MiFID « Quick Fix » to enter into force

What is the “MiFID Quick Fix”?

Under the label of “Capital Markets Recovery Package: MiFID and EU Recovery Prospectus”, the European Parliament voted on 10 February 2021 to adopt the directive amending “Directive 2014/65/EU as regards information requirements, product governance and position limits and Directives 2019/878/EU and 2013/36/EU as regards their application to investment firms, to help the recovery from the COVID-19 pandemic.”

The main aim of this initiative by the European regulator was to encourage investments by removing or relaxing certain administrative procedures that prevented fluid market participation by both retail, professional and institutional investors, whilst maintaining and in some instances even increasing protection for retail investors – the key element of MiFID II regulation.

As access of companies and public entities to deep debt and capital markets is crucial to Europe’s economic wellbeing, supporting the economic recovery from the pandemic induced crisis was a primary driver for the European regulator when publishing these amendments to MiFID II.

What changes will be applied as of February 28, 2022?

The switch from paper-based communication to digital communication as the default for all MiFID related information (but leaving a possible paper-based option for retails clients) was one of the most promising measures of the directive.

Unfortunately, the transposition into Belgian law seems to limit the scope of digital communication as default to pre-contractual information about the investments and/or the elements that facilitate the investment process. This will not simplify the processes of the financial sector striving at offering more digitalization in their commercial offers to match their “voice of the clients” and their sustainability transition.

One of the other changes is that Investment firms will no longer be required to conduct a cost-benefit analysis of certain portfolio activities for eligible counterparties and professional clients. A procedure that proved to be too cumbersome for this type of client. However, they will still have the possibility to opt-in.

It has also been demonstrated by the various parties, namely investment firms, professional clients and eligible counterparties, within the framework of an ongoing relationship, that the mandatory service report is considered as unhelpful as most of the time, it is not read and investment decisions are taken without consulting the information available in these reports. This report is no longer to be automatically provided to eligible counterparties and professional clients, but they will still have the option to choose to receive it.

The directive also marks the importance of being able to support small and middle-capitalization issuers by increasing the research available on these small- and mid-cap companies. The goal being to give a wider access to corporate bonds available and a better connection between Investors and Issuers.    
However, it is important to mention that the research on these issuers is limited.
Indeed, their market capitalization cannot exceed 1 billion and companies established for less than 36 months are not included in the scope.

Eligible counterparties and professional investors will be exempted from cost and charges disclosure requirements, except for professional investors that entered into an advice or portfolio management contract with a bank. A signal in this sense had already been put on the table by the European Securities and Markets Authority (ESMA).

The product governance requirements will no longer apply for bonds with a make whole clause. Firstly, because they are considered as safe and simple for retail clients and secondly because eligible counterparties have sufficient knowledge of financial instruments.

In conclusion

While the objective of the MiFID II ‘Quick Fix’ Directive was to introduce ‘quick fixes’ to mitigate the effects of Covid-19 we should remember that the ambition of the consultation performed by the European Commission in Q1 2020 was to gather information from the financial sector about the implementation MiFID II/MiFIR.

Whilst the consultation was not a review of the entirety of MiFID II or MiFIR, the European Commission’s survey suggested that MiFID II refit would be a combination of liberalizing (new categories of client) and tightening (inducement ban on financial advisors).

Today, it is still unclear at this stage whether this review will result in a simple MiFID II Refit or MiFID III.