DIPARTIMENTO DI GIURISPRUDENZA
Corso di Laurea Magistrale a Ciclo Unico in Giurisprudenza
Tesi di Laurea
Concepts of Investor’s Vulnerability Through the Eyes
of European Financial Product Governance
Relatore:
Vincenzo Pinto Correlatore:
Luca Della Tommasina
Candidato:
”Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that’s creative.” Charles Mingus
1 Introduction 2
2 Evolving MIFIDs 5
2.1 Pre-crisis negotiation: a lobbyist clash . . . 6
2.2 The Birth of Financial Product Governance . . . 11
2.3 The Role of ESMA . . . 19
2.4 Technical advises and Quick fixes . . . 24
3 Trying to shape who is “vulnerable” and what is “dangerous” 30 3.1 Subjective Vulnerability . . . 31
3.1.1 Psychological Biases . . . 33
3.2 Consumers and Investors are not the same thing . . . 37
3.3 Vulnerability Due to External Elements . . . 40
3.3.1 Legislative Loopholes . . . 41
3.3.2 Product Complexity . . . 42
3.3.3 Derivatives and OTC venues . . . 44
3.3.4 Insight on Fintech . . . 58
3.3.5 High frequency fees . . . 62
3.3.6 Beware of the robots . . . 64
3.4 The Question of Disclosure . . . 65
3.4.1 Contractual issues . . . 70
4 Judicial approaches 75 4.1 The Uncertain Position of the CJEU . . . 79
4.2 MIFID enforceability and Alternative Dispute Resolutions . . . 81
5 Comparative perspectives between European and American Law-making 86 5.1 Two Different Cultural Premises . . . 87
5.2 American Retail Investors and The Dodd-Frank Act . . . 93
5.3 Rating Agencies . . . 96
6 Conclusion 101
7 Greetings 103
8 Table of Authorities: 104
Chapter 1
Introduction
During the preparatory works of the TUF (Testo Unico delle Disposizioni in Materia Finanziaria)1
and other relevant legal sources of the framework that we are about to dive in, there have been made plenty of references, both explicitly and implicitly, from the Law & Finance theory. Accord-ing to the latter, financial markets’ development inherently relies on the quality of legislation and the available safeguards for investors2. In the Anglo-Saxon world, it is likely to encounter closer
relationships between the rules and the financial progress of a given country, however some Eu-ropean authors, especially jurists, have risen some criticisms with regard to the coincidence of law-making ratios and what is good for the market3. Without addressing this peculiar academic debate, it is no doubt true that my research work trusts the belief that law-makers are the ones who set the boundaries for market players, simply because an unregulated environment has al-ready demonstrated to be unreliable.
Many centuries have passed by now since the rules that brought the order to international transactions found their origin in the so-called lex mercatoria for those merchants who were the first to issue credit across the borders of emerging nation-states4. The enforcement of the customs
used to be effective thanks to social and business exclusion from the merchant community. And this has not changed significantly until the early 20thcentury. Nowadays, the role of controlling and punishing private actors is usually supposed to be looked after by the State, acting both locally
1D.lgs n.58/1998, February 24th
2Il Testo Unico della Financa 20 ani dopo, Rivista delle Società, fasc.1, 1 Febbraio 2019, Guido Ferrarini
3Abhishar Vidyarthi, ’Legal Origin, Growth and Financial Market Development: Comparative Perspective’ (2018)
8 GNLU JL Dev & Pol 137
4# Lex Mercatoria, Legal Pluralism, and the Modern State through the Lens of the East India Company, 1600–1757,
and internationally5. Yet, in spite of this monochromatic perception, responsibilities are split into
public and private competencies in a very fluid mechanism. Arguably the most eloquent example of how law-making procedures require harmony between fast-paced contractual relationships and a strong public policy is the Financial Product Governance discipline, disruptively came into force in 2017 thanks to MIFID II Directive6and all the specific attachments.
This dissertation focuses in particular on the elusive definition of “Vulnerability”.
It is such an ambiguous concept as it depends on numerous factors which get together through different interconnections.7 It is able to pitch the “weakness” of a specific contractor so that he
or she needs greater protection than the average consumer, and within the financial markets, this role is played by the retail consumer8.
Vulnerability is nothing but a qualitative status that follows a sinusoidal trend, and thus it is not likely to fit in the pre-existent rigid schemes9. According to the British FCA and Occasional Paper n.8, a disclosure venture towards understandable and accessible information is enough in order to maintain a relatively safe market equilibrium, but obviously such a mind shift would bring with it the deconstruction of a classical Hard Law system, in search of more dynamic benchmarks. By contrast, Soft law tools are privileged because although they have been written as a flexible discipline, they are still based on constitutional principles. I am not going to discuss whether constitutional principles can interfere with everyday contractual relationships, but it is undeniably true that their combination with dynamic soft law meant a lot for our national legal culture. For instance, there seems to be a few definitory influences in Art. 25, co2 MIFID II, where the adequacy requirement of the investment depends also on the customer’s financial situation, and his capacity of tolerating losses.
The essay goes as follows: Section 2 will provide the historical, legal, and economic raw mate-rial upon which the following analysis has to be based: the evolution of European Financial Law and its relationship with the Italian TUF and Consob. Section 3 will search for specific situations in order to seek any relevant lacuna in the protective discipline. Behavioural Finance, derivatives
5Who Governs Finance? The Shifting Public–Private Divide in the Regulation of Derivatives, Rating Agencies and Hedge Funds, Stefano Pagliari, European Law Journal, Vol.18, January 2012
6Markets in financial instruments directive EU 2017/593
7Paul Ali and Ian Ramsay and Cate Read, ’Behavioural Law and Economics: Regulatory Reform of Consumer Credit
and Consumer Financial Services’ (2014) 43 Comm L World Rev 298
8La Tutela del Cliente “vulnerabile”, Banca Borsa Titoli di Credito, fasc.5, 1 OTTOBRE 2018, Giovanni Berti de
Marinis
INTRODUCTION
and OTC markets will be protagonists in this part, as financial vulnerability not only depends on the individual level of literacy of the investor, but also on “objectively” dangerous environments and activities. Section 4 will then address what the Jurisprudence suggests on the matter, after a careful selection among the most relevant caselaw of the Italian Supreme Court Cassazione and the Cour of Justice of the European Union, with the intention of searching for confirmations of the evolutionary trend of European Financial Law. Eventually, Section 5 will address some of the key-points touched with a more comparative and internationalist approach: since legal matters are likely to rely on cultural and philosophical heritages, I will contrast the American and the Eu-ropean law-making policies, starting from their idea of the Market itself. A brief conclusion will eventually summarise my thoughts about the future of the subject.
Evolving MIFIDs
The European Commission ex-president Jean-Claude Junker exposed the Capital Markets Union project for the first time in 2014 during its political campaign. The aim is “to get money (investments and savings) flowing across the EU so that it can benefit consumers, investors and companies, regardless of where they are located”10.
