RegTech Intelligence 
Earlier today, the European Commission published part of the long awaited Delegated Acts for MiFID II. This was an unexpected move by as not many were expecting to see them in separate parts.
This first set of Delegated Acts for MiFID II has been based on advice from ESMA and covers three topics; safeguarding of client financial instruments and funds, product governance requirements and inducements.
When the MiFID II framework was due to be implemented in 2017, ESMA wrote to the Commission in 2015 stating that the timeline was not achievable. This was due to the need for a large reporting system to be built, encompassing the 300 trading venues around Europe and up to 15 million financial products.
The Commission considered ESMA’s advice and came to the conclusion that an extension of the MiFID II application date, by one year, to 2018 was warranted. A proposal was made earlier this year, and this is currently being discussed by the European Parliament and Council.
For the time being, the Commission is continuing with the finalisation of more than 30 level II measures to provide greater certainty for firms’ implementation strategies. This article explores the requirements noted under the first of the level II measures.
Safeguarding of client financial instruments and funds
This discusses governance and organisational arrangements to ensure that client money is protected appropriately.
In particular, measures have been specified to ensure the “appropriate use of title transfer collateral arrangements when dealing with non-retail clients or preventing the unintended use of client financial instruments, the arrangements to be adopted with respect to securities financing transactions or those concerning the recording and disclosure requirements”.
To address concentration and contagion risks to client funds, firms are being asked to strengthen their due diligence requirements. For example, by requiring firms to “consider diversification when depositing client funds as well as the compliance with the principle of a limit on client funds deposited with group entities”.
Product governance requirements
This chapter sets out details for the implementation of the product governance rules introduced under MiFID II. Requirements for product governance have been set to ensure that firms (both manufacturers and distributors of financial instruments) take their consumers into account when they design and market products.
For those that manufacture financial instruments, i.e., firms that create, develop, issue and/or design products, a number of procedures and arrangements must be established. In particular, requirements surrounding the management of conflicts of interest, governance and control of the manufacturing process, the assessment of products’ potential target market, the provision of information to distributors and the review of products have been detailed.
Distributors also face a number of obligations under product governance. These rules apply to investment firms who intend to offer a range of products (issued by themselves/other investment firms/non-MiFID entities) and services to clients. Specifically, these include requirements to ensure that the products and/or services are “compatible with the characteristics, objectives and needs of an identified target market, the involvement of management bodies, the periodic review of product governance arrangements to ensure that they remain robust and fit for purpose”.
Inducements
The final chapter sets out rules with which an investment firm must comply when “providing or receiving fees, commissions or any monetary or non-monetary benefits”.
The Commission has noted that inducements for non-independent advice must enhance quality for consumers and they have made adjustments to ESMA’s advice to make the rules ‘easier’ to implement.
For the rules on research spending by asset managers, the Commission has kept ESMA’s core requirements, such as the need to budget and account for research spend, but have added flexibility in terms of how it is collected and managed.
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