Technical summary - MiFID II (Directive)

The MiFID II Directive encompasses the rules and guidelines on governance, products, investor protection and information disclosure. In addition, the requirements for third country firms to access the EU market are addressed. The contents of the Directive are subject to Level 2 and Level 3 measures as well as, potentially, to national implementation specifics by EU Member States, as far as allowed.


Management body

MiFID II introduces new requirements for the management body and requirements for firms to be compliant with CRD IV.

Responsibilities of the management body in the area of:

  • the identification, definition and review of the strategic objectives, risk strategy and internal governance of the firm.
  • the approval of its internal organisation, including criteria for selection and training of personnel.
  • effective oversight of senior management.
  • the definition of the policies governing the provision of services and activities, including the remuneration of sales staff and the approval of new products for distribution.

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New requirement on remuneration, building on the ESMA Guidelines on remuneration policies and practices published in June 2013:

  • Obligation to have a remuneration policy for persons involved in providing services to clients.
  • Obligation to prevent conflicts of interest arising from the remuneration and incentives structures.
  • Prohibition of remuneration and sales targets which provide an incentive for recommending or selling a particular financial instrument when another one may better meet the client's needs.

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New requirement concerning the recording of telephone conversations or electronic communications:

  • Obligation to take all reasonable steps to record telephone conversations and electronic communications that result or may result in client orders and transactions when dealing on own account.
  • Obligation to notify the client, in advance, that the conversations are recorded.
  • Obligation to keep the records for 5 years and to provide them to the client upon request.

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Tied agents

MiFID II now requires that all Member States allow firms to appoint tied agents. The possibility to allow these tied agents to handle client money or financial instruments is left at their discretion.

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Investor protection

Product governance/product lifecycle

MiFID II imposes stricter product governance obligations for both product manufacturers and distributors.

Product manufacturers

  • Obligation to set-up for each product (and each significant adaptation of the product) a product approval process: identification of target market of end clients, assessment of all relevant risks associated with the target market, consistency of the intended distribution strategy with such market.
  • Obligation to take reasonable steps to distribute the product to the target market.

ESMA clarifies the obligations. Manufacturers have to identify the target market at a "sufficient granular level" to avoid the inclusion of investors for whom the product is not compatible, conduct a scenario analysis of the product, analyse the charging structure and perform a regular review of existing products to identify crucial events that affect the potential risk or return expectations.

"Distributing financial instruments to the identified target market"

  • Obligation to review the product marketed or offered to assess whether the product remains consistent with the need of the target market and whether the distribution strategy remains appropriate.

ESMA clarifies the obligations. Distributors have to ensure that the products and the intended distribution strategy are consistent with the identified target market, identify the investors for whom the product is not compatible and perform regular review of the products distributed to ensure the continued consistency of the product and distribution strategy.

ESMA specifies that product governance requirements apply to MIFID firms. As regards UCITS management companies and AIFM "with extended scope", product governance only apply for the MiFID service.
ESMA advises to clarify the scope of application of these obligations. The obligations for distributors shall apply even if the products are issued by entities out of MiFID scope. When the manufacturers are non-MiFID firms and third-country firms, including UCITS management companies and AIFMs, distributors shall take all reasonable steps to ensure that the product information they obtain from them is of reliable and adequate standard to ensure the consistency of the distribution strategy with the target market. If no information is publicly or otherwise available, distributors shall conclude an agreement with the manufacturer to ensure that it will provide the information.

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Independent advice

MiFID II introduces the concept of "independent advice". Any investment firm that declares itself to be an independent adviser must comply with two requirements:

  • It must assess a sufficiently large and diverse range of financial instruments and not limits the assessment to instruments that it -or its related entities- issues.
  • It must not accept or retain inducements from third parties.

ESMA clarifies the selection process that independent advisers have to set-up to assess and compare an 'adequately representative' range of sufficiently diverse financial instruments. The process must include elements such as a diversified selection of products by type, issuer, or product provider or criteria of comparison such as costs, complexity and the characteristics of the clients.

ESMA also specifies (1) the conditions under which a firm providing independent advice is allowed to focus on certain categories or a specified range of financial instruments and (2) those under which a firm can provide both independent and non-independent advice. In that case, the firm must not hold itself out as "independent" for its business as a whole and ensure a clear separation between both type of advice services and advisers (physical persons).

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Information to clients

MiFID II strengthens the requirements regarding the "appropriate information" that an investment firm must provide in good time to the client.

Information on the service provided

  • In case of investment advice, clear explanation of the nature of the advice services: obligation to inform the client as to whether the advice is provided on an independent basis or not and whether it is based on a broad or more restricted analysis of the financial instruments available on the market.

Information on the financial instruments

  • Clear warnings and guidance of the risks associated the financial instruments and of whether the financial instrument is intended for retail or professional clients.

Information on costs and charges

  • Additional disclosure requirements about a firm’s cost and charges:
    • Information to provide on both investment and ancillary services and including the cost of advice, the cost of the financial instrument and how the client may pay for it;
    • Information on the aggregated costs to allow the client to understand the overall costs and the cumulative effect on return of the investments;
    • An itemised breakdown of the costs if the client requests one.

