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ESMA finalises guidelines on complex products & appropriateness testing under MiFID II
4th December 2015
The European Securities and Markets Authority (ESMA) has now published their Final Report on guidelines for complex debt instruments and structured deposits under MiFID II.
Whilst Article 25(4) in MiFID II allows investment firms to provide order-handling services (such as receiving and transmitting of orders and execution of orders on behalf of clients) without performing the appropriateness test, this only relates to ‘non-complex’ products and more complex products cannot be treated in the same way. ‘Non-complex’ products include certain debt instruments as well as certain structured deposits, however MiFID II also identifies circumstances when these products cannot be classified as “non-complex”.
The guidelines are set to help firms to identify complex financial instruments and structured deposits for which the provision of ‘execution-only’ services is not possible, thus boosting investor protection for complex debt instruments and structured deposits under MiFID II. For these more complex products, firms must carry out the appropriateness test for the client, meaning that firms will have to gather information on the client’s knowledge and competence so that they may assess the appropriateness of the transactions envisaged to and for the client, before transacting.
ESMA consulted on these guidelines earlier in the year as finalised guidelines must be in place by 3rd January 2016, in accordance with Article 25(10) of MiFID II – a year before they are to be applied under MiFID II on 3rd January 2017.
It seems that following the responses received to their consultation, ESMA has altered their originally proposed guidelines and reviewed some examples they had given in the consultation process. The finalised guidelines will now help firms to assess the complexity of following products:
It should be noted that the guidelines also cover debt instruments embedding a derivative. However ESMA have also finalised their opinion on the following instruments, clarifying these should not fall under instruments embedding a derivative or present a structure that makes it difficult for the client to understand the risks:
ESMA’s finalised report also clarifies that instruments which have complex mechanisms to calculate or determine the return should be deemed complex as they incorporate a structure which they believe would make it difficult for the client to understand the risk associated with the instrument. In addition, ESMA have added a new example of structured deposit incorporating a structure making it difficult for the client to understand the risk of return. In particular, ESMA deems that for structured deposits, where the credit institution has the unilateral right to terminate the agreement before term, should also be considered complex.
Click here to view ESMA’s Final Report 2015-1783 on complex debt instruments and structured deposits.
Considering the new rules and the scale of expected changes MiFID II presents, affected firms should all be in the early stages of planning for the new rules as best as possible based upon what is known at present, and what the new rules might mean for your firm and business lines.
If your firm is currently reviewing how MiFID II will impact your business and require support or assistance in planning for MiFID II implementation in 2017, please contact our experienced regulatory & compliance support team, who would be happy to help.
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