The European Securities and Markets Authority (‘ESMA’) is required by the Markets in Financial Instruments Directive II (‘MiFID II’), to develop guidelines specifying criteria for the assessment of knowledge and competence of the investment firm’s personnel giving investment advice or information about financial instruments, investment services or ancillary services to clients on behalf of the investment firm. This is laid down in article 25 of MiFID II, which also states that the guidelines have to be adopted by January 3rd 2016. These guidelines aim to increase investment firms’ knowledge and competence, which will in turn lead to improved investor protection.
Article 25(10) of MiFID II requires ESMA to develop guidelines for the assessment of the complexity of:
- Bonds, other forms of securitized debt and money market instruments incorporating a structure which makes it difficult for the client to understand the risk involved; and
- Structured deposits incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term.
In light of all this, ESMA has published two consultation papers for the abovementioned guidelines. The purpose of the consultation papers is to explain the reasoning behind ESMA’s draft guidelines and to gather feedback from stakeholders. ESMA will take the responses into consideration before publishing its final guidelines.
With regards to the guidelines on the knowledge and competence of the investor firms’ personnel, ESMA believes that the level and intensity of knowledge and competence which is expected should be higher for those giving advice than for those only giving information on financial instruments, structured deposits and services. This is due to the high value of the service, which requires an advanced level of investor protection.
As for the consultation paper on the complex debt instruments and structured deposits guidelines, ESMA has set out draft guidelines on related issues that are important for the correct classification of debt instruments as either “complex” or “non complex,” in particular, the concept of embedded derivative for debt instruments. These guidelines also seek to increase investor protection.
If you wish to seek advice on any of these activities, or if you want to forward any queries and/or feedback regarding the consultation paper, please contact us on [email protected]