR (the "Draft Amending Decree").2
In this Quoted, a number of the amendments set out in the Bill and the Draft Amending Decree are discussed, including extension of the licence obligation to new parties; extension of the ban on commissions
in relation to providing certain investment services to professional investors; introduction of the obligation to charge clients separately for investment research; new product governance rules; changes in the assessment of suitability and appropriateness; introduction of a suitability requirement for employees, and changes in the rules on the provision of information.3
2. More parties subject to a licence obligation under MiFID II
Under MiFID II, more parties are subject to a licence obligation as an investment firm as a result of the extension of the definition of "financial instrument", the limitation of the exceptions to the licence obligation for dealing on own account, the introduction of a new investment activity and the extension of the definition of "execution of orders on behalf of clients".
It is expected that approximately 80 parties will have to apply for a licence with the Netherlands Authority for the
1 Kamerstukken II, 20162017, 34 583, no 2. 2 The Bill and the Draft Amending Decree are not yet final and may be amended before they enter into effect. 3 For the sake of completeness, we note that MiFID II entails more amendments than the ones discussed in this Quoted. Examples include pre- and
post-trade transparency requirements, obligations concerning the recording of phone calls and of direct conversations and electronic communication with clients. In addition, MiFID II and MiFIR not only have consequences for investment firms and banks but also, for example, for operators of regulated markets, managers of alternative investment funds and UCITS (who provide investment services), data reporting services providers and parties trading in financial instruments on the various trading platforms. Third-country parties that wish to provide investment services or perform investment activities in the EU will additionally be confronted with the (partly) harmonised third-country regimes under MiFID II and MiFIR. The consequences of MiFID II and MiFIR for these parties are not discussed in this Quoted.
Financial Markets (Stichting Autoriteit Financile Markten, the "AFM"), as these parties will fall within the scope of MiFID II.4
In addition, under MiFID II the conduct of business rules for investment services are declared partly applicable to selling, or advising on, structured deposits. These amendments are discussed in more detail in the sections below.
2.1 Extension of the definition of "financial instrument"
First and foremost, under MiFID II the definition of financial instrument is extended to include emission allowances and derivatives of emission allowances.5 This means that parties which provide investment services or perform investment activities in regard to those rights and instruments will need to have a licence. There are two exceptions to this licence obligation. The first exception regards the provision of investment services or performance of investment activities related to emission allowances by operators who are obliged to comply with the Directive for greenhouse gas emission allowance trading6 and who deal exclusively on own account, do not execute client orders and do not apply high-frequency algorithmic trading techniques.7 The second exception regards the "ancillary activity exception" discussed in more detail in section 2.2 below.8
Another extension of the definition of "financial instrument" concerns commodity derivatives (contracts) traded on an organised trading facility (OTF) and which may be physically settled.9 Finally, in subsection e of the definition of financial instrument, "forward rate agreements" is replaced by "forwards". Unlike forward rate agreements, forwards can have an underlying value other than interest.
2.2 Limitation of the exceptions for dealing on own account
Under MiFID, dealing on own account was exempt from the licence obligation, with the exception of acting as market maker or frequent trading in an organised and systematic fashion, outside a regulated market or multilateral trading facility, by offering a system accessible for third parties, to enter into transactions with them.10 Under MiFID II, dealing on own account is exempt from the licence obligation only if one of the following situations applies:
A person deals exclusively on own account in other financial instruments than commodity derivatives, emission allowances or instruments derived from emission allowances and that: -- does not act as market maker; -- does not use direct electronic access (DEA) and is no member of or participant in a regulated market or multilateral trading facility;11 -- does not apply high-frequency algorithmic trading techniques;12 and -- does not deal on own account when executing client orders.13
A person deals on own account in commodity derivatives, emission allowances or instruments derived from emission allowances, and: -- does not deal on own account when executing client orders; -- this is an ancillary activity to its main business;14 -- the main business of the group does not consist of providing investment services, carrying out investment activities, exercising the business of a bank or acting as a market maker in relation to commodity derivatives;
4 Kamerstukken II, 20162017, 34 583, no. 3, pp. 18-19. 5 Annex I, section C(11) MiFID II. Also see subsection k of the definition of "financial instrument" in article 1:1 Bill. 6 Directive 2003/87/EC 7 Article 1:18(f) Bill. 8 Article 1:18(h) Bill. 9 Subsection f of the definition of "financial instrument" in article 1:1 Bill. Energy products intended for wholesale trading on an OTF, to be physically settled,
are excepted from this definition. This concerns spot contracts and commodity derivatives (contracts) for electricity and gas (the REMIT exception). 10 Article 1:18(h) Financial Supervision Act. 11 DEA means that the systems or trading codes of another investment firm or bank are being used to gain access to a trading platform. In that case, no
membership is required. 12 Algorithmic trading is the trading in financial instruments whereby, with little or no human interference, automatic individual parameters of the order are
determined. High-frequency algorithmic trading is a subcategory of algorithmic trading whereby a large number of orders, listings or cancellations are processed. 13 Article 1:18(g) Bill 14 See Delegated Regulation (EU) 2017/592 of the Commission of 1 December 2016 for the criteria to establish whether there is an ancillary activity.
