2014-07-31

ESMA

ESMA MiFID II/MiFIR Consultation paper (ESMA/2014/549)

The Swedish Investment Fund Association (SIFA) has provided ESMA with the following answers to the ESMA consultation paper.

Q19: Do you consider that there is sufficient clarity regarding the requirements of investment firms when acting as manufacturers, distributors or both? If not, please provide details of how such requirements should interact with each other.

 

<ESMA_QUESTION_19>

No, the text provided by ESMA in the Consultation Paper creates uncertainty about the applicability to UCITS and AIF manufacturers. When ESMA writes: “The proposals in this chapter do not override responsibilities in other directives, such as the Prospectus Directive and UCITS” (p. 46, para 17) this implies that there might be a responsibility for these manufacturers to apply MiFID II rules together with other rules. However, there are no such requirements since these manufacturers are exempted from the MiFID scope (art. 2(1)(i).

<ESMA_QUESTION_19>

Q69: Do you agree with the proposal to further specify information provided to clients about financial instruments and their risks?

 

<ESMA_QUESTION_69>

We would like ESMA to clarify that these information requirements apply when there is no other existing European legislation already requesting the same information. We are concerned that there might be overlaps in legislation unless it is made perfectly clear that information about financial products are regulated in many directives and regulations already in place such as the KIID regulation.

<ESMA_QUESTION_69>

 

Information to clients on costs and charges

 

Q71: Do you agree with the proposal to fully apply requirements on information to clients on costs and charges to professional clients and eligible counterparties and to allow these clients to opt-out from the application of these requirements in certain circumstances?

 

<ESMA_QUESTION_71>

No, we do not agree. As is provided for in MiFID professional clients should be allowed to opt in to be treated as non-professional clients.

<ESMA_QUESTION_71>

Q72: Do you agree with the scope of the point of sale information requirements?

 

<ESMA_QUESTION_72>

We agree that point of sale disclosure is important and that transparency about costs must be as comprehensible and accurate as possible. However, we do not entirely agree with the broad interpretation of the scope. When providing portfolio management it is not possible to foresee all possible investments that might be made under the mandate by the client. Therefore such information would not be relevant since it cannot be calculated before the investments has been made. As ESMA points out (paragraph 21) the client will receive reports about the costs incurred ex post through the application of article 25(6).

<ESMA_QUESTION_72>

Q73: Do you agree that post-sale information should be provided where the investment firm has established a continuing relationship with the client?

 

<ESMA_QUESTION_73>

The Swedish Investment Fund Association (SIFA) agree that information should be provided to clients with an established relationship. However, SIFA cannot agee with the ESMA interpretation of MiFID II level 1 text concerning the content of the information. We acknowledge that article 24(4)(c) refers to cost information, including aggregated costs and information about the cumulative effect on the return, to be provided on a regular basis.  Such information can very well be given regularly so as to inform the client of any changes in cost structure or service so that the client can compare the investment with other investments. However, it does not imply that the information should be anything else than provided for when entering into contract. When producing the information, ex post figures should be used to illustrate with generic examples the effect of costs and charges, but this does not mean that personalized ex post information is required. We would therefore recommend ESMA to delete the last part of its advice under paragraph 16 on page 115.

<ESMA_QUESTION_73>

Q74: Do you agree with the proposed costs and charges to be disclosed to clients, as listed in the Annex to this chapter? If not please state your reasons, including describing any other cost or charges that should be included.

 

<ESMA_QUESTION_74>

No, we do not agree. We seriously request ESMA to reconsider its inclusion of transaction costs in the cost disclosure requirements. As ESMA points out, such information is not available for UCITS funds. The reason is that the KIID regulation does not include transaction costs in the ongoing charges figure since such costs can vary depending on market conditions, market risk etc. The conclusion not to include transaction cost in the KIID regulation was reached after lengthy discussions and consultations. As is stated in recital 78 of MiFID II if there are information requirements about costs and charges in any other union law this should be regarded as sufficient. As there are rules in the KIID regulation these information requirements should be acknowledged and applied. If information about transaction costs are required ex ante this will obviously mean that the information is highly hypothetical and cannot be used when making an investment decision. Such information would seriously confuse investors and complicate their investments.

<ESMA_QUESTION_74>

Q75: Do you agree that the point of sale information on costs and charges could be provided on a generic basis? If not, please explain your response.

 

<ESMA_QUESTION_75>

Yes, we agree that point of sale information should be provided on a generic basis but would request that ESMA reconsiders its requirement for personalised ex post information.

<ESMA_QUESTION_75>

Q77: Do you have any comments on the requirements around illustrating the cumulative effect of costs and charges?

