An increase in cross-border distribution of products and services has prompted a review of MiFID II’s article 34. Benjamin David explains.
A rise in the number of asset managers who have expanded their services into other European countries without establishing local branch offices is a key factor that triggered the EU’s review of ‘Article 34’ of MiFID II.
The European Securities and Markets Authority (Esma) is concerned to see that regulators from a firm’s home country can work better with regulators in ‘host’ countries where firms newly market their products and services.
MiFID – or the Markets in Financial Instruments Directive – is a far-reaching piece of regulation introduced after the 2008 financial crisis. Key aims of MiFID are investor protection and market stability.
Esma says the digitalisation of financial services has increased the ability of firms to provide services across borders and that the pandemic contributed to more retail investors having exposure to cross-border firms.
Cross-border investment services are a vital element of the EU single market in financial services that fosters competition among fund managers and expands choice to consumers who can confidently choose among a broader number of firms and investment opportunities.
Esma said it would publish a final report and submission of draft technical standards to the European Commission (EC) for endorsement by the end of 2023.
Article 34 of MiFID II
MiFID II and associated measures were adopted to improve protection levels for investors and create a more uniform regulatory environment in the EU. “MiFID II recognises the importance to allow the provision of investment services across the EU through the freedom to provide services under [this] regime,” states the consultation paper, adding that a result is increased choice for consumers.
Esma launched the Article 34 consultation with the aim of improving ‘regulatory technical standards’ (RTS) and ‘implementing technical standards’. This, in large part, is to help regulators – the ‘national competent authorities’ (NCAs) – better regulate the rise in cross-border activities, even ensuring that firms expanding their services into other countries have the right language skills to handle customer complaints.
Esma has two main targets: firstly, the information that regulators need when a firm wishes to provide cross-border services without the establishment of a local branch; and secondly, the creation of standard forms, templates and procedures for the communication of information.
Esma says the continued increase in cross-border activities provided under the MiFID II regime means NCAs must increase their focus on the supervision of cross-border activities and their cooperation with each other. The development of cross-border activities that are not accompanied by an increased supervisory focus “risks undermining investors’ trust and backfiring on the achievement of the single market”, Esma adds.
The consultation paper proposes several amendments to the current RTS, focusing on the information that investment firms are required to give when they passport services over borders. These are:
• The marketing means used by the firm in host member states;
• That a firm has the required language skills to deal with complaints from clients in each of the host member states where it provides services;
• Details of which member states the firm will actively use its passport in, and the client categories targeted; and
• How a firm will organise itself in relation to cross-border activities.
Investor choice
Kate Webber, head of product strategy at asset servicer Northern Trust, tells Funds Europe that the outcome of Esma’s consultation has the ability to “limit where and when funds are offered if the bar for passporting is significantly increased and ultimately limits investor choice across Europe”.
The consultation is a good opportunity for improving fund distribution in the EU. Gaëtan Parchliniak, head of regulatory affairs at FundRock, a third-party UCITS management company and AIFM, tells Funds Europe that a positive outcome of the consultation could be to increase harmonisation of fund distribution rules across regulatory regimes.
The EU has always faced issues of regulatory divergence, which is where a regulator may add additional requirements locally, sometimes known as ‘gold-plating’.
Parchliniak adds that the ambition for a single EU market generally requires investment firms to have “substance” in the EU – but that the need for substance should not be synonymous with requiring a local presence in each host member state.
Making the point in a wider global context, he says: “This is particularly important when the investment firms intend to use tied agents. The tied agents must have a substance in the EU and not use the resources based in non-EU countries.”
The consultation says that in relation to marketing calls, regulators should know whether the investment firm will use a call centre, tied agents or whether calls will be placed by employees of the firm.
“When performing active cross-border activities to non-professional investors, investment firms must be able to answer to the investor at least in one of the official languages of the host member state – not only for complaint-handling,” Parchliniak says.
Relating to Esma’s point about the “means of marketing” in host member states, it is important to reinforce supervision on social media platforms, he adds.
Parchliniak stresses that the consultation, in emphasising a need for more scrutiny of investment firms’ cross-border activities, means NCAs in-home member states also have enough means and resources to supervise cross-border activities in a host member state. If they do not, he warns, this could possibly have the unintended consequence of increasing “regulatory jurisdiction shopping”.
At law firm Clifford Chance, Anne-Lise Vandevoir, senior associate, investment funds Luxembourg, and Oliver Zwick, counsel, investment funds Luxembourg, note that Esma’s consultation paper is broadly in line with industry expectations in that “there is a broader trend towards more supervision and regulation of cross-border activities undertaken by investment firms”.
Speaking to Funds Europe, they both note that it will be relevant to see how Esma’s information requirements around “marketing means” will be applied and supervised in practice.
“Under the new rules, investment firms will be required to provide and update detailed information on the marketing means – including via social media campaigns and mobile apps – used on a cross-border basis to their home regulator, which might turn out to be quite burdensome for both regulators and investment firms alike,” they add.
Looking ahead
Concerns about regulatory jurisdiction shopping aside, the consultation paper is welcomed on a prima facie basis as a positive development for the funds industry in Europe. The main amendments will remodel the information that investment firms are required to provide when submitting a notification to the NCA of its home member state in exercise of passporting rights to provide investment services and activities in other member states.
There is in the industry a broad curiosity regarding the “marketing means” and the impact that the consultation will have on the financial industry as a whole.
Moreover, asset managers will no doubt be hoping that investors’ trust around cross-border activities can be bolstered as a result of the consultation, helping safeguard the EU’s single market.
© 2023 funds europe