-- no high-frequency algorithmic trading techniques are applied; and
-- the AFM is notified annually of the fact that this exception (also called the "ancillary activity exception") is being used.15
2.3 Introduction of a new investment activity
Under MiFID II, operating an organised trading facility (OTF) is considered an investment activity.16 An OTF is a multilateral system which is not a regulated market or a multilateral trading facility, in which multiple thirdparty selling and buying interests in bonds, structured finance products, emission allowances and derivatives are able to interact in the system in a way that results in a contract.17 A licence is required to operate an OTF, unless the operator of the OTF is a market operator that has a licence to operate a regulated market or that can rely upon an exception to the licence obligation. Two OTFs are expected to be established in the Netherlands.18
2.4 Amendment of definition of "execution of orders on behalf of clients"
Executing orders on behalf of clients is an investment service. The definition of "execution of orders on behalf of clients" is extended to include "concluding agreements to sell financial instruments issued by a bank or investment firm at the moment of their issuance". The purpose of this addition to the definition of execution of orders on behalf of clients is to clarify the scope of the definition to protect investors. The clarification pertains to the situation of banks or investment firms trading financial instruments that they have issued on the primary market, without providing advice on these instruments.19
This extension has led to a great lack of clarity; it is unclear, for example, whether this extension also pertains to the issuance of shares or other instruments by investment firms for purposes of enhancing their equity.20 We believe
the extension aims to enhance investor protection if investment firms (or banks) act as distributors to clients of financial instruments which the investment firms (or banks) have issued.
2.5 Selling or advising on structured deposits
Investment firms and banks that sell structured deposits to clients, or advise clients on these investment products, must comply with specific conduct of business rules under MiFID II. This obligation pertains to banks and investment firms that act as intermediaries for banks which have issued structured deposits and which, based on the Capital Requirements Directive, may receive deposits.21 Although structured deposits are not considered financial instruments, they nevertheless fall within the scope of MiFID II because European legislators deemed it necessary to create an adequate level of investor protection with regard to structured deposits.
For the application of MiFID II, a structured deposit is a deposit that is fully repayable at maturity on terms under which interest or a premium will be paid or is at risk, according to a formula involving factors such as an index or a combination of indices, excluding variable rate deposits, whose return is directly linked to an interest rate index such as Euribor or Libor; a financial instrument or combination of financial instruments; or a commodity or combination of commodities or other physical or nonphysical non-fungible assets.22
The conduct of business rules that apply to investment firms and banks that sell and advise on structured deposits regard inter alia professional competence, sound and controlled business operations, provision of information to clients, product distribution rules and appropriateness and suitability assessments.23
15 Article 1:18(h) Bill. This exception also applies to persons who provide investment services in commodity derivatives, emission allowances or instruments derived from emission allowances, to the clients or suppliers of their main business. The same conditions apply, except the condition that this person does not deal on own account when executing client orders.
16 Article 1:1 Bill. 17 Article 1:1 Bill. 18 Kamerstukken II, 20162017, 34 583, no. 3, p. 21. 19 Kamerstukken II, 20162017, 34 583, no. 3, p. 46. 20 See e.g., C.W.M. Lieverse, "The scope of MiFID II", p. 27 in D. Busch and G. Ferrarini, Regulation of the EU Financial Markets. MiFID II and MiFIR, Oxford:
Oxford University Press 2017. 21 Kamerstukken II, 20162017, 34 583, no. 3, p. 13. 22 Kamerstukken II, 20162017, 34 583, no. 3, pp. 12-13. 23 Article 4:2e Bill.