 

<ESMA_QUESTION_77>

Cumulative illustrations showing the potential effect of costs and charges will serve a purpose when entering into contract (ex ante) if the underlying calculations are based on numbers that can be estimated correctly. When such information is updated it can also serve a purpose for the client when receiving regular information since it will give the client the opportunity to compare different investments. However, to enable the client to compare different services or investments, such information must be provided on a generic basis and not on an individual basis. SIFA would also like to stress the importance of not including costs that cannot be estimated with any kind of precision such as transaction costs. SIFA is also of the strong opinion that illustrations of cumulative costs must be accompanied by illustrations of cumulative returns in order for the clients to understand the costs. 

<ESMA_QUESTION_77>

Q78: What costs would you incur in order to meet these requirements?

 

<ESMA_QUESTION_78>

If the ESMA advice becomes binding rules we expect a serious increase in information costs and administrative burden not only for MiFID companies but also for UCITS companies.

<ESMA_QUESTION_78>

 

1.2. The legitimacy of inducements to be paid to/by a third person

 

Q79: Do you agree with the proposed exhaustive list of minor non-monetary benefits that are acceptable? Should any other benefits be included on the list? If so, please explain.

 

<ESMA_QUESTION_79>

Instead of an exhaustive list of minor non-monetary benefits SIFA suggests a non-exhaustive list. There might be minor monetary benefits not foreseen by ESMA that actually enhance the quality of the service. SIFA is of the opinion that an exhaustive list would not be in line with the level 1 text.

 

SIFA would also suggest the deletion of the reference to financial research in the ESMA advice paragraph 5(i) (p. 123). Financial research is a financial service fundamentally connected to the service of execution and should not be defined as a non-monetary benefit. Research is necessary to perform portfolio management and execute transactions and thus it is part of the service paid for. Including research in the definition of non-monetary benefits would have unintended negative consequences for the financial markets. Examples of such negative consequences are: increased cost and complication of portfolio management; favouring larger firms with in house research facilities; and creating an un-level playing field with markets outside the EU.

<ESMA_QUESTION_79>

Q81: Do you agree with the non-exhaustive list of circumstances and situations that NCAs should consider in determining when the quality enhancement test is not met? If not, please explain and provide examples of circumstances and situations where you believe the enhancement test is met. Should any other circumstances and/or situations be included in the list? If so, please explain.

 

<ESMA_QUESTION_81>

We feel that the list of circumstances provided is unclear and must be explained further. The first example under paragraph 10 (p. 124) seems to suggest that ESMA is of the opinion that a fee, commission or non-monetary benefit cannot be used to finance the business at all. As we understand it this is not the intention of ESMA. It should be made clear that ESMA is of the opinion that a fee commission or non-monetary benefit may be acceptable as long as the firm does not base its entire operations on inducements. If this is made clear it is easier to read paragraph 10 in connection with paragraph 11. We welcome the reference to commissions fees or non-monetary benefits being acceptable if they give access to a wider range of financial products. That is in line with the level 1 directive and will make the choice between independent advice and non-independent advice possible for retail investors.

<ESMA_QUESTION_81>

Q82: Do you anticipate any additional costs in order to comply with the requirements proposed in this chapter? If yes, please provide details.

 

<ESMA_QUESTION_82>

As explained above ex post information, especially on an individual basis, will incur much higher costs.

<ESMA_QUESTION_82>

Q90: Do you agree the existing criteria included in Article 38 of the Implementing Directive should be expanded to incorporate the above points, and that an instrument not included explicitly in Article 25(4)(a) of MiFID II would need to meet to be considered non-complex?

 

<ESMA_QUESTION_90>

We would like to object to the ESMA interpretation of article 25(4)a that all listed AIF:s are complex instruments. This interpretation would not be in line with the MiFID II level 1. The article only explains that certain products are automatically non-complex. Nothing in the text imply that it should be interpreted as defining products as complex. Products not automatically defined as non-complex can be defined as “other non-complex financial instruments” if they meet certain criteria. The ESMA advice should reconsider its position that AIF:s listed on a regulated market are always complex. Such a position would contradict the member state option in the AIFM-directive to create AIF:s for retail. A Swedish example of retail-AIF:s is the “specialfond” which is intended for retail investors. These funds provide the same level of protection as UCITS funds and are generally regarded as non-complex instruments as they meet the criteria in the implementing directive article 38. It would be illogical if such an instrument would meet the criteria in article 38 only if it was not traded on a regulated market.

<ESMA_QUESTION_90>

SWEDISH INVESTMENT FUND ASSOCIATION

/Lena Falk

Legal counsel

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