We are not so far away from that additional principle to be realized in the Union, as 12 out of 13 legislative proposals have already been agreed by Member States, but until then, jurists have to confront themselves with a really complex framework, thanks to an enduring and unstable legisla-tive layering. A diluvio legislativo (legislalegisla-tive rainfall) indeed, according to Professor Minervini11.
National disciplines, like the TUF in Italy, have been gradually dominated by a series of Directives and attached recommendations and Regulations since the 1998-2008 decade. As a result, they ended up in a mixture of technical links from one legal source to another.
Such a phenomenon can be demonstrated not only by looking at the range of issues addressed by the Commission, that has expanded in years12, but also thanks to the methods used by the EU
legislator. In the subject of capital markets, European Directives traditionally used to be based on the “minimum-harmonization” and the new-born “mutual-recognition” principles: the back-ground philosophy used to be functional to mutual recognition between member states. The new approach adopted by the EC is a bit more ambitious instead, because it has emerged that the more free national legislators are, the less policy standards are unified. Consequently, the Lamfalussy
10
https://ec.europa.eu/info/business-economy-euro/growth-and-investment/capital-markets-union/legislative-measures-taken-so-far-build-cmu_it
11MINERVINI, 1992 12Directive 2004/25/EC
EVOLVING MIFIDS
procedure set in 2001 a more comprehensive use of Directives, thanks to four-level legal machin-ery of enforcement13. At a later time, following the recommendations put forward by the ‘de
Larosière Group’ in 2009 and the Commission in 2010, public enforcement has been strength-ened, by establishing an harmonised ‘toolkit’ of sanctions applicable to all infringements of the Directive which shall be “effective, proportionate and dissuasive” (Article 70).14
The policy reconsideration gave birth to the Market in Financial Instruments Directives (MIFID), perhaps the most important legal source for the European financial system. There have been two of them, in 2004 and 2014 respectively: the timing of these reforms is also very loquacious, because it shows how significative the 2008 financial crash was in the rising of new principles, or at least new tackles for the same ones.
2.1
Pre-crisis negotiation: a lobbyist clash
A new standard of harmonized protection for investors was brought by the first MiFID legislation, in replace of the ISD (Investment Services Directive)15on April 30th, 2004. In order to understand
so, one first clear textual change concerns the relationship between public markets, especially in light of what would evolve afterwards thanks to the second version of the Directive.16
According to MiFID I there are three different trading venues. The residual trade is subsumed under Over the Counter markets (OTC, see Section 3):
• Regulated Markets (RMs)
• Multilateral Trading facilities (MTFs)
• Systematic internalisers (Sis)
SIs however were introduced but not widely used under the first iteration of the law, perhaps due to the provision to trade equities in an OTC capacity and in the absence of pre-trade trans-parency, via the internal matching facility of an investment firm, commonly referred to as a broker
13Reflections on the Regulation of European Securities Markets, Alexandre Lamfalussy. Vienna: SUERF (SUERF Studies:
14)
14The private enforcement of the MiFID conduct of business rules. An overview of the Italian and Spanish experiences,
Federico Della Negra
15Directive 93/22/CEE, incorporated by the Italian framework with the d.lgs. 415/1996 “decreto Eurosim” 16MIFID II and the relationship between public market and systematic internalisers, Artur Fischer and Dave Murphy,
crossing network (BCN)17; authorisation and transparency requirements were eventually binding for regulated markets, and the introduction of a new tier of alternative trading venues known as MTFs. Given the above MiFID I legal setup and and significant flexibility in the rules on crossing, many large European brokers adopted the BCN framework.
Whereas market rules such as organizational, transparency, or surveillance requirements are directly applied to the categories mentioned above, there are a great number of environments which cannot be associated with any regulation as a trading venue (that is why the MIFID review aimed to reduce substantially this number of marketplaces).18
MIFID I was a proper revolution when it came into force in 2007, as a representation of noth-ing but the final outcome of a lastnoth-ing clash between different concerns, lobbyist formations from the stock exchange industry and the brokerage/OTC sector. 19 On the one side, the former had
to consolidate its dominating position by canalizing equity orders into exchanges, or at least mov-ing towards similar rules on off-exchanges tradmov-ing venues. This way of tradmov-ing is price-settmov-ing as levels of pre- and post- trade interests (i.e. activities still to negotiate, and the ones which are just ended) are revealed, and indeed the venues are predominantly linked to the more formally organized lit trading. On the other side, the brokerage lobby supported a different functionality of discretionary execution to the exchanges’ one, whether it is provided bilaterally or passed in-ternally through other client orders: thus, different rules would have to apply in order to avoid risks and costs of such magnitude that the business would become unsustainable, with consequent damage to innovation and investor choice20.
In the end, the level of transparency required by MIFID’s negotiation systems might be sym-bolized by pre- and post- trade information, with the goal of reaching the so-called market equi-librium.21 It was limited however only to the securities which were allowed within regulated
market negotiations, and, as a consequence, the discipline led to exclude any financial activity
17ITG, MiFID II: Systematic Internalisers and Liquidity Unbundling, p.2. The ITG in the above document
men-tions Goldman Sachs and UBS as examples of firms that chose to operate both a BCN and MTF under MiFID I. In turn, agency-style brokers such as ITG and Instinet, interested only in matching client orders against other client orders, structured their dark pools as MTFs, as for example POSIT MTF and Blockmatch. Firms operating BCNs typically used them to bring together and cross in-house principal ows, client orders and electronic liquidity provider (ELP) ows.
18MIFID Review: How does it affect you?
19Reshaping Order Execution in the EU and the Role of Interest Groups: From MiFID I to MiFID II, Guido Ferrarini.
