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Investment advice (MiFID definitions)
European Union Electricity Market Glossary

 

 

 

'Investment advice' means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments (Article 4(1)(4) MiFID II).

 

The provision of a general recommendation about a transaction in a financial instrument or a type of financial instrument constitutes the provision of an ancillary service within Section B(5) of Annex I to Directive 2014/65/EU, and consequently Directive 2014/65/EU and its protections apply to the provision of that recommendation (Recital 17 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive).

 

 

 

Recitals 14-16 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

(14) Advice about financial instruments addressed to the general public should not be considered as a personal recommendation for the purposes of the definition of ‘investment advice’ in Directive 2014/65/EU. In view of the growing number of intermediaries providing personal recommendations through the use of distribution channels, it should be clarified that a recommendation issued, even exclusively, through distribution channels, such as internet, could qualify as a personal recommendation. Therefore, situations in which, for instance, email correspondence is used to provide personal recommendations to a specific person, rather than to address information to the public in general, may amount to investment advice.

 


(15) Generic advice about a type of financial instrument is not considered investment advice for the purposes of Directive 2014/65/EU. However, if an investment firm provides generic advice to a client about a type of financial instrument which it presents as suitable for, or based on a consideration of the circumstances of, that client, and that advice is not in fact suitable for the client, or is not based on a consideration of his circumstances, the firm is likely to be acting in contravention of Article 24(1) or (3) of Directive 2014/65/EU In particular, a firm which gives a client such advice would be likely to contravene the requirement of Article 24(1) to act honestly, fairly and professionally in accordance with the best interests of its clients. Similarly or alternatively, such advice would be likely to contravene the requirement of Article 24(3) that information addressed by a firm to a client should be fair, clear and not misleading.


(16) Acts carried out by an investment firm that are preparatory to the provision of an investment service or carrying out an investment activity should be considered as an integral part of that service or activity. This would include, for example, the provision of generic advice by an investment firm to clients or potential clients prior to or in the course of the provision of investment advice or any other investment service or activity.

 

 

 

 

Investment advice

 

MiFID II confirms the definition of investment advice outlined in MiFID I. The MiFID Implementing Directive specifies the definition of a personal recommendation, which is a core element of an investment advice service. It states that 'a recommendation is not personal if it is issued exclusively through distribution channels or to the public' (Art. 52 MiFID Implementing Directive).

 

ESMA's technical advice:

 

ESMA recommends that the content of Article 52 of the MiFID I Implementing Directive should be confirmed except for the last sentence which should be changed from:

 

"A recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public."

 

To:

 

"A recommendation is not a personal recommendation if it is issued exclusively to the public."

 

ESMA technical advice intends to align the legal text with technical and market developments, where a personal recommendation in respect of financial instruments is provided using various distribution channels (e.g. electronic communication). The issue was addressed in the 2010 CESR Questions & Answers ''Understanding the definition of advice under MiFID'', where CESR clarified that a recommendation to a wide group given through a mechanism such as a mail or the Internet should not automatically exclude the provision of a personal recommendation.

 

Assessment of IA need:

 

The proposed change seeks to confirm the interpretation of 'personal recommendation' as clarified by the CESR in the 2010 Q&A under MiFID I by clarifying that, in light of the growing number of intermediaries who use internet and other similar means, personal recommendations may be provided through such distribution channels. Also, a large majority of stakeholders agreed with ESMA's technical advice. This is a technical improvement which will have no significant impact on the functioning of the investment advice market and market practice. It is therefore the view of the Commission that it is not proportionate to submit the new wording compared to Art. 52 of the MiFID Implementing Directive to further impact assessment.

 

Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 70

 

 

 

 

Question 1 [Last update: 10 October 2016]

 

Could a firm still hold itself out as being independent where it assesses and compares a sufficient range of financial instruments available (which are not limited to financial instruments issued or provided by the firm itself or by entities having close links) but that the outcome of such an assessment in a considerable number of cases is that the firm recommends financial instruments to its clients which are issued or provided by the firm itself or by entities having close links?


Answer 1


When a firm holding itself out as being independent frequently assesses financial instruments which are issued or provided by the firm itself or by entities having close links as best suited for its clients, ESMA considers this could potentially conflict its status as 'independent'.


Independent advisers are reminded of their obligations stemming from MiFID II (and in particular Article 24(4) and 24(7)) and implementing measures (in particular Articles 52 and 53 of the MiFID II Delegated Regulation). A firm is also expected to manage conflicts of interest at all times. In doing so, the firm should establish, implement, maintain and update regularly adequate internal systems and controls in order to ensure that it is not bound by any form of agreement with a product provider that may limit the firm's ability to provide a personal recommendation which is unbiased and based on an assessment of a sufficient range of financial instruments available on the market. Also a regular review of the service and financial instruments it offers should be performed by the firm. Consequently, ESMA expects that these internal controls and systems should provide for a permanent internal awareness of its independency status.


In practice this means that the outcome of the unbiased and unrestricted analysis of the financial instruments available on the market could occasionally result in the firm recommending its own products. However, if the outcome is that the firm routinely recommends its own products or if there appears to be a systematic bias to advise clients to invest in its own products, the firm would most likely have problems in demonstrating the provision of advice on an independent basis. In such a case ESMA expects the firm to do thorough internal assessments determining if and to what extent clients' interests are or could be affected. Such an internal assessment should at least consider information on how the firm assessed and compared financial instruments which are issued or provided by the firm itself or by entities having close links versus a sufficient range of financial instruments available on the market. Also it should make clear the factors the assessment has been based upon and which factors determined the outcome. The firm should be able to provide this analysis to its clients and on request to the supervisory authority.

 

Questions and Answers, On MiFID II and MiFIR investor protection topics, 10 October 2016 ESMA/2016/1444, Investment advice on an independent basis [Last update: 10 October 2016]

 

 

 

 

 

 

IMG 0744

    Documentation    




 

 

 

MiFID II, Article 4(1)(4)

 

Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, Recitals 14-17

 

Questions and Answers on MiFID II and MiFIR investor protection and intermediaries topics, 18 December 2017, ESMA35-43-349

 

Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 7

 

 

 

 

 

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Last Updated on Friday, 22 December 2017 12:57
 

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