ESMA publishes appropriateness and execution-only MiFID II guidelines

The final guidelines follow a public consultation with participants and aim to enhance clarity and foster convergence in the industry’s approach to investor protection under MiFID II.

The European Securities and Markets Authority (ESMA) has published a final set of industry guidelines relating to appropriateness and execution-only requirements under MiFID II regulation.

Under MiFID II regulation as a means of investor protection, institutions providing non-advised services are required to ensure client knowledge and understanding of the investment service or product they intend to provide. If after assessment the institution finds this knowledge is not sufficient then they are required to issue a warning that this service or product is not appropriate.

The final guidelines published on 3 January apply to participants and competent authorities and follow a public consultation opened by ESMA in January last year alongside thepublication of a draft set of guidelines, to which the industry was invited to respond.  

They set out the terms of the time period and language that should be used to inform clients of inappropriateness, the policies and procedures used to gather relevant information for the assessment of clients’ appropriateness, the types of investment products and services to be considered alongside the nature of the client, and record keeping.

“ESMA believes that the adoption of guidelines is the best tool to achieve the explained objectives since it further reduces the risk of diverging interpretations that might lead to discrepancies in the application and supervision of the relevant regulation and requirements across Member States (determining a risk of regulatory arbitrage and circumvention of rules),” the regulator said in its report. “Moreover, the adoption of guidelines enables the creation of a cohesive and comprehensive document aimed at clarifying the appropriateness and execution-only process.”

ESMA has made several amendments to MiFID II regulation in the last few months, most recently scrapping payments for research on small caps and RTS 27 and 28 reporting requirements in December. More contentious were its changes in November which included changes to dark volume caps and the systemtic internaliser (SI) regime in a bid to encourage more volumes on the lit markets and exchanges.