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Inducements and Other Matters

AUTHOR(S): Joe Beashel
PRACTICE AREA GROUP: Regulatory Risk Management and Compliance
DATE: 28.06.2016

On 7 April 2016 at the European Commission (“Commission”) published as awaited delegated directive (the “Delegated Directive”) under (Directive 2014/65/EC)  MiFID 2 related to safeguarding financial instruments and funds belonging to clients, product governance obligations and rule applicable to the provision and reception of fees, commissions or any monetary or non-monetary benefits (inducements). At the most basic level investment firms must not be biased or distorted in the provision of services by inducements.

The draft Delegated Directive follows on from advices provided by the European Securities and Markets Authority (“ESMA”) in late 2014 and is one of over two dozen such additional measures which are being included to supplement the text of MIFID 2.

The Draft Delegated Directive

The clarity provided by the Delegated Directive in respect of fees and inducements will be welcome for market participants in ensuring that anything that is provided is in accordance with the requirements.The recitals to the Delegated Directive specifically the scope, minor / brief summaries of “own opinions” related to current economic statistics or simple provision of opinions on company results shall not constitute a non-monetary benefit.

On the other hand if any non-monetary benefit involve a third party allocating resources to an investment firm shall not be considered minor and could be contrary to the requirement to act in a client’s best interests. There are also requirements to ensure that research payment accounts are appropriately constructed and operated so that they are not driven by amounts of executed transactions but are rather related to specific research charges aligned to a budget.

Inducements in Focus

The primary responsibility of the Directive requires investment firms “paying or being paid a commission or providing or being provided with a non-monetary benefits in connection with the provision of an investment service or ancillary service” to ensure that the requirements set out in MIFID II are addressed.

Inducements are designed to enhance the quality of the service. If it is justified, on the basis of additional or higher levels of service to the relevant client that it is in proportion with the level of inducement received. The criteria in considering a fee, commission or non-monetary benefit:

  • Providing non-independent investment advice related to product that is not closely linked to the investment firm providing the service;
  • Non-independent advice in addition to either an (at least) annual suitability assessment of the financial instruments in which the clients have invested, or the non-independent advice in addition to an ongoing service which could suggest an optimal asset allocation; and
  • Access to a wider range of financial instruments to which the investment firm does not have close links and that are produced from third party providers.

The key assessment is whether there is an ongoing benefit to the client and secondly that the provision of services to the client are not distorted as a result of the inducement. In all cases where an investment firm continues to pay or to receive an inducement the requirements set out above must be assessed.

Evidence of inducements paid or received must always be recorded. This is complied with by keeping an internal list of all files, fees, commissions and non-monetary benefits and secondly by recording how the inducements and to the quality of the service provided to the clients. Inducements must not impair a firm’s overriding duty to act honestly and professionally in accordance with the best interests of the client.

Disclosure Requirements

An investment firm must always disclose to the client information on inducements in accordance with MIFID II. There are increased disclosure requirements based on the nature of the inducement received. For example, minor non-monetary benefit may be described in a generic way. It follows that a more extensive benefit must be described and set out proportionately.

Where it is not possible to provide an exact amount in relation to the inducement received, an investment firm shall provide the method of calculation of the amount and, at least, annually for so long as ongoing investment inducements are received by an investment firm. The firm must inform its clients on an individual basis of the exact amount of payments made or received in respect of inducements.

Inducements in respect of investment advice on an independent basis or portfolio management services

Investment firms must return to clients any fees, commissions or monetary benefits paid by a third party as soon as possible after receipt in respect of the independent advice or portfolio management services. Firms are required to set up and implement the policy to ensure that the amounts are correctly allocated and transferred to each individual client. Information must be sent by the investment firm too clients through periodic reporting statements detailing the benefits transferred to them.

Firms providing investment advice on an independent basis or portfolio management services shall not accept non-monetary benefits that do not quality as acceptable minor non-monetary benefits.

Minor non-monetary benefits include:

  • Generic information and documentation relating to a financial instrument that is non-personalised;
  • Distribution of information papers by a corporate issuer or potential issuer to promote a new issuance that is similarly available to the public and that the relationship and any payments between the issuer and the investment firm are fairly disclosed in the material (see note below);
  • Conferences, seminars and other training benefits;
  • Reasonable hospitality such as food and drink during a meeting, conference seminar, of a reasonable value; and
  • Member States may also define certain non-monetary minor benefits that do not impair compliance with investment firms, duty to act in the best interest of a client and can enhance the quality of the service provided to a client. We have not had an indication of what these might be from an Irish perspective.

In all cases, minor non-monetary benefits shall be reasonable and proportionate and of a scale that they are unlikely to influence a firm’s behaviour in any way that is prejudicial to the interest of the client. It is important to note that in minor non-monetary benefits, must be disclosed to clients in advance of the provision of services.

Investment Research

Research shall not be considered to be an inducement provided the following conditions (if any) are met:

  • The investment firm pays, from its own resources, for the research;
  • The payments come from a separate research payment account. If the research is paid for by a client the research payment account is funded by a specific research charge to the client;
  • The investment firm shall be responsible for the research payment account;
  • The quality of the research is regularly assessed on robust criteria so that it is likely to contribute for better investment decisions; and
  • In operating the research payment, investors firms must provide information to clients on the budgets amounts for research and the estimated research charge for each client. A similar research exists in respect of setting out annual information on the total costs incurred for their party research.

There is also a general requirement to provide more specific information upon request on the summaries of amounts paid and the benefits to the firm of that research. Any rebates or residual funds must be clearly set out. Research budgets must be driven by actual client needs and not linked to values or value of transactions. In collecting research changes along with other changes or transactions commission shall clearly set out that the charge relates to research and is in compliance with the above criteria.

A consideration for investment firms in providing estimates is that the charge for research to clients cannot exceed the research budget. The research charges can be spread over a defined period. Furthermore, increases can only occur if clear information has been shared with clients. Any surplus can be off-set against future research changes or rebated to the client.

Research budgets are the responsibility of senior management. Appropriate internal controls (including a written policy) must be maintained to ensure it is managed in the client’s best interests. Audit trails are required to ensure internal research is not funded and that the research provided is of value to clients. The policy document must also consider appropriate allocations in the case of portfolio clients. All costs relates to execution must also be specified for each client.

Key Departures from previously issued ESMA guidance

  • The Delegated Directive has made it explicit that it will apply to UCITS Management Companies and if AIFs when such entities are authorised to perform specific investment services such as the management of portfolio investments, investment advice and safe keeping.
  • The research account and research as set out above are a material departure from the previously issued guidance.
  • ESMA did not include any third party material in its list of acceptable benefits in its technical advice.
  • By contrast, the Delegated Directive allows for “written material from a third party that is commissioned and paid for by a corporate issue or a potential issue or to promote a new issuance by the company, or where the third party firm is contractually engaged and paid by the issuer to produce such material on an on-going basis, provided that the relationship is clearly disclosed in the material and that the material is made available at the same time to any investment firms wishing to receive it”.


The Delegated Directive has in the main confirmed the position as had been previously advised by ESMA. We have set out instances where this has not been the case and where perhaps further consideration should be given to the measures in advance of the implementation date. The text in the Directive mirrors the previously applicable regime but the Delegated Directive adds a level of detail and provides for more restrictions that had previously been the case.

The Delegated Directive will now be considered by the Council of the European Union and the European Parliament and shall enter into force 20 days after publication in the official journal provided that no objections are forthcoming from the Council or the Parliament.


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