3. Ban on commissions extended to include services provided to professional investors
The rules on commissions for investment services to nonprofessional investors have been stricter in the Netherlands since 1 January 2014 than the rules on commissions under MiFID. The Dutch rules on commissions entail that an investment firm does not pay or receive commissions related to investment services or ancillary services provided to non-professional investors.24 That ban on commissions is retained under MiFID II.25
Under MiFID II, an investment firm that provides independent advice26 or portfolio management services is no longer permitted to receive and retain a commission for those services, irrespective of the type of investor to which it renders those services.27 Such investment firms will be obliged to pass on the commission, directly or indirectly received from a third party, to the investor as quickly as reasonably possible.28 This "passing on obligation" does not apply to commissions received for "non-independent" advice, the provision of investment services other than portfolio management (without also providing advice) and the provision of an ancillary service to a professional investor, where: the professional investor, prior to services being
provided to it, is informed (annually, if a continuous commission is concerned) of the existence, nature and amount of the commission; the commission benefits the quality of the services provided; and the commission neither leads to conflicts of interests nor detracts from the investment firm's obligation to make an effort to serve the investors' interests.
4. Paying separately for investment research
With the introduction of MiFID II, the provision of investment research by third parties to investment firms is brought under the scope of the rules on commissions.
Investment research in this context should be understood as covering research material or services concerning one or several financial instruments or other assets, or the issuers or potential issuers of financial instruments, or be closely related to a specific industry or market such that it informs views on financial instruments, assets or issuers within that sector. That type of material or services explicitly or implicitly recommends or suggests an investment strategy and provides a substantiated opinion as to the present or future value or price of such instruments or assets, or otherwise contains analysis and original insights and reach conclusions based on new or existing information that could be used to inform an investment strategy and be relevant and capable of adding value to the investment firm's decisions on behalf of clients being charged for that research.29
In practice, the costs for investment research are invoiced by the investment firm as part of its own costs. However, under MiFID II that is no longer possible for all investment services to non-professional investors and for portfolio management and investment advice provided to professional investors. In those situations, investment firms will have to bear the costs for investment research themselves, or ask clients to pay for that research separately.30 In the latter case, the investment firm will have to open a separate account in which payments by those clients are received and from which payments for research are made. Payments invoiced in this respect may only be based on a budget for research established by the investment firm and may not depend on the volume and/or the value of transactions carried out on behalf of clients.31
24 Article 168a Market Conduct Decree. 25 Kamerstukken II 20162017, 34 583, no. 6, p. 2. 26 An investment firm advises independently if it assesses a sufficient number of comparable financial instruments available on the market. These financial
instruments must be sufficiently diverse as to their type, the issuing institution or the provider, and not be offered exclusively by the investment firm in question or by entities that have close links (for example contractual ties) with the investment firm (article 58a(2) Draft Amending Decree). 27 Article 24(7) and (8) MiFID II. 28 Article 12 Delegated Directive (EU) 2017/593 of the Commission of 7 April 2016 (the "Delegated Implementing Directive") and article 168aa Market Conduct Decree of the Draft Amending Decree. 29 Preamble (28) Delegated Implementing Directive. 30 Article 168a(2)(f) and article 168aa(4)(c) Draft Amending Decree. 31 Article 13(1) and (2) Delegated Implementing Directive.
