The European Union Directive 2014/65/EU (so-called ‘MiFID II’) MiFID II reformulates and reorganises the fundamental duties of the

intermedi-ary (‘know your product’ and ‘know your customer’), extracting them from the general principles present in MiFID I; moreover, it modifies the rules on author-isation and organauthor-isational requirements for investment service providers and on investor protection; it introduces the so-called ‘organised trading facility’; it de-fers and rede-fers to the regulatory source (Regulation no. 600/2014, so-called MiFIR) to strengthen the transparency and competition of trading activities, in-troducing It introduces the so-called Organised Trading Facility (OTF); it defers and refers to the regulatory source (Regulation 600/2014, the so-called MiFIR) the strengthening of transparency and competition in trading activities, introduc-ing: a restriction on exceptions to disclosure requirements; a guarantee of non-discriminatory access to trading venues and central counterparties; and the in-troduction of a system for the exchange of financial information (⁵), and, above all, a channelling of derivatives trading to organised venues. The decision to reg-ulate certain matters through the use of the regulatory technique is justified by the fact that this legal form is by its very nature directly applicable in each Mem-ber State of the European Union, i.e. without the need for transposition into law by each Member State. This option of Community legislative policy removes from the discretion of the national authorities the matters for which it is intended to guarantee a uniform and certain regulation of the financial markets (⁶). With

(⁵) The central counterparty is the entity which, by interposing itself between two contracting parties through the novation of the original obligation, constitutes itself as the buyer of the contract sold and the seller of the contract purchased, guaranteeing the proper performance of the obligations assumed. This institution ensures the control and containment of substi-tution (or market) risk: the credit risk of the person executing a transaction is replaced by the credit risk of the CCP. The CCP manages risk-taking in such a way that its probability of default is much lower than the probability of default of the whole market and its participants.

(⁶) Recital 3 of EU Regulation No. 600/2014 (MiFIR): “This regulation should therefore be read in conjunction with the directive. The need to define a single set of rules for all financial institutions regarding certain requirements and to avoid potential regulatory arbitrage, as well as to provide greater legal certainty and reduce regulatory complexity for participants in the market justifies the use of a legal basis that allows for the adoption of a regulation. In order to remove the remaining obstacles to cross-border trading and the significant distortions of competition resulting from diverging national laws, as well as to avoid the emergence of further probable obstacles to cross-border trading and significant distortions of competition, it is appropriate to adopt a regulation defining uniform rules in all Member States”.

this technical instrument, the European legislator tackles one of the main critical issues in the application of MiFID I, restoring uniformity of application.

Directive 2014/65/EU of the European Parliament and of the Council, ap-proved on 15 May 2014 to replace Directive 2002/92/EC and Directive 2011/61/EU, is only partially discontinuous from the previous system: it largely maintains the basic approaches that characterised the matter in the previous con-text, but significantly extends the scope of its operation, in the areas of provision of investment services, protection of retail investors, definition of independent advisory services and adequacy of disclosure, adopting a more comprehensive system of supervision and enforcement of the rules, with the aim of regulating an increasingly vague and complex market.

Directive 2014/65/EU of the European Parliament and of the Council, ap-proved on 15 May 2014 to replace Directive 2002/92/EC and Directive 2011/61/EU, is only partially discontinuous from the previous system: it largely maintains the basic approaches that characterised the matter in the previous con-text, but significantly extends the scope of its operation, in the areas of provision of investment services, protection of retail investors, definition of independent advisory services and adequacy of disclosure, adopting a more comprehensive system of supervision and enforcement of the rules, with the aim of regulating an increasingly vague and complex market, The aim is to develop a single market for financial services in Europe, in which transparency and investor protection are ensured, including in cross-border transactions, thanks to the European pass-port.

From a technical-legal point of view, 2014/65/EU is a recast of the previous MiFID I, which is therefore transposed in principle (even if it has proved less effective in practical applications); however, MiFID II also includes important regulatory updates. The first fact that emerges clearly is represented by the new structure of the regulatory plateau, articulated by levels, expression of a precise hierarchical architecture of the sources (from the directive in question descend the regulations and even the collateral directives that regulate the insurance ac-tivity). In short, MiFID II represents, to all intents and purposes, a complex reg-ulatory block, composed of several acts (articulated according to the Lamfalussy process), which includes a compendious body of technical rules, issued by the EU Commission with the support of ESMA. Significant is the increasing use of the related instrument of the regulation and, at the same time, the search by the Community legislator for levels of stronger harmonisation, limiting the legislative power of the Member States. From a structural point of view, MiFID II encom-passes a broader web of interconnections: with EU regulations (no. 648/2012,

so-called EMIR (⁷), No 1286/2014, so called PRIIPs (⁸)) and also with the recast Directive 2016/97 (so-called Insurance Distribution Directive – IDD) on insur-ance distribution. The critical application issues of the first MiFID directive be-came apparent especially with the financial crisis of 2008-2009: shortcomings in the functioning and transparency of financial markets, weaknesses in the regula-tion of markets and related financial instruments. The new MiFID II directive therefore intervenes in over-the-counter (OTC) trading, intensifying the rules on transparency and investor protection. The aim is to strengthen confidence in the system, to include previously unregulated sectors, and to provide supervisory authorities (i.e. external, public and superordinate bodies with respect to internal compliance functions) with adequate powers, including sanctions, to carry out their tasks (so-called ‘product intervention’). It is envisaged, in fact, that the Eu-ropean Securities and Markets Authority (ESMA), the EuEu-ropean Banking Au-thority (EBA), for structured deposits, and the national supervisory authorities may prohibit or temporarily limit the distribution of certain financial products, including by assessing the merit of the products offered, if their marketing ex-poses investors or the financial stability of the system to excessive risks (⁹).