and Niamh Moloney
20Again, the relationship between legal change and market change (see intro)
21Regolamentazione del Mercato Finanziario e Principio di Trasparenza, Responsabilita’ Civile e Previdenza, fasc.3,
EVOLVING MIFIDS
with no capital representation. More generally speaking, the MiFID introduced an ensemble of organizational defenses, according to the fact that in order to grant transparency and correctness, legislative precautions have to be established ex ante, i.e. prior to the trading activity itself. Dur-ing this phase, the legislator is not intended to carve the broker-investor contractual duties, but to enhance the principles just mentioned by using an external network of rules.22 In order to do
so, through the details given by the applicative Directive 2006/73/EC, it was prescribed a series of binding information for intermediaries during the reserved activities of consulting and port-folio management. Such information is needed for shaping the client’s inclination towards risky behaviours and their awareness of eventual losses, and they concern:
1. Experience and knowledge in investing a specific product or service; 2. Private financial state
3. Investing goals
Important weaknesses of the discipline came exactly from the methods used for these investor-profiling procedures, since they were based, and they still are, on informal questionnaires which clients rarely were aware of. Although this matter involves a number of intrinsic issues that are supposed to be addressed afterwards in this work, it is necessary to note that it has involved the attention not only of researchers but also of some supervisory authorities. In Europe, the Autorité des marchés financiers (AMF) has recently published a study on risk aversion detection23, which
analyses a sample of 14 questionnaires and assesses their adherence both to MiFID provisions and to the indications the economic literature on risk tolerance measurement (De Palma and Picard, 2010). With regard to this last point, the study compares a “standard” questionnaire, which allows a quantitative measurement of risk aversion , with the questionnaires of intermediaries, admin-istering them to a sample of 1,500 subjects and verifying the deviations between the measures thus obtained. The evidence gathered shows that the instruments used by the industry are not reliable, since they profile the same individual in different ways and very often collect irrelevant information, i.e. not explanatory of the attitude to risk. The policy indication that emerges from
22Luca Di Nella, ’Features of the New Financial Markets Law (MIFID 2 AND MIFIR)’ (2018) 15 Revista Brasileira
Direito Civil 119
23# Résultats des deux campagnes de visites mystère ” risquophobe ” et ” risquophile ” conduites sous MIF
2, https://www.amf-france.org/fr/actualites-publications/publications/rapports-etudes-et-analyses/resultats-des-deux-campagnes-de-visites-mystere-risquophobe-et-risquophile-conduites-sous-mif-2
the study is in support of the quantitative measurement of risk tolerance, considered the most appropriate for the formulation of investment recommendations that, by definition, have a quan-titative dimension themselves. The British Financial Services Authority (FSA) also took action by publishing guidelines on the broader issue of adequacy assessment in March 2011 (FSA, 2011). This initiative was prompted by the results of supervisory activity, which had revealed frequent misalignments in the conduct of intermediaries with respect to the FSA’s Conduct of Business Sourcebook24. As explicitly stated by the FSA, the objective of the guidelines is not to prescribe a
method for assessing client risk appetite and making investment recommendations, but to iden-tify poor and good practices. In contrast to the MFA, therefore, the FSA covers the entire process of suitability assessment (which requires client profiling, financial instrument classification and concludes with an investment recommendation) by providing fairly general guidance on the prin-ciples that should guide the assessment of risk appetite. The FSA is not prescribing a method for assessing client risk appetite and making investment recommendations.
Yet, mere transparency demonstrated to be very limited at protecting investors, if consid-ered in its broadest sense. 2008 international crisis and the crisis of sovereign monetary policies brought us to attention that considering the market players as neoclassical maximisers of indi-vidual wealth is not the correct picture of what was happening, although this mindset was really comfortable to legislators and administrative authorities, enabling them to overlook tough deci-sions involving opposite public interests.25 Financial institutions have proven to be much more
fragile than previously thought, and the entire regulatory architecture has proved inadequate for the size and complexity of today’s banks. Since April 2005, the Financial Stability Forum (now the Financial Stability Board) has proposed a series of measures26, many of which have yet to be
implemented, and has in particular highlighted the problem of supervision of large global banks, which fall under the jurisdiction of several supervisory authorities. For this group of banks, the FSB proposed to strengthen cooperation between different countries, through so-called ’colleges of supervisors’. The report of the Group of Thirty27published in January 2009 expressed the same wish.
The evolution of the market towards structures which got less and less bound by public
pow-24https://www.handbook.fca.org.uk/handbook/COBS/ 25Servizi di investimento e tutela dell’investitore, Perrone
26Financial Stability Forum, Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience
7 April 2008.
EVOLVING MIFIDS
ers, and conversely rely more on private ventures, has significantly influenced the balance among contractors. Their cognitive situations are now completely disproportionate, and thus terminol-ogy like “disclosure” and “knowledge” have become of crucial importance.28The discipline took a
paternalistic turn since it now considers cognitive limitations of investors; moreover, it resulted to be careful with regard to possible private interests of the intermediary, avoiding consultations or executions at the expense of the latter. ESMA’s Guidelines confirm this customer-centred ap-proach to transparency, also limiting the sphere of application of execution only services.
Notwithstanding the difficulties caused by a global crisis, from the legislator’s perspective it is well known how tight the bond between market rules and intermediaries’ organization can get. This one, with the addition of constant interaction between general and private interests, is important especially because it results in administrative and civil sanctions in case of unrightful behaviours. In the matter specifically related to the MiFID’s failure at protecting investors, the orientation that impacted the most on a new policy order was the High-Level Group of Financial Supervision in the EU29, headed by Jacques de Larosiere. The report that came out in 200930
in-vestigated on the possible causes of the crisis and formulated 31 recommendation regarding those aspects according to which MiFID should be reformed, such as the structure of European Authori-ties, international cooperation, risk management, etc…31These proposals are the official response to European problems and have been welcomed, particularly because of their stated aim of achieving a European level of regulation. However, many details where the devil notoriously lurks -seem insufficiently defined. Others -seem to offer partial or sub-optimal solutions.32 European
experience has indeed shown beyond any reasonable doubt that compromises (and the commit-tees33resulting from them) have very often failed to achieve the objectives optimistically assigned
to them. The latest example is the Lamfalussy procedure, the disappointing results of which are
28Regolamentazione del Mercato Finanziario e Principio di Trasparenza, Responsabilita’ Civile e Previdenza, fasc.3,
2016, pag. 0991B, Giovanni Berti De Marinis
29Communication from the Commission - European financial supervision {SEC(2009) 715} {SEC(2009) 716}/*
COM/2009/0252 final */
30The de Larosière Group, Report, 2009.
31Other main points that have been adressed include: The revision of MiFID’s transparency requirements and
in-vestors’; Informative prospects, with particular regard to the regime of exemptions; More rigid controls on rating agencies (already reformed uder the EU Reg. n.1060/2009, but subject to further modifications); Writing of unified norms for hedge funds and private equity funds, involving also all those funds which differ from the requirements set by UCITS Directives; Introduction of centralised counterparts in order to allow the negotiation of derivatives outside of regulated markets.
32European financial supervision after the de Larosière Report: are we on the right track?, Marco Onado,
Wolper-tinger Conference, Bancaria special issue
33Cebs (Committee of European Bank supervisors), Cesr (Committee of European Security Supervisors), and Ceiops
well illustrated by the de Larosière Report itself.
2.2
The Birth of Financial Product Governance
MiFID II introduced the next level of investor’s protection within European financial markets, that is a governance discipline during the manufacturing and distribution processes of financial products. It consists of organizational and behavioral boundaries for the intermediaries who are obliged to retail investors, and it still presents itself as a neoclassical measure, since the protection goes through the enhancement of transparency.34This latter shows its only apparently moderate influence in the context of all those articles35that avoid obscure nooks where professionals might feel protected by their out of reach position. A reliable evidence of this is the inducements’ dis-cipline, came into force in 200636: economic and other nature inducements can be received by
intermediaries from third parties, but they had to meet requirements in order to prevent external influences that distract the pursuit of client’s interest. On a much larger scale, but with the same ratio, transparency is supposed to be able to help markets’ integrity.
