On 6 November 2020 and on 21 December 2020, ESMA updated its Questions and Answers (“Q&As”) concerning investor protection and intermediaries topics under Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFID II”) and Regulation (EU) No. 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFIR”).
In Question 33 (updated on 21 December 2020), related to information on costs and charges, ESMA addressed the presentation of information about ex-post costs and charges to clients in a fair, clear and not misleading manner in accordance with Article 24(3) of MiFID II. According to ESMA, such information should be presented:
- through a standalone document (which could still be sent together with other periodic documents to clients); or
- within a document of wider content, provided that it is given the necessary prominence to allow clients to find it easily.
Furthermore, where a breakdown of aggregated figures is provided (at the client’s request), it is important that the consistency of the overall ex-post disclosure presented is ensured so that clients are in the position of easily reconciling aggregated figures with their itemised breakdown referring to the same reporting period (both for cash amounts and percentages).
On 6 November ESMA updated Questions 2, 3 and 4 relating to product governance. In Question 2 ESMA covered how firms should manufacture financial instruments to ensure that these financial instruments' costs and charges are compatible with the needs, objectives and characteristics of the target market under Article 9(12)(a) of the MiFID II Delegated Directive (2017/593/EU) (the “MiFID II Delegated Directive”). In ESMA’s view, firms should have clear and robust policies and procedures to identify and quantify all product related costs and charges. Such policies and procedures should be robust and documented, with a clear determination of roles and responsibilities in the process. For example, policies and procedures should be clear on which market parameters are used for the pricing of products and related determination of costs (sources, frequency of updates, how they are applied to products of different characteristics/duration, etc.). Firms should then assess if and how the costs and cost structures identified are compatible with the envisaged target market of the product and whether adjustments are needed.
In Question 3 ESMA clarified how firms manufacturing financial instruments should ensure that costs and charges do not undermine the financial instrument's return expectations, as required by Article 9(12)(b) of the MiFID II Delegated Directive. According to ESMA, during the product design phase the firm should undertake a scenario analysis of their financial instruments and, in this context, simulate product returns taking into account all costs of the instruments (implicit and explicit).
Lastly, in Question 4 ESMA explained how firms should ensure that the charging structure of the financial instrument is appropriately transparent for the target market, such as that it does not disguise charges or is too complex to understand as required by Article 9(12)(c) of the MiFID II Delegated Directive. ESMA gives a non-exhaustive list of examples showing what is expected in this regard.
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