To the extent investment research can be designated as a small non-cash benefit, this does not qualify as a commission. This is the case, for example, where shortterm commentary regarding the latest economic statistics or company results are concerned, or information on future releases or events, which are supplied by a third party and offer only a summary of its own opinion on that information, without any further substantiation or substantive analysis, and merely reiterating opinions based on existing recommendations, substantive research material or services.32
5. Introduction of product governance rules
As of 1 January 2013, article 32 of the Market Conduct Decree (Besluit markttoegang financile ondernemingen Wft) includes requirements for the product governance process of financial undertakings.33 Those requirements did not apply to inter alia investment firms. This will change under MiFID II. MiFID II introduces rules on product governance concerning the issuance, development, creation and design of financial instruments as well as rules on the distribution of those financial instruments.34
The degree to which the procedures and measures are applied may differ, depending on the complexity and the impact of the financial instrument. As the complexity of the financial instrument increases, for example, also the refinement of the target market should be more intensive.35
5.1 Product manufacturing rules
As from 3 January 2018, investment firms that issue financial instruments on the primary market or develop or create financial instruments and make them available
on the secondary market ("manufacturers")36 must have adequate procedures and measures to safeguard that balanced consideration is given to the investor's interests in the development of the financial instrument and that the financial instrument has verifiably resulted from that weighing of interests.37
The procedures and measures must safeguard that: the target market for the financial instrument is clearly identified, analyses are carried out to establish the effect of the financial instrument so that it may be assessed whether the financial instrument meets the target market's objective, the product information and the distribution strategy are geared to the target market, and regular checks and, where necessary, adjustments of the procedures and measures take place. The procedures and measures must be periodically applied to the financial instruments that are issued, developed or created. If a financial instrument prejudices the investor's interests, it should be amended or taken off the market.38
A manufacturer must inform an investment firm that provides investment services on the financial instrument in question, regarding its features and risks, the procedures and measures for the product manufacturing process, the target market and the distribution strategy (i.e. portfolio management, advice or execution only).39
5.2 Product distribution rules
Investment firms that distribute financial instruments ("distributors")40 must have adequate procedures and measures in place to safeguard that the financial instruments they distribute meet the needs, characteristics and objectives of the target market and the distribution strategy is suited to the target market in question.41
32 Preamble (29) Delegated Implementing Directive. 33 The underlying purpose of supervising the product development process is to prevent large-scale losses for consumers and society as a result of patently
bad financial products (Government Gazette 2012, 695, p. 35). 34 See also the Final Report Guidelines on MiFID II product governance requirements as published by ESMA on 2 June 2017 (ESMA35-43-620). 35 Explanatory notes to the Draft Amending Decree, pp. 69, 70. 36 These include firms that create, develop, issue and/or design financial instruments, also if they advise issuers on the release of new financial instruments.
See preamble (15) Delegated Implementing Directive. 37 An estimated 120 investment firms develop their own financial instruments (Explanatory notes to the Draft Amending Decree, p. 38). 38 Also see the Explanatory notes to the Draft Amending Decree, pp. 68-69. The product manufacturing requirements are elaborated further in article 9 of
the Delegated Implementing Directive. 39 Article 32(a)(1) Draft Amending Decree. 40 In the ESMA Guidelines on MiFID II product governance requirements (Final Report of 2 June 2017, ESMA35-43-620, p. 19) the following definition of
the concept "distributor" is used: " 'distributor' means, taking into account Recital 15 and Article 10(1) of the MiFID II Delegated Directive, a firm that offers, recommends or sells an investment product and service to a client." In this context, ESMA observes in addition that the concepts "distributor" and "manufacturer" must be interpreted broadly, to safeguard that the product governance rules also receive ample application. 41 Article 32(b) Draft Amending Decree.
The financial instruments may only be distributed if this is in the interest of the client. This is the distributor's own responsibility.42 The procedures and measures must be evaluated periodically and adjusted where necessary.
Like the manufacturer, the distributor must determine the target market and distribution strategy.43 For this purpose, the distributor must have procedures and measures in place to (i) obtain information on the development of the financial instrument from the manufacturer and its own clients and (ii) understand the features of each financial instrument and the intended target market. The distributor must periodically evaluate whether the financial instruments meet the target market's objective and whether the distribution strategy still suits the target market. Where necessary, the distributor should adjust the target market or the distribution strategy. In addition, the investment firm must establish for what target market a specific financial instrument is not suited. The distributor should provide the manufacturer with relevant information on the sale of the financial instrument and on the outcome of periodical evaluations (including sales outside of the target market, types of client and complaints received).44
If several distributors work together, the distributor that has direct contact with the investor must comply with the product distribution rules.45 However, the other distributors must ensure that relevant product information is passed on from the manufacturer to the end distributor and that also the manufacturer receives the requisite information. Where applicable, these distributors must comply with the product manufacturing rules.46
6. Extension of suitability and appropriateness assessments
When providing portfolio management services or investment advice, an investment firm must carry out a prior suitability assessment. An investment firm must carry out an appropriateness assessment when providing investment services other than investment advice or portfolio management. MiFID II includes a number of amendments to the assessment of suitability and appropriateness, which are discussed below.
6.1 Limitation of exceptions to appropriateness assessment for noncomplex financial instruments
Under specific circumstances, an investment firm is not obliged to carry out an appropriateness assessment, namely if, on the client's initiative, the investment firm only renders execution only services with regard to specific non-complex financial instruments. After implementation of MiFID II, investment firms will have to carry out an appropriateness assessment with regard to execution only services provided to clients more frequently, since the number of financial instruments that may be offered without an appropriateness assessment will become more restricted.47 After 3 January 2018 the appropriateness assessment will also have to be carried out in respect to providing execution only services related to: participation rights in investment institutions or
structured UCITS; shares, bonds and money market instruments, if these
comprise a derived instrument; bonds, money market instruments, if these products
are structured in such a way as to make it difficult for the client to understand the risks involved; structured deposits that make it difficult for the client to assess the risk of return or the costs of early exit.48
42 Explanatory notes to the Draft Amending Decree, p. 70. Where an investment firm acts as both manufacturer and distributor, the target market needs to be established only once.