Bringing the attention back to MIFID II, two out of the three instruments that the ex-ante protective discipline is made of came into force with the 2014 directive:
• Patrimonial separation (Art. 22 TUF);
• Product Governance (Reg. Consob 20307/2018); • Knowledge Competence.
Today, most of the regulation, except for a few integrations, refers to EU Regulation 565/2017, whereas product governance and knowledge competence are core disciplines which have not been implemented directly by an EU source, but only thanks to the national one. Thus, they are arguably one of the only parts of transparency and correctness defense that remained in the regulation.
Actually, there already used to be some signs of product governance before, but they were dictated by administrative authorities, so they never reached a systematic cohesion37. It is now
a general tool imposed by first-ranked legal sources: With regard to the Italian framework, art.
34La Product Governance nel nuovo regime MiFID 2, Silvia Morino, Studio Legale Tributario EY 35Art. 21 TUF, Artt. 27 Reg Consob
36Art. 26, Dir Dir. 2006/73/CE
EVOLVING MIFIDS
21, co 2-bis and -ter TUF sets general benchmarks, reproducing the ones mentioned in the 2014 directive, while it finds a more detailed application in Articles 60 ss of Consob Regulation. More detailed requirements and technical guidance for the implementation of MiFID II and MiFIR re-quirements are provided by the European Securities and Markets Authority (ESMA) in the form of a series of regulatory technical standards (RTS).38
The rules adopted by the MIFID II have a specific function that makes them closer to the ad-equacy rule: they are needed to avoid mis-selling situations, i.e. the offer, sale, or placement of financial instruments for a circle of clients whose target market was already inadequate even be-fore the trading activity. Due to structural characteristics involving risk, patrimonial capacity, or technical accessibility to information, financial products have to be set on an expressed mar-ket and retail clients target. As a result, when a mis-selling episode happens, product governance discipline stops the trading activity, or even the production of such product. The suitability re-quirement is moved then from the single obligations between intermediary-clients (so it is neither ex-post nor concrete), but it is functionally and qualitatively the same as the adequacy control.
The precautionary temperament of the discipline emerges twice during the handling of a finan-cial product. Firstly, at its creation; and secondly, when the distribution strategy is being decided. After all, the attached regulation explains first the notions of manufacturing and distributor inter-mediary, and only then it starts to describe the relating disciplines in turn (Art. 62 Consob Reg is split into letters A39and B40).
Addressing the manufacturers first, the category is not only made up by those who create from a structural point of view, or who emit their “own-made” product (i.e. self-placement), but also consultants with the intent of producing or putting into circulation. In fact, the intermediary is regarded as manufacturer and he is bound by the respective responsibilities in all of the three cases mentioned.
Other accountabilities concern the distribution strategy: here, the rules deal with the distrib-utor’s behavior. The national norm41is intentionally vague, so that it can hug all the investment
38ESMA publishes key transparency calculations for MiFIDII/MiFIR implementation, 06 December 2017
ESMA50-164-1173
39“a)”intermediari che realizzano strumenti finanziari” o “intermediari produttori”: gli intermediari che creano, sviluppano, emettono e/o concepiscono strumenti finanziari o che forniscono consulenza agli emittenti societari nell’espletamento di tali attività;”
40“b) intermediari che distribuiscono strumenti finanziari” o “intermediari distributori”: gli intermediari che offrono o raccomandano strumenti finanziari ai clienti.”
services that are likely to come up with either offers (standardized, individual, …) or recommen-dation.
It was concluded earlier that the suitability imposed by product governance, compared to the adequacy requirement, is not only ex-ante (i.e. precautionary) but also abstract. These tendencies are logically linked one another by reason of the fact that if the requirement is set before the inter-mediary met the single retail client, it has to be necessary abstract. As a result, the yardstick is not referred to a specific person, but to a “target market”, which is either potential (Art. 64) or actual depending on whether we are in the manufacturing or in the distribution phase.
Art. 16, §3, 3 MiFID: The product approval process shall specify an identified target market of end clients within the relevant category of clients for each financial instrument and shall ensure that all relevant risks to such identified target market are assessed and that the intended distribution strategy is consistent with the identified target market.
The investment firm is required to examine the financial instruments offered or commercial-ized regularly, with the eventual recalculation of potential risks and the target-market when an event weighs on the investor’s interests. Nevertheless, this recurring check does not always lead to an incoherency alarm for the instruments according to the chosen target’s needs and the dis-tributive strategy.
Art. 16, §3, 4: An investment firm shall also regularly review financial instruments it offers or markets, taking into account any event that could materially affect the potential risk to the identified target market, to assess at least whether the financial instrument remains consistent with the needs of the identified target market and whether the intended distribution strategy remains appropriate.
The manufacturing investment firms which emits financial instruments are also bound to pub-lish any relevant information about the product is being offered, its procedures of approval and the target of investors for whom it is likely to be more appropriate.
Art. 16, §3, 5: An investment firm which manufactures financial instruments shall make available to any distributor all appropriate information on the financial instrument and the product approval process, including the identified target market of the financial instrument.
Instead, a company that recommends or offers financial instruments created by others must be familiar with them, assess their compatibility with the needs of the clients to whom it provides services, take into account the reference market of the end clients, and ensure that such financial instruments are only offered or recommended when it is in the interests of those clients (Art. 24
EVOLVING MIFIDS
para. 2 (2) of the Directive42). The adoption of special organisational measures is required here, too. They make appropriate arrangements to obtain the information mentioned in Art. 16 para. 5 of the Directive and to understand the characteristics and the identified target market of each financial instrument (Art. 16 para. 3 (6) of the Directive). If the intermediary has decided to in-clude complex or structured products in its range of offerings, enhanced attention must be paid, in compliance, however, with all the safeguards indicated by ESMA on the subject. With the indi-cations of the Opinion on selling practices, the agreements concluded between the producer and the distributor for the configuration of the remuneration of the distribution activity will be struc-tured in such a way as not to lead to an increase in the conflict of interest (for example, because of more favourable remuneration arrangements for the distributor). In this specific context, the peculiar conflict arising from the possible dual role assumed by the intermediary, especially if it is a bank, as issuer and provider of investment services, in a phase characterised by the possible need to acquire capital resources and for funding, will therefore have to be managed with appropriate care, not relying exclusively on transparency rules (See the question of inducements in Section 2.3).
