Tuesday, 11 June 2024
by Andrea Briganti, Head of e-Learning at Indigita SA, and Martin Horni, Head of Products & Asset Management at BRP Bizzozero & Partners SA.
The Markets in Financial Instruments Directive II (MiFID II), adopted by the European Parliament in 2014 and in force since January 3, 2018, has significantly reshaped the landscape for offering financial products in the European Union. Its broad scope, aimed at enhancing financial stability, improving investor protection, and fostering market efficiency, requires a closer look at how financial institutions can navigate this regulatory maze, particularly when it comes to the distribution of financial products, taking into account product registration and documentation requirements.
Distribution of Financial Products
MiFID II broadens the regulatory framework established by its predecessor, MiFID, to include additional financial instruments and to introduce stringent requirements for investor protection, market transparency, and corporate governance.
A key aspect of MiFID II in relation to the provision of investment services is the definition of the term "distribution", meaning “any active offering, recommending or marketing of financial products with the aim of concluding a contract for the purchase or sale of a corresponding product”.
Distribution activities must comply with “local distribution rules” (i.e. product registration and documentation requirements) or rely on a “private placement exemption” where applicable.
Local Distribution Rules
The application of “local distribution rules” depends on several criteria, including the nature of the service provided (i.e. execution-only, advisory, or discretionary asset management services), the type of solicitation (i.e. active solicitation, reverse solicitation), and the localization of the activity (i.e. at target, at source, or through remote means of communication).
For financial institutions, understanding these criteria is crucial to determine whether their activities qualify as distribution and, consequently, which regulatory requirements apply. This understanding helps in mitigating regulatory risks and ensures compliance, protecting both the financial institution and its clients.
Licensing and Product Registration Requirements
The marketing and promotion of financial products, such as funds and structured products, are subject to specific licensing and product registration requirements. These requirements vary depending on the entity acting as the marketer/distributor and the type of product being marketed.
For example, funds may be offered or marketed subject to prior registration, authorization, or notification to local regulators, in accordance with the procedures outlined in applicable laws. Structured products, on the other hand, generally require approval of a prospectus by local regulators, although certain “private placement” exemptions may apply.
Mandatory Product Documentation
Providing mandatory product documentation is essential to ensure transparency and help investors make informed investment decisions.
This includes the Key Information Document (KID) for Packaged Retail and Insurance-based Investment Products (PRIIPs), which must be provided to retail clients within the EU, irrespective of the type of solicitation.
Conclusion
Navigating the complexities of MiFID II requires a thorough understanding of its definitions, offering scenarios, and compliance requirements. Financial institutions operating within the EU must carefully assess their distribution activities, ensure appropriate licensing and product registration, and provide mandatory documentation to comply with the rigorous standards of MiFID II.
As the regulatory environment continues to evolve, staying informed and compliant is not only a legal necessity, but also a strategic advantage that enhances investor trust and market stability.
This blog aims to demystify the complexities of MiFID II for financial institutions and underscores the importance of compliance in today’s regulatory environment. By adhering to these regulations, institutions not only safeguard their operations but also contribute to a more transparent, efficient, and secure financial market within the EU.
What we do at Indigita
At Indigita, we are committed to supporting professionals in understanding and navigating the complexities of the product placement from a regulatory and cross-border perspectives. We offer a comprehensive course on Placement of Financial Products – EEA designed for banking executives, relationship managers, and compliance officers. This course provides a summary of key definitions related to financial product placement and analyses the marketing rules subject to license under MiFID II.
Additionally, through our inApp and inApp Products solutions, we provide product placement compliance answers on the go, including MiFID II appropriateness scores, empowering professionals to make informed decisions in the rapidly evolving landscape of cross-border product placement.
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