43 Explanatory notes to the Draft Amending Decree, p. 70. The distributor must take as a point of departure the target market and distribution strategy determined by the manufacturer; however, the distributor may deviate, giving reasons, from the target market established by the manufacturer if a product is not suited thereto, or suited to a different target market (Kamerstukken II, 20162017, 34 583, no 6, p. 31). The distributor should also determine the target market where the investment firm that has developed the financial instrument has not done so.
44 Explanatory notes to the Draft Amending Decree, p. 72. 45 Article 32(c) Draft Amending Decree. 46 Article 10(10)(a)-(c) Delegated Implementing Directive. This latter only occurs, or so we believe, if the intermediary distributor also qualified as
manufacturer. 47 Article 4:24(5) Bill. Also see article 80d Draft Amending Decree and article 57 Delegated Regulation (EU) 2017/565 of the Commission of 25 April 2016
(the "Delegated Regulation on Organisational Requirements"). 48 Also see the Guidelines on complex debts instruments and structured deposits of ESMA (ESMA/2015/1787).
6.2 Suitability and appropriateness assessments for combined services
Under MiFID II, investment firms will be obliged to carry out an appropriateness test if they render execution only services in combination with providing credit for the purchase of financial instruments.49 This also applies where the services provided concern exclusively non-complex financial instruments. If, in addition, an investment service is provided in combination with another financial service or a financial product, the investment firm must assess the suitability or appropriateness of all the services provided and of the combination of the financial service and the financial product;50 for example, providing a securitiesbased mortgage in combination with executing client orders.
6.3 Suitability statement in relation to investment advice
Under MiFID II an investment firm providing investment advice to a non-professional investor is obliged to provide a suitability statement.51 This statement must provide non-professional investors with information about the specifications of the advice rendered and in what way the advice is in line with the investor's preferences, investment objectives and other characteristics (such as knowledge, experience and risk preparedness). The suitability statement must be provided before a transaction is executed. If an investment firm has informed its client that it will carry out a periodic suitability assessment, the periodic report must contain an updated statement of the manner in which the investment is in line with the preferences, objectives and other characteristics of the non-professional investor.52 The periodic suitability statement should be supplied at least once every year.
7. Knowledge and experience of employees
An investment firm must ensure that its employees and other natural persons working under its responsibility ("Relevant Persons") who provide investment advice or inform clients about financial instruments, investment services or ancillary services, have the requisite professional competence, that is knowledge and experience.53 Under MiFID, the Member States were free to choose how to give shape to this requirement. However, under MiFID II Member States are required to disclose their criteria for assessment of professional competence. For the implementation of this assessment, the Draft Amending Decree prescribes that criteria will be drafted by ministerial regulation.54 Alignment will be sought in this respect to the criteria as recorded in the Guidelines for the assessment of knowledge and competence established by ESMA.55
To facilitate compliance with the criteria as outlined in the ESMA Guidelines, the AFM recently entered into a covenant with the Dutch Securities Institute (the "DSI").56 The parties agreed that DSI will be engaged in the certification of Relevant Persons, safeguarding that the Relevant Persons it has certified meet the criteria as established in the ESMA Guidelines.57 DSI keeps a public register of certified Relevant Persons. With such an entry in the register, an investment firm can show that the person in question has the requisite knowledge and experience as referenced in the ESMA Guidelines. Investment firms are not obliged to safeguard their employees' professional competence through DSI. If not through DSI, however, they must be able to show this in some other way.