The policies, processes and provisions adopted by firms that create products and by those that recommend or offer them do not exempt them from complying with all other obligations under MiFID I and Regulation No. 600/2014 (MiFIR), including those relating to disclosure, suitability and appropriateness judgments, identification and management of conflicts of interest and undue incentives (Art. 16, §3, para. 7, Dir.43). It should be pointed out that the assessment of the
suitabil-ity of the instrument with respect to the profile and needs of the concrete client remains central and cannot therefore be considered fulfilled by the generic belonging of the latter to the target group of clients for whom the product has been abstractly designed. The investment firm must also ensure and demonstrate to the competent authorities, upon their request, that the natural per-sons providing investment advice or information on financial instruments, investment services or ancillary services on behalf of the client have the necessary knowledge and expertise to fulfil their obligations under Articles 24 and 25 of the Directive. When implementing the Directive, Member
42“An investment firm shall understand the financial instruments they offer or recommend, assess the compatibility of the financial instruments with the needs of the clients to whom it provides investment services, also taking account of the identified target market of end clients as referred to in Article 16(3), and ensure that financial instruments are offered or recommended only when this is in the interest of the client”.
43“The policies, processes and arrangements referred to in this paragraph shall be without prejudice to all other
requirements under this Directive and Regulation (EU) No 600/2014, including those relating to disclosure, suitability or appropri ateness, identification and management of conflicts of interests, and inducements”.
States must publish the criteria to be used to assess such knowledge and skills (Art. 25(1) Dir44). Another attached document of MIFID II implementation, this time far from the Consob, is the PRIIPS Regulation45, which confirms a stronger protection for retail investors thanks to the
selection of targets, whose pursuit is still mandatory as a clause within single contracts:
1. Any subject manufacturing a financial product (a PRIIPs manufacturer), before it becomes ‘available’ to retail investors in the EEA, must publish a key information document (KID) and then regularly review it, and if needed, notify any correction;
2. Any person advising on, or selling, such a product (a distributor, though no connection to the PRIIPs manufacturer is specifically required) must provide retail investors in the EEA with the KID in sufficient time before those retail investors are bound by any contractual relationship.46
Eventually, it is important to remind that any breach of these brokers’ organizational duties does not provoke the nullity of investment’s contracts: neither the framework contract, nor the single sale or underwriting.47
The provisions on costs, which mainly concern the disclosure of costs in the offer documen-tation, are also aimed at ensuring adequate transparency of information for the investor so that the latter is in a position to make informed investment decisions. These provisions are found, first and foremost, in EU Regulation No. 583/2010, which defines the rules for implementing Direc-tive 2009/65/EC (so-called UCITS) with reference to the content of the Key Investor Information Document (KIID). The KIID is a document that must be delivered to the investor before the sub-scription of units or shares of the UCITS. Subsequently, the EU Regulation No. 1286/2014 on Packaged Retail and Insurance Investment Products (PRIIPs) laid down the provisions on the Key Information Document (KID) for packaged retail and insurance investment products, including UCITS and AIFs. The entry into force of the PRIIPs Regulation was postponed until 1 January 2020 for UCITS funds and AIFs marketed to retail investors for which, at national level, Member
44“Member States shall require investment firms to ensure and demonstrate to competent authorities on request that
natural persons giving investment advice or information about financial instruments, investment services or ancillary services to clients on behalf of the investment firm possess the necessary knowledge and competence to fulfil their obligations under Article 24 and this Article. Member States shall publish the criteria to be used for assessing such knowledge and competence.”
45EU Reg. 1286/2014
46MiFID II product governance and PRIIPs in the flow transaction space, Roderick JD Ewing 47Gestione fiduciaria del risparmio e product governance, Luca della Tommasina, 2020.
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States have extended the KID requirement under the UCITS Directive.48
Under the UCITS Directive and its implementing legislation, the EU Regulation no. 583/2010, at art. 10, prescribes that the information on the costs of the fund must be provided in percentage form, in a table, whose structure is explicitly defined in Annex II of the above mentioned Regula-tion and more specifically outlined in the document CESR/10-1321 - CESR’s template for the Key Investor Information Document. The costs reported in the KIID are divided into three categories: 1) subscription and redemption costs, i.e. costs that are not directly charged to the fund’s assets
but are deducted from the amount invested or disinvested;
2) “recurring fees”, the so-called “ongoing charges”, i.e. fees that are deducted periodically throughout the year from the fund’s assets (excluding, however, trading fees for the purchase and sale of financial instruments);
3) fees that are applied under specific conditions (e.g. performance fees).
The numerical information (as a percentage) must be accompanied by narrative explanations aimed at highlighting, inter alia, that the figure for subscription and redemption fees is a maximum value; the figure for ongoing charges is calculated on the basis of the costs incurred in the last year and it may vary from year to year; in the case of newly established funds, for which historical data are not available, the figure for ongoing charges is estimated on the basis of the total expected expenses; the calculation of the figure does not include performance fees nor transaction costs in-curred in relation to the investment and disinvestment activity of the assets. CESR Guidelines/10-67449(CESR’s guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document) further specified the rules for calculating ongoing charges. With regard to the representation of costs instead, the PRIIPs Regulation, in Article 8(3)(f), provides that the KID of packaged products marketed to retail investors must include an ad hoc section dedicated to costs. This section must contain the disclosure of all costs borne by the in-vestor in connection with the investment in the PRIIP; the costs must be highlighted in monetary and percentage form by means of a synthetic indicator. EU Regulation 2017/65350, adopted by 48Il costo dei fondi comuni in Italia: evoluzione temporale e confronto internazionale, G. Finiguerra, G. Frati, R. Grasso,
Discussion papers Consob (2018)
49CESR Guidelines/10-674
the European Commission on 8 March 2017, in accordance with the provisions of Article 8(5) of the PRIIPs Regulation, implemented the latter Regulation, specifying details regarding the rep-resentation of costs in the KID and the methodology for calculating the synthetic indicator. In terms of representation, the Implementing Regulation requires that the KID include two cost ta-bles. The first table illustrates the impact of costs on the investment over time, identifying three time intervals to assess this impact: the first year after the investment, half of the recommended time horizon and the entire recommended time horizon. The second table provides the magni-tude of each type of cost calculated on an annual basis. In order to apply the above-mentioned European framework relating to the representation of costs ex ante and ex post, at the national level, CONSOB and the Bank of Italy, each in relation to the profiles of its own competence, have introduced further provisions in relation to aspects not falling within the scope of harmonisation of the Community discipline. With regard to the transparency of information, CONSOB, in the Issuers’ Regulations (Article 2751), extended the obligation to draft the offer documentation
pro-vided for UCITS funds (i.e., KIID and prospectus) also in relation to AIFs marketed to the retail public. The Bank of Italy, in the Regulation on collective asset management, and in relation to the minimum content of the Regulation on the management of UCITS, has codified specific rules for the definition of the expenses to be borne by the funds, including, in particular, the mechanisms for calculating and levying incentive fees.
The approach of an investment firm in parallel with the product governance structure.