In particular, the recast Directive aimed to strengthen the protection of investors also with respect to the provisions of MiFID I, trying to overcome some opera-tional holes (which allowed, for example, free zones from the rules of regulated advice, through a distorted, excessive and formalistic use of the clause ‘execution only’). The effective protection of investors is the subject of the provisions of Article 24 (general principles and client information) and Article 25 (assessment of suitability and adequacy and communication to clients), which are of general (⁷) The EMIR Regulation (on OTC derivatives, central counterparties and trade repositories) introduced a number of requirements for counterparties to a derivative contract in order to reduce risk in derivatives markets and improve transparency. These obligations are modu-lated differently depending on the nature of the counterparties (financial and non-financial).

(⁸) The PRIIPs Regulation introduces the obligation, regulates the content and methods of presentation of the so-called KID (Key Information Document), a summary document con-taining key information for investors. It fulfils pre-contractual obligations, as it enables the retail investor to make informed and unformed investment decisions. To this end, it must be drafted using comprehensible terminology and clear communication. The KID covers pack-aged retail and insurance investment products (hence the acronym PRIIPs).

(⁹) Art. 69, § 2, letters f, q, s, t and u, MiFID II, lists among the supervisory powers to be conferred on competent authorities those of: “request the temporary prohibition of profes-sional activity; […] issue public notices; […] suspend the marketing or sale of financial in-struments or structured deposits if the conditions set out in Articles 40, 41 or 42 of MiFIR are fulfilled; […] suspend the marketing or sale of financial instruments or structured depos-its if the investment firm has not developed or implemented an effective product approval process or otherwise complied with the provisions of Article 16, paragraph 3, of MiFID II;

paragraph request the removal of a natural person from the board of directors of an invest-ment firm or market operator”. The European Securities and Markets Authority (ESMA) exercised its product intervention power for the first time on 27 March 2018.

application, limiting the free zones from the obligations of consistency assess-ment, represented by the mere execution of orders given by the client. The duty of disclosure is reinforced: in order to give serious and responsible advice, it is necessary to understand how much the client is willing to risk, what his objectives are and how much he would be able to amortise any losses. Firms are also re-quired to explain and outline to the client the reasons for the investment and why it would be consistent with the client’s wishes. The disclosure requirement also covers the costs and charges associated with investment or ancillary services, which must also include the cost of advice (if material), the cost of the financial instrument recommended or sold to the client and how the client may remuner-ate the investment service received. In addition, the information must be pre-sented in aggregate form, to allow the client to know the overall cost and its impact on the expected return on the investment.

Not only must the investment firm provide all the information related to the financial instrument, including risks and costs, but it must also ensure that the person offering the instruments has been adequately trained to perform the role of the financial advisor. The Member States shall define the criteria against which this knowledge and experience shall be assessed. The employee, in order to be able to provide advice, must meet certain requirements, i.e. have a level of knowledge certified through an ‘appropriate qualification’ (demonstrated through qualifications, tests or training courses meeting certain criteria); the competence must be based on ‘appropriate experience’, demonstrated through recent work activity over an effective period of time determined by the compe-tent national authority. Employees without the required experience must be sup-ported in the provision of advice by staff who meet the requirements.

The two main guidelines outlined by the legislator in the recast directive can be summarised as ‘investor protection’ on the one hand, and (above all) ‘market infrastructures’ on the other. In particular, the new elements impact on the in-ternal organization of the investment companies, through an innovative process outlined by the Community Legislator and constituted by the so-called POG (Product Oversight Governance).

MiFID II introduces, through Product Governance, rules that impose on inter-mediaries an organisational and behavioural structure relating to the creation, offer and distribution of financial products to investors. Product Governance is part of a process of transformation of the instruments of investor protection, which is not summed up in the sole discipline of transparency of information, but is declined in detailed regulations of the behavioural obligations that bind the entire organisational structure of the intermediary: the latter must be able to demonstrate that the protection of the investor is concretely pursued in every act, along the entire value chain of the financial product, from its creation to its distribution and periodic reporting. The Directive, in short, imposes a real obli-gation of organisational behaviour: strategies, processes, functions of production

and distribution of financial products must be concretely consistent with the needs and objectives of customers. In short, it imposes a real obligation of or-ganisational behaviour: strategies, processes, functions of production and distri-bution of financial products must be consistent with the needs and objectives of clients. It distinguishes the so-called manufacturer, an authorised intermediary who designs, develops and issues investment products, from the so-called dis-tributor, an authorised intermediary who markets, distributes or places any fi-nancial instrument.