The ESMA Guidelines contain a number of minimum standards from which the AFM may depart by setting higher requirements for the professional competence of Relevant Persons. The AFM has decided not to do this, besides requiring that investment firms must be able to
49 Article 4:24(5) Bill . Also see Kamerstukken II, 20162017, 34 583, no. 3, p. 72. 50 Article 4:23(4) and article 4:24(2) Bill. 51 Article 4:23(3) Bill. 52 Article 58(a) Draft Amending Decree. Article 54(12) and (13) Delegated Directive on Organisational Requirements. Based on article 25(6), final section
MiFID II, this provision also applies to portfolio management. 53 Article 4:9(3) Bill. 54 Article 5(a) Market Conduct Decree of the Draft Amending Decree. 55 Based on article 25(9) MiFID II. 56 Covenant between the AFM and DSI as regards the requisite knowledge and competence of Relevant Persons of 20 July 2017, Government Gazette
2017, 44009 (the Convenant). 57 Article 2(1) in conjunction with 2(2) Covenant.
prove the professional competence of Relevant Persons. In addition, the AFM decided to set the period required to gain appropriate experience at 12 months, working full time, and to maintain the maximum period during which a Relevant Person could work under supervision at 4 years.58
8. Provision of information to investors
Under MiFID II, rules regarding the provision of information to investors are largely included in the Delegated Regulation on Organisational Requirements.59 This Regulation has direct effect; accordingly, it is not transposed into Dutch legislation.60 However, a number of its provisions were included in the Draft Amending Decree. Those provisions entail that under MiFID II, an investment firm must provide each investor with: 61
an explanation of and warning regarding the risks attached to the financial instrument or investment strategy in question, as well as an indication of the target market for which the financial instrument is intended.62
more information on costs and expenses. A consolidation of all costs related to the investment service and the financial instrument (not resulting from market developments), so that the client obtains insight into the total costs and in the cumulative effect on the return on the investment. And upon the client's request, an itemised cost specification.63
in the case of investment advice, prior to providing such advice: information as to whether the firm advises on an independent basis or otherwise and whether the advice is based on a more or less limited analysis of the market.64 An investment firm that provides advice must also inform the client as to whether the client will
receive a periodic review of the suitability of the financial instruments advised to the client.65 in the case of a package sale, information as to (i) whether it is possible to purchase the various components separately and (ii) what each separate component costs. Additionally, if there is a chance that the risks ensuing from the package differ from the risks attached to the separate components, vis--vis a nonprofessional investor: an adequate description of the various components of the package and the manner in which their mutual interaction impacts the risks.66 periodic reports on the services provided.67
9. Practical suggestions
In this Quoted, a number of changes are discussed that MiFID II will entail for the organisation and business operations of investment firms and banks that provide investment services. To help your organisation be ready for those changes on 3 January 2018, we have the following suggestions:
1. Ascertain whether your organisation falls within the scope of MiFID II, for example as a result of the limitation of the exceptions to this scope, and if so, whether in that case your organisation will need to apply for a licence.68
2. Map what agreements you have made with third parties and clients concerning payment of commissions and check whether those agreements are still allowed under MiFID II.
3. Check whether your organisation pays or is paid for investment research, how clients are charged for those costs and whether this is still permitted under MiFID II.
58 See item 22 ESMA Guidelines and the press release of the AFM, `AFM sets standards for knowledge and competence in the ESMA guidelines', dated 17 July 2017, as published on its website: https://www.afm.nl/nl-nl/nieuws/2017/juli/normen-bekwaamheid.
59 See articles 3, 26, 44 through 52, 59 through 63, 65(6) and 66 Delegated Regulation on Organisational Requirements. 60 Article 4:19(4) Financial Supervision Act is deleted, as are articles 58(b) through 58(f) and 59 Market Conduct Decree. 61 Under MiFID II, various information requirements apply also vis--vis eligible counterparties; this follows from the amendment to article 4:18(b) Financial
Supervision Act as proposed in the Bill. 62 Article 58(2) Draft Amending Decree. 63 Article 58(3) and (4) Draft Amending Decree. Also see Article 50 Delegated Regulation on Organisational Requirements. 64 Article 58(a) Draft Amending Decree. 65 Article 58a Draft Amending Decree. Explanatory notes to the Draft Amending Decree, pp. 36-37. 66 Article 58(5) and (6) Draft Amending Decree. 67 Article 68c Draft Amending Decree. 68 This is important in particular for undertakings engaged in trading commodity derivatives, emission allowances and instruments derived from emission
4. Ascertain whether your organisation issues, develops or creates, or distributes financial instruments, and if so, what product manufacturing or distribution rules apply.
5. Check whether your procedure to determine suitability and/or appropriateness of your services for your clients should be adjusted to the new requirements of MiFID II.
6. Ascertain whether your employees who provide investment advice and/or who inform clients about financial instruments, investment services or ancillary services have the requisite professional competence.
7. Compare your marketing material and other documentation with the new requirements under MiFID II to check whether adjustments are needed.
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