ESMA advises the following:

  • Extension of the disclosure requirements to professional clients and eligible counterparties (possibility for firms to agree on a limited application of such requirements for these clients, except when the financial instruments embed a derivative or when services of investment advice or portfolio management are provided to professional clients);
  • Further specifications regarding the firms subject to the disclosure obligation and the costs and charges to aggregate and disclose;
  • As regards UCITS, recommendation to the European Commission to consider UCITS KIID to be sufficient, with the possibility of requiring the disclosure of costs and charges that are not included in the UCITS KIID. Transaction costs should be calculated and disclosed by the firm if not provided by the UCITS management company.

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Third party inducements

MiFID II restricts the possibility to receive or retain inducements from third parties.

Minor non-monetary benefits

ESMA proposes to define minor benefits as benefits that are:

  • Reasonable and proportionate and
  • Unlikely to influence the recipient’s behaviour.

ESMA also advises to introduce an exhaustive list of minor non-monetary benefits.

Financial research

ESMA specifies the treatment of financial research. The provision of research is not to be considered as an inducement if it is received in return for direct payments by the firm out of its own resources or payments from a separate research payment account controlled by the firm under certain conditions.

Quality enhancement

ESMA advises to introduce a non-exhaustive list of situations where this quality enhancement test is not passed. The list that ESMA had initially drawn up had raised great concern, some viewing it as introducing a de facto ban of inducements.

ESMA has amended the list and has removed the situation where the inducement is "used to pay or provide goods or services that are essential for the recipient firm in its ordinary course of business".

An inducement is now considered as not enhancing the quality of the service if:

  • It is not justified by the provision of an additional or higher level service to the client, proportional to the level of inducements received (e.g. the provision of non-independent advice combined with a periodic assessment of suitability of the products the client has invested in); or
  • Directly benefits the recipient […] without tangible benefits to the client; or
  • In relation to an on-going inducement, it is not justified by the provision of on-going benefit to the relevant client.

The final report gives examples of higher quality service situations that aim at encouraging the provision of high quality non-independent advice, the assessment of a wide range of financial instruments (in favour of open architecture) or the provision of post-sale services by firms to clients.





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Suitability and Appropriateness


  • Explicit requirement to take into account the client's risk tolerance when assessing the investment objectives and the ability to bear losses when assessing the financial situation.
  • Statement of suitability to provide to retail clients in case of investment advice before the transaction or immediately after the client is bound, specifying how the advice meets the preferences, objectives and other characteristics of the client.
  • Periodic assessment of suitability (ESMA advises to impose to carry it out "at least annually"), mandatory in case of portfolio management and possible in case of investment advice if the firm informs the client at the outset.


Extension of the scope for the appropriateness test i.e. expanded list of complex financial instruments. The list now also includes, amongst others, structured UCITS, shares in non-UCITS, shares that embed a derivative and structured deposits "that incorporate a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term".

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Services or products package

MiFID II introduces specific requirements when an investment firm offers a package of products or services:

  • Information to clients on: whether it is possible to buy the components separately, evidence of the costs and charges for each component and explanation on how their interaction changes the risks; and
  • Suitability/appropriateness test at the level of the package.

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Best execution

MiFID II imposes additional information requirements for both investment firms and trading venues regarding best execution.

Investment firms

  • Obligation to publish annually, for each class of financial instruments, the top five execution venues in terms of client orders in the preceding year and information on the quality of execution.
  • Prohibition to receive any remuneration, discount or non-monetary benefits from routing orders to particular venue.

Trading venues

  • Obligation to make available to the public at least annually, and without any charges, data relating to the quality of execution of transaction on the venue.
  • Obligation to inform the client where the order was executed and to make periodic reports including details about price, costs, speed and likelihood of execution for individual financial instrument.

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Transactions with eligible counterparties

MiFID II extends to the relationship with eligible counterparties the following requirements:

  • Obligation to act honestly, fairly and professionally and communicate in a fair, clear and not misleading way.
  • Obligation to provide appropriate information with regard to the investment firm and its service, the financial instruments, the execution venues and all costs and charges.
  • Periodic reporting requirements.

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Third country regime

MiFID II creates a new regime for granting third country firms access to EU markets. The regime is based on a differentiated approach depending on the type of clients the firm expects to serve:

  • Services to retail clients and professionals on requests may require the establishment of a branch if the Member State where the third country firm intends to provide the services requires it.
  • Services to professional per se and eligible counterparties do not require the establishment of a branch if the third country firm is registered in the ESMA register of third country firms (based on equivalence decision).

In any event, the third country firm may operate without the establishment of a branch and/or without being registered when the client initiates at its own initiative the provision of services.


Contact us

Olivier Carré

Partner Regulatory Advisory - MiFID II Leader

Tel: +352 49 48 48 4174

Cécile Liégeois

Regulatory & Compliance Advisory Services - Banking - Partner, PwC Luxembourg

Tel: +352 49 48 48 2245

Rima Adas

Partner Audit - Financial Services Leader

Tel: +352 49 48 48 2101

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