Conclusive considerations about the MIFID II could be the following: in view of what has hap-pened in 2008, the lawmaker’s attention to the relationship between the intermediary and the final client has been brought backwards to the manufacturing phase. That is why the new-born man-ufacturer and distributor characters occupy most of the innovative articles of this directive. The goal is simple: the performance of both the figures has to be compatible with the target, which is based on the cognitive experience of the investor and how understandable the financial product is. Beyond the technicalities, products get a sort of qualifying label which does not exist if not linked to the proper target characteristics. Thus, the product that is originally deprived from those
men-of the European Parliament and men-of the Council on key information documents for packaged retail and insurance-based investment products (PRIIPs) by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32017R0653
51”L’impresa di paesi terzi, diversa dalla banca, che intende essere autorizzata allo svolgimento di ulteriori servizi o attività di investimento o servizi accessori inoltra domanda alla Consob ai sensi dell’articolo 25.”
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tioned characteristics, would be considered as defective, and it would be so because it is already intrinsically bound to its reference market, not because any structural objective fault. Having said that, the administrative authorities have the power to enforce these rules, and actively interfere thanks to the so-called product intervention: thus, whether the market targeted is not respected by neither producing nor distributing an incompatible product, Articles 40-43 of the MIFIR (EU Regulation n.600/2014) state that national authorities can limit or even stop the selling of what has caused a “significative threat”.52
In order to warn retail investors off, more sources of our careful framework are suggested: the PRIIP Regulation (EU Reg 1286/2014), for instance, is undeniably explicit about the difficult ap-proach that is taken towards financial technical vocabulary and quantitative reasoning. The rules often state certain levels of performance, however the lawmaker seems to be quite insecure about the general principles which have to be followed: on the one hand, instinctive, sometimes igno-rant, investments tend to be the major engine of small retail investors, paradoxically encouraged by a number of behavioral economics scholars53; on the other hand transparency is supposed to
be the most effective key against framing and other techniques used for hiding real costs of the intermediary service.54 The fact that such pre- and post- trade information is made available at “reasonable commercial conditions” illustrates in the first place an enhanced system characterized by charges in return for information access, clashing not only with the obligatory disclosure, but also with the general principle of effective knowledge of information for the largest public pos-sible. Technology gave a remarkable help in this path towards disclosure, just as MIFID II made its contribution to the emerging Big Data industry thanks to the vast and exploitable data sets of computerized prices that are now more valuable than ever before. 55 MiFID II effectively took
MiFID I’s regulatory template for public price transparency that was introduced for equity trad-ing in 2007 and extended it to the secondary market for bonds, OTC derivatives and most struc-tured finance products.56 The critical point of the product governance discipline is the fact that the many rules from the past Directives (conflict of interests, best execution, execution only,…) have not been neither updated nor substituted by new principles, and indeed it became rigid from
52The matter will be treated with more detailed thoughts in the following section.
53How Financial information disclosure affects risk perception. Evidence from Italian investors’ behaviour. Linciano,
Lucarelli, Gentile, Soccorso, 24 Eur. J. Fin. (2008)
54Servizi di investimento e tutela dell’investitore, Perrone 55MIFID II and data Law
the lack of understanding of the new governance mindset.57 Even more confusion comes from the private contractual point of view, since no remedy has been introduced for enabling clients to claim damages against the investment firms. Therefore, Member States remain free to estab-lish, under the principles of equivalence and effectiveness, the remedies and procedures that the investors can use to enforce the rights conferred by EU law.58The conceptual and operative
pos-itive outcome of it, if properly understood and valorized, stays right behind the realization that the traditional approach towards financial protection had failed. If the unlawful conduct can be located while the head of a firm is describing the characteristics of a financial product and its of-fer conditions, the breaching consecutive investment service is nothing but an effect of the first decisions. By concluding this, it is now easy to understand why the governance ultimate goal should move backwards and activate earlier than the breach itself. It would result in a remarkable increase of effectiveness.59
2.3
The Role of ESMA
Ultimately, under the current regulation and the principle of supervisory convergence60, ESMA
has a key role within the network of national competent authorities (NCAs), as the coordinator of the supervisory actions of the Union, and it decides on the specific topics that have to be addressed as well. With this respect, the 2021 program involves mainly two issues: fees charged by fund managers; and the quality of transparency data reported under MIFIR. As a result, this section is supposed to be a sort of natural progression of the MIFIDs’ overview which has taken most of my words so far. The daily work of the Public Authorities of the Union represents a critical applicative link indeed between the discipline’s ratios and the faults of the market, as they stand out especially thanks to the implementation of product intervention against “threats”. Moreover, although a coactive intervention of an administrative body is arguably the last and therefore one the most pathologic moments of a Law-making process, it is also likely to be regarded as a new starting point for market players in the retail market, because these pronouncements handle the variety of tools available and therefore make new practices be born. By affecting the validity of the
57Gestione fiduciaria del risparmio e Product Governance, Luca della Tommasina, 2020
58The private enforcement of the MiFID conduct of business rules. An overview of the Italian and Spanish experiences, Federico Della Negra
59SELF-PLACEMENT DI TITOLI BANCARI TRA VINCOLI PATRIMONIALI E TUTELA DELL’INVESTITORE,
Banca Borsa Titoli di Credito, fasc.2, 1 APRILE 2019, pag. 153, A. Sciarrone Alibrandi, U. Malvagna
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financial contracts touched upon by ESAs’ temporary intervention powers it reflects on the forms of private protection that investors and clients are entitled to invoke before the Courts. it is all too evident that, in this area, private litigation and the consequent decisions taken by the courts do not exhaust their effects within the narrow boundaries of the individual contractual relations, but easily end up influencing the behavior and the business model of the firms participating to these markets.61
Financial market complexity embodies the never-ending enemy of supervisory authorities, and with regard to the one provoked by product governance, we have already mentioned that product regulation have been strengthened and product intervention powers have been conferred to the European Supervisory Authorities (ESAs), which is able to take the appropriate measures in order to temporarily ban62 or restrict certain financial instruments/practices whether there
is a threat to the orderly functioning and integrity of financial markets or the financial stability of the Union (Articles 3963– 43 MiFIR)64. As for the decision-making process, temporary
inter-vention decisions are taken on the basis of the qualified majority under Article 44(1), second sub-paragraph, of their respective founding regulations (Article 9, paragraph 5, sub-paragraph 3). A Member State may request the Authority to reconsider the decision as well, and in that case, the Authority has to decide whether to confirm the decision or not by qualified majority under the same provision. In addition, National authorities can take product intervention measures in ac-cordance with Article 42 of the MiFIR in or from their Member State. 65 Whether there are two
NCAs adopting product intervention measures that both apply in and from their Member State and that differ from each other, it is important for investment firms to comply with the product intervention measures that apply from the Member State in which they are authorised in case of cross-border provision of investment services. They have to comply with the product
interven-61Connecting public and private enforcement, Raffaele D’Ambrosio and Stefano Montemaggi.
62”1. In accordance with Article 9(5) of Regulation (EU) No 1095/2010, ESMA may, where the conditions in paragraphs 2 and 3 are fulfilled, temporarily prohibit or restrict in the Union:
(a) the marketing, distribution or sale of certain financial instruments or financial instruments with certain specified fea-tures; or (b) a type of financial activity or practice. A prohibition or restriction may apply in circumstances, or be subject to exceptions, specified by ESMA.”
63“1. In accordance with Article 9(2) of Regulation (EU) No 1095/2010, ESMA shall monitor the market for financial instruments which are marketed, distributed or sold in the Union.”
64MiFIR provisions give also space to EBA (European Banking Authority) for the Market monitoring Scheme of
ESAs, in accordance with Art. 39(2). However, since we are dealing with financial instruments specifically, and not with structured deposit, this section will only consider the position of ESMA.
65Questions & Answers on Mifid and Mifir investor protection and intermediaries topics, 21 Dicembre 2020, ESMA
tion measures applicable in a Member State where the client is located as well.66 These are only a few reasons why ESMA is required to publish an annual report with aggregated information on all sanctions and measures imposed by national competent authorities (NCAs) pursuant to Article 71(4) of Directive 2014/65/EU67. ESMA also has to include in the report data on criminal
tions imposed under MiFID II, given that Member States have decided to lay down criminal sanc-tions for MiFID II/MIFIR infringements, and send them to ESMA no later than 31 March of each year.68 The Reports should be considered in the context of the following provisions as provided
for in the Annexes II and III of the Commission Implementing Regulation (EU) 2017/111169: - The sanctions and measures imposed may be based on more than one legislative provision, so the sum of the number of sanctions or measures/values of fines disclosed in the analytical tables of the Report may not correspond to the total number of sanctions/measures or to the total value of fines imposed.
- The criminal sanctions imposed may be based on more than one legislative provision, so the sum of the number of criminal sanctions/value disclosed in the Annex of the Report may not correspond to the total number of criminal sanctions/total value of fines imposed.
- If the relevant sanctions does not only refer to breaches relating to the relevant article of Directive 2014/65/EU or of Regulation (EU) No 600/2014, but also to other provisions, and the relevant amounts cannot be disaggregated per article of the MiFID II framework, which was in-fringed, a reference to “AGGREGATED FIGURE” is provided with the respective values in the Report.70
The first version of the Report was published in 2019. This report instead covers the period from 1 January to 31 December 2019. Notifications of sanctions and measures applied under the MiFID II framework in this period reveal that (out of 30 EU/EEA Member States) in 15 Mem-ber States, NCAs imposed sanctions and measures which resulted in a total of 371 sanctions and
66In order to determine the location of the client, firms could, for example, consider the habitual residence of the
client based on information collected in their client-onboarding process as part of the know-your-customer assess-ment. It is possible that national product intervention measures contain specific rules on the territorial scope of their application.
67“Member States shall provide ESMA annually with aggregated information regarding all sanctions and measures imposed in accordance with paragraphs 1 and 2. That obligation does not apply to measures of an investigatory nature. ESMA shall publish that information in an annual report. Where Member States have chosen, in accordance with Article 70, to lay down criminal sanctions for infringements of the provisions referred to in that Article, their competent authorities shall provide ESMA annually with anonymised and aggregated data regarding all criminal investigations undertaken and criminal sanctions imposed. ESMA shall publish data on criminal sanctions imposed in an annual report.”
68ESMA website, “Investor Protection”: https://www.esma.europa.eu/regulation/mifid-ii-and-investor-protection 69C/2017/4219
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measures. Those applied sanctions and measures were of an aggregated value of EUR1,828,802. The evaluation of differences between the 2019 and 2020 reports shows a rise within the number of Member States where sanctions and measures were applied, the total amount of sanctions and measures reported and also the aggregated amount of administrative sanctions imposed. ESMA believes that as MiFID II/MiFIR has been applicable for two years and due to the considerable time that enforcement processes take from the beginning to their conclusion; and (ii) the differ-ences between the requirements of the MiFID II framework and national legislation on sanctions and measures highlighted above the data does still not allow to determine clear tendencies in the imposition of sanctions and measures, nor to supply the basis for detailed statistics or clear com-parisons among Member States.71
The ESAs’ 2019 report however can already be acknowledged for some significant breaking points. Against the background of “the orderly functioning and the integrity of financial markets or the stability of the whole or part of the financial system”, under the pre-reform ESAs’regulations, consumer protection was not the stated purpose of the ESAs’ temporary intervention powers, but could only be attained through the duty to ensure the orderly functioning and the integrity of fi-nancial markets and the stability of the whole or part of the fifi-nancial system. The reform of 2019 explicitly included the customers and consumers protection within the scope of Article 9 of their founding regulations. Indeed, the new text of Article 9(5)72allows the exercise of the ESAs’ tem-porary intervention powers, not only in case of a threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system in the Union, but also when the products or practices “have the potential to cause significant financial damage to cus-tomers or consumers”. The wide reference to the mere potentiality of the damage to an unprecise number of customers and consumers confirms the preventive nature of the product intervention powers. At the same time, considering the impact that those measures might have on the freedom to rule financial business as protected by the EU Charter of Fundamental Rights73, the wording used by the Legislator should be tested in light of the specific rules of Union law which confer
pow-71ESMA publishes draft technical standards under EMIR REFIT, ESMA Press Release 17 December 2020,
ESMA74-362-1016 r
72“The Authority may temporarily prohibit or restrict certain financial activities that threaten the orderly functioning and integ rity of financial markets or the stability of the whole or part of the financial system in the Union in the cases specified and under the conditions laid down in the legislative acts referred to in Article 1(2) or if so required in the case of an emergency situation in accordance with and under the conditions laid down in Article 18.”
73European Union: Council of the European Union, Charter of Fundamental Rights of the European Union (2007/C 303/01), 14 December 2007, C 303/1
ers in practice to ESAs. That particular wording cannot be a self-standing empowerment clause indeed, still after the reform, and it depends on surrounding EU Law applicable disciplines.
But why is the product intervention so relevant for the retail market? Product intervention matters to costumers because they should not be exposed to toxic financial products, not only be-cause of their complexity, but also bebe-cause most of their investments end up with losses. In this category, binary options and Contracts for difference (CFDs) received the most careful attention from ESMA and BEUC, basically because they lack of purpose from a real economy perspective74.
Moreover, national legislations’ cautions are ineffective because these kinds of products are of-fered mostly on online platforms. 75 Among the two, CFDs have not been object of any ESMA’s pronouncement yet, even though they are paradoxically more complex than BOS, and they involve unconventional assets such as Crypto values.76 77
2.3.0.1 The Case of Binary options78
In the last years it has been registered a quick growth of the binary options (BO) offer to Ital-ian retail investors, especially from European intermediaries, in a free service performance legal regime. Already in 2017, Consob published a advice about investor’s protection in order to high-light the circumstance according to which BO are intrinsically both risky and complex products, and so were recognized by ESMA79. As such they are not suitable to retail customers, therefore the ESMA with the collaboration of Consob and other national administrative authorities, inter-vened in accordance to article 40 MIFIR and banned BO trading activities within the European retail market.80 To be more precise, we refer to BO as a category which contains many peculiar 74ESMA35-36-794 Q&A - Relating to the provision of CFDs and other speculative products to retail investors under
MiFID published 31 March 2017
75Call For Evidence on Product Intervention, Measures proposed by ESMA: BEUC response. BEUC-X-2018-009,
07/02/2018.
76Crypto-assets need common EU-wide approach to ensure investor protection, Press Release 9 January 2019,
ESMA71-99-1084
77According to the Italian jurisprudence, bitcoins are financial products whether they are bought with investment
goals. To understand the ambiguous definition of cyprocurrency specifically within the Italian and European financial law framework, see Agnino Francesco, Vendita di bitcoin e intermediazione finanziaria abusiva, Cassazione penale sez. II, 17/09/2020, n. 26807, Giurisprudenza commentata, Ilpenalista.it , 9 OTTOBRE 2020.
78A binary option is a financial product where the parties involved in the transaction are assigned one of two
out-comes based on whether the option expires in the money. Binary options depend on the outcome of a “yes or no” proposition, hence the name “binary.” Binary options have an expiry date and/or time. At the time of expiry, the price of the underlying asset must be on the correct side of the strike price (based on the trade taken) for the trader to make a profit.
79Statement on preparatory work of the European Securities and Markets Authority in relation to CFDs, binary
options and other speculative products, Date: 29 June 2017, ESMA35-36-885
80Delibera 20 giugno 2019, n. 20975, Commissione Nazionale per le Società e la Borsa, Gazzetta Ufficiale Repubblica
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instruments: while the product intervention was being reiterated, some binary options character-ized by a sufficiently long deadline (at least 90 days from the introduction into the market, e.g. “in-line warrant”) and a cover from market risks thanks to attached prospects have sure enough been excluded from the decision starting with the first renewal, as they would not seem able to awaken particular worries.
Another interesting point is no doubt true the grade of compulsoriness of the rules81in order
to pass the quality enhancement test, i.e. a technical confirmation of quality enhancement in the services rendered to the client: it is one of the three requirements needed for granting incentives to intermediaries, obviously in exchange for services different from individual portfolio manage-ment and independent consulting, where those takings are forbidden unless they will immediately return to the client. According to some attendants at the consultation82, the cases should be
con-sidered as the only ones allowed, with the consequence that any other kinds of incentive cannot be admitted if justified by other ways of quality enhancement. According to a second perspective, which corresponds to the thesis adopted de iure condito by the ESMA, the requirements are sim-ply three examples among many others that can be found by intermediaries’ practices, although having a closed range would be undeniably beneficial.
2.4
Technical advises and Quick fixes
Product intervention is obviously the most eye-catching duty of ESMA because it consists basi-cally on an administrative coercion into the market, but in fact the authorities of the Union deal with the legislation and market failures in a much more dynamic and interconnected way. ESMA is constantly linked to other EU Law bodies, such as the European Commission, the BEUC, or even Member States’ Ministries, with the intention of usefully guide the evolution of the MiFID framework. A number of technical advices have been published, and many other documents de-scribe the so-called “Quick fix”, which is supposed to both solve some of the nastiest issues of the current legislation and set new principles to follow for future policies. For example, back in May 2018, the European Commission published a legislative proposals collection in order to promote “sustainable finance” practices, in line with the objectives mentioned in its Action Plan of the same
81EU Directive 2017/593 Art. 11, and Italian Intermediaries Regulation, Art. 53
82https://www.dirittobancario.it/approfondimenti/servizi- bancari- e- finanziari/mifid-
year.83 The retail investors’ attention has been captured by the sustainability matter, and inter-mediaries inserted it in their commercial policies84. This did, of necessity, touch the MIFID II
implementation documents, and ESMA sent a technical advice on the subject to the EC.85
After-wards, EU Reg. 2019/2088 was published on last December 8th relative to information disclosure about sustainability within financial services86, which set harmonized norms for the market’s
par-ticipants of the Union. It is said in the paragraph 18, lett. E of the “Guidelines on MIFID II product governance requirements”87, that a given product can be specifically conceptualized for monetary
protection, green, ethical, etc… investments goals as appropriate.
The product governance discipline has been revised very recently as well, in the early summer of 2020. As a justifiably instinctive result to the Covid-19 global pandemic and the relative eco-nomic disruptions, the European Commission published its Capital Markets Recovery Package on 24 July 2020. In the proposed package there were set new amendments to the Prospectus Regula-tion and the SecuritisaRegula-tion RegulaRegula-tion, as well as a series of correcRegula-tion to the MiFID II Directive.88
The goal is to make investments in the real economy smoother and to enable rapid recapitalization of corporations in the EU.89Prior to this, the regulatory framework has been seriously criticized.
Its implementation and the ongoing compliance with it is associated with a laborious bureaucratic burden for market participants and the added value of individual investor protection provisions is being doubted by market participants.90 Therefore, already in 2019 the German Federal Ministry of Finance organized a public consultation at the national level and published a position paper91
with proposals for improvement. A unique trait of the Quick-Fix is obviously the simplification of informative requirements. These are particularly significant for services offered to professional clients and eligible counterparties, but also affect services to retail clients. Product governance
83Renewed Sustainable Finance strategy and implementation of the action plan on financing sustainable growth, 08
March 2018,https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en
84Commissione Nazionale per le Società e la Borsa, provvedimento 12/03/2020 – Prestazioni di servizi di
investi-mento e questioni ESG
85Final report ESMA’s technical advice to the European Commission on integrating sustainability risks and factors in MIFID II
86SFDR- Sustainable Finance Disclosure Regulation
87ESMA Document 35-43-869, 28/05/2018 – Final report – Guidelines on certain aspects of the MIFID II
sustain-ability requirements
88“Coronavirus response: Making capital markets work for Europe’s recovery”, European Commission - Press release,
Brussels, 24 July 2020
89
https://www.dlapiper.com/it/italy/insights/publications/2020/10/finance-and-markets-global-insight-issue-19-2020/the-capital-markets-recovery-package/
90MIFID II Quick Fix – overview and further MIFID II review process, Newstex Blogs, October 2020
91https://www.bundesfinanzministerium.de/Content/DE/Gesetzestexte/Gesetze_Gesetzesvorhaben/Ab
teilungen/Abteilung_VII/19_Legislaturperiode/Position-paper-MiFID-and-PRIIPS.pdf?__blob=public ationFile&v=9