The various stages of the process chains involving production and distribution involve, first, the identification of the target market for each financial product;

then the assessment of the relevant risks for clients and the market; and the as-sessment of the compatibility and consistency of the financial product with the needs of the target market, with reference to the different audiences targeted by those who produce and those who distribute. In practice, intermediary distribu-tors are required to identify the target market not in a theoretical way, but through the use of actual and individualised information on their customers. This commitment also translates into the identification of customer groups for which the specific product is not compatible.

The new regulatory frameworks introduced by MiFID II also redefine and ex-pand responsibilities and duties related to internal controls. The so-called ‘top manage-ment’, i.e. senior managers and high-level professionals involved in the produc-tion and distribuproduc-tion chains, have greater responsibility for the definiproduc-tion, appli-cation and effective monitoring of processes, with attention to both the manage-ment of potential conflicts of interest and the verification of the advisory skills of employees (ranging from the simple provision of information – so-called ‘giv-ing information’ – to actual financial advice). Even more central is the Compli-ance function, which is responsible for verifying the compliCompli-ance and functional-ity of organisational measures and product governance procedures as well as in-ternal and exin-ternal reporting (to supervisory authorities). This governance pos-tulates precise rules in the definition of the mutual responsibilities of companies (between manufacturers and distributors of financial instruments intended for savers), with the aim of outlining a complete ‘process chain’ and a ‘chain of re-sponsibilities’ in the process leading up to the advice given to savers. A clear separation of roles (producer versus distributor) and a logic of monitoring the entire ‘life cycle of the financial product’ are affirmed. The POG also places at the centre of the reflection and internal control activities a more articulated and pervasive discipline of the conflict of interest, oriented to ensure, among other things, the quality of the control that, in the organisation of business functions, must inhibit the recognition of inappropriate economic ‘incentives’, both to em-ployees and to corporate subjects (the so-called ‘economic retrocession’), in the operations of investment companies that concern the end user: the saver. The aim of these rules is to protect the best interests of the client, avoiding the most

disastrous effects of the mass sale of financial products, almost reduced to ‘over-the-counter products’.

The changes introduced by MiFID II do not only concern the POG, but also the conceptual redefinition of the nature of investment advice: there is a shift from generic and depersonalised advice, which makes use of typified tools, to specific advice, which consists in the provision of personalised recommendations as they are intended for a specific client, at his request or at the initiative of the investment firm. A recommendation is personalised if it is presented as suitable for the client or based on the client’s characteristics, including those derived from the MiFID questionnaire. Information disseminated to the public through dis-tribution channels is not personalised. It follows that recommendations ad-dressed to the general public (gross mass marketing), disseminated only through mass distribution channels, are not personalised (and therefore do not fall within the scope of the advisory activity).

In the perimeter already touched by MiFID I, the practical rules become more precise and detailed: in particular, the distinction, contained in the dual model provided for by the directive, between ‘independent’ and ‘non-independent’ ad-vice, subject to different disciplinary rigour, is central. The former takes into ac-count all the products available on the market (not only those of the intermediary and of third-party companies with which he has entered into commercial agree-ments) and the related service is remunerated on a fee basis, like any professional service. The second, although it should guarantee, under MiFID II, a greater extension of the offer, does not assume such a wide perimeter and, above all, is remunerated in the traditional way, i.e. not by the client but by the intermediary or by several intermediaries (through economic awards, incentives and retroces-sions). These service models can also be adopted by investment firms in a non-alternative manner, since they are complementary to each other and therefore can both be integrated within the same organisational structure of the bank. In particular, independent advice seems in itself more suitable to express higher protection of the investor, since the latter is evidently willing, in hypothesis, to choose such a service, select the provider and pay the corresponding price (‘fee’), recognising, through this sequence of acts, the intrinsic quality of the advice re-ceived. On the other hand, the regulation of inducements granted by the banking company to the consultant, on the basis of the sales made, represents, in short, a legitimate possibility from the legal point of view, but also a potential risk or obstacle to consultancy aimed at achieving the best interests of the client. In this sense, the different regulation of incentives, depending on whether one is dealing with independent or non-independent advice, represents a fundamental (albeit not decisive) step forward from MiFID I to MiFID II. In all fairness, it must be acknowledged that the regulatory evolution has not been followed by sufficient practical implementation of the independent advice model, which to date still represents a niche experience among financial intermediaries. Finally, it is

important to note that the ‘independent’ and ‘non-independent’ nature of the advisory model chosen by each intermediary has no connection with the auton-omous or salaried nature of the employment relationship of financial advisors: it is technically possible, and indeed desirable, to have employees of the financial intermediary who provide independent advice. Such a condition (of fixed salary workers), combined with a hetero-nomic regulatory statute protecting their ef-fective independence, by means of specific limitations on the employer’s power of compliance, would ensure the most effective realisation of the ‘best interests of the client’. In other words, it would be necessary to make the subordinate work free and independent from undue commercial solicitation by the employer for the placement of specific products and financial instruments in its own in-terest.

1.4. Post-MiFID II regulatory developments in